Acceptable forms of help

I was reading this note by Kunal Bahl, CEO and co-founder of Snapdeal on the company’s turnaround after the failed acquisition by Flipkart last year. It’s a very interesting note – while I’ve never been a fan of the company (never considered buying from them), this story seems rather interesting, especially given the deep shit it was in a year ago.

What caught my eye is this little note about getting help from a small network of mentors. Bahl writes:

I was able to get the guidance and counsel from some of the most respected and leading business persons in the country. […] In our time of need, it was those who had the least to gain, and most to give, that came to our help. Not with money. But with their wisdom and encouragement. I recall sitting in the room with one of the above persons in August 2017, staring down the barrel with only months of money left in the bank. The gentleman, probably seeing how dire our situation was, picked up the phone and called six of the top business people in the country in quick succession explaining our situation to them – that we were good guys stuck in a bad situation – and requesting them to meet me to see if there were any synergies with their businesses[…]

(emphasis added)

What this got me thinking was about why it’s considered okay to give or take help in the form of intangibles, but not in terms of money. It’s rather common that people help each other out by way of providing advice, making introductions and sometimes just hearing them out. It’s not that common, though, that people help each other out with money.

To take a personal example, if someone asks to talk to me to get some advice, or asks for some connections, it’s very likely that I’ll help them out. On the other hand, if someone were to ask me for money I’ll start seeing them suspiciously.

One quick reason as to why intangibles is okay is that it is sometimes “cheap”. Making introductions doesn’t cost you much as long as you think it’s mutually beneficial for both parties (and in that, it seriously helps if you do double consent introductions – talk to both parties independently before introducing). Advice costs you maybe half an hour or an hour of your time, and if you feel like your time is being wasted, it’s not hard to cut losses. And the value that the recipient gets from this can far exceed the cost incurred by the “giver”.

Another reason is that intangibles are intangible – they’re hard to measure. And by that measure, you don’t rack up some sort of debt. If I take money from you, then what I owe you becomes precisely measurable. And until I repay you, things between us can be awkward. Introductions or advice, on the other hand, keep the value of the “debt” fuzzy, and in most case it gets “written off” any way, permitting the two parties to continue their relationship normally.

Anything else that I might have missed out?

Triangle marketing

This blog post is based more on how I have bought rather than how I have sold. The basic concept is that when you hear about a product or service from two or more independent sources, you are more likely to buy it.

The threshold varies by the kind of product you are looking at. When it is a low touch item like a book, two independent recommendations are enough. When it involves higher cost and has higher impact, like a phone, it might be five recommendations. For something life changing like a keto diet, it might be ten (I must mention I tried keto for half a day and gave up, not least because I figured I don’t really need it – I’m barely 3-4 kg overweight).

The important point to note is that the recommendations need to come from independent sources – if two people who you didn’t expect to have a similar taste in books were to recommend the same book, the second of these recommendations is likely to create an “aha moment” (ok I’m getting into consultant-speak now), and that is likely to drive a purchase (or at least trying a Kindle sample).

In some ways, exposure to the same product through independent sources is likely to create a feeling of a self-fulfilling prophecy. “Alice is also using this. Bob is also using this” will soon go into “everybody seems to be using it. I should also use it”.

So what does this mean to you if you are a seller? Basically you need to hit your target audience through various channels. I had mentioned in my post earlier this week about how branding creates a “position of strength“, and how direct sales is normally hard because it is done through a position of weakness.

The idea is that before you hit your audience with a direct sale, you need to “warm them up” with your brand, and you need to do this through various channels. Your brand needs to impact on your audience through multiple independent channels, so that it has become a self-fulfilling prophecy before you approach to make the sale.

What these precise channels are depends on your business and the product that you’re trying to sell, but the important thing is that they are independent. So for example, putting advertisements in various places won’t help since the target will treat all of them as coming from the same source.

Finally, where is the “triangle” in this marketing? It is in the idea that you complete the branding and sales by means of “triangulation”. You send out vectors in seemingly random directions trying to build your brand, and they will get reflected till a time when they intersect, or “triangulate”. Ok I know my maths here is messy ant not up to my usual standard, but I guess you know what I’m getting at!

 

Branding and positions of strength

I had an invitation to attend a data science networking event today. I had accepted the free pass for option value, but decided today to not exercise the option. Given I was not going to speak at the event, I realised that the value of the conversations at the event for me would be limited.

One of the internet gurus (it might be Naval Ravikant, but I’m unable to locate the source) has this principle that you shouldn’t go to networking events unless you’re speaking. Now, if everyone applied this principle events would look very different, with speakers speaking to one another (like in NED Talks!).

Thinking about it, though, I see clear value in this maxim. Basically when you go to a networking event and speak, you can network from a position of strength, especially after you’ve spoken. This is assuming you’ve done a good job of your speech, of course, but apart from elevating your status as a “speaker”, speaking at the event allows potential counterparties in conversations to have prior information about you before they talk to you.

So there is context in the conversation, and since you know they know something about you, you can speak from a position of strength, and hopefully make a greater impact.

It is not just about speaking and events. For a long time, a lot of my consulting business came from readers of this blog (yes, really!). This was because these people had been reading me, and knew me, and so when I spoke to them, there was already a “prior” on which I could base my sale. Of late, I’ve been putting out a lot of work-related content here and on LinkedIn, and that has sparked several conversations, which I have been able to navigate from a position of strength.

A possibly simpler word to describe this is “branding”. By speaking at an event or putting out content or indulging in other activities that let people know about you and what you do, you are building a brand. And then when the conversation happens, the brand you have thus built puts you in a position of strength which makes the sale far easier than if you didn’t have the brand.

You need to remember that position of strength as I’ve described here is not relative. It is not always necessary for the brand to elevate you to a level higher than the counterparty. All that is necessary is for it to put you at a high enough level that you don’t need to talk from a position of weakness. And if you think about it, cold calling and door to door sales is basically selling from a position of weakness – while it might have worked occasionally (which makes for fantastic stories), it is on the most part not successful.

And in some way, this concept of branding and positions of strength is well correlated to what I recently described as “the secret of my happiness“. By being really good at what you are good at, you are essentially putting yourself in a position of strength, so that people have no choice but to tolerate your inadequacies in other areas. Putting it another way, being really good at what you are good at is another exercise in brand building!

Brand building efforts can sometimes fail. There are times when I have given talks and got few questions – clearly indicating it was a wasted talk (either I didn’t talk well, or the audience didn’t get it). I have put out content that has just sank without a trace or any feedback. The important thing to know is that somewhere it all adds up – that these small efforts in branding can come together at some point in time, and make it work for you.

 

The missing middle in data science

Over a year back, when I had just moved to London and was job-hunting, I was getting frustrated by the fact that potential employers didn’t recognise my combination of skills of wrangling data and analysing businesses. A few saw me purely as a business guy, and most saw me purely as a data guy, trying to slot me into machine learning roles I was thoroughly unsuited for.

Around this time, I happened to mention to my wife about this lack of fit, and she had then remarked that the reason companies either want pure business people or pure data people is that you can’t scale a business with people with a unique combination of skills. “There are possibly very few people with your combination of skills”, she had said, and hence companies had gotten around the problem by getting some very good business people and some very good data people, and hope that they can add value together.

More recently, I was talking to her about some of the problems that she was dealing with at work, and recognised one of them as being similar to what I had solved for a client a few years ago. I quickly took her through the fundamentals of K-means clustering, and showed her how to implement it in R (and in the process, taught her the basics of R). As it had with my client many years ago, clustering did its magic, and the results were literally there to see, the business problem solved. My wife, however, was unimpressed. “This requires too much analytical work on my part”, she said, adding that “If I have to do with this level of analytical work, I won’t have enough time to execute my managerial duties”.

This made me think about the (yet unanswered) question of who should be solving this kind of a problem – to take a business problem, recognise it can be solved using data, figuring out the right technique to apply to it, and then communicating the results in a way that the business can easily understand. And this was a one-time problem, not something you would need to solve repeatedly, and so without the requirement to set up a pipeline and data engineering and IT infrastructure around it.

I admit this is just one data point (my wife), but based on observations from elsewhere, managers are usually loathe to get their hands dirty with data, beyond perhaps doing some basic MS Excel work. Data science specialists, on the other hand, will find it hard to quickly get intuition for a one-time problem, get data in a “dirty” manner, and then apply the right technique to solving it, and communicate the results in a business-friendly manner. Moreover, data scientists are highly likely to be involved in regular repeatable activities, making it an organisational nightmare to “lease” them for such one-time efforts.

This is what I call as the “missing middle problem” in data science. Problems whose solutions will without doubt add value to the business, but which most businesses are unable to address because of a lack of adequate skillset in solving the issue; and whose one-time nature makes it difficult for businesses to dedicate permanent resources to solve.

I guess so far this post has all the makings of a sales pitch, so let me turn it into one – this is precisely the kind of problem that my company Bespoke Data Insights is geared to solving. We specialise in solving problems that lie at the cusp of business and data. We provide end-to-end quantitative solutions for typically one-time business problems.

We come in, understand your business needs, and use a hypothesis-driven approach to model the problem in data terms. We select methods that in our opinion are best suited for the precise problem, not hesitating to build our own models if necessary (hence the Bespoke in the name). And finally, we synthesise the analysis in the form of recommendations that any business person can easily digest and action on.

So – if you’re facing a business problem where you think data might help, but don’t know how to proceed; or if you are curious about all this talk about AI and ML and data science and all that, and want to include it in your business; or you want your business managers to figure out how to use the data  teams better, hire us.

Lessons from Shoe Dog

I first came across Shoe Dog, Nike founder Phil Knight’s memoir, from this post on Tren Griffin’s blog. Soon enough, I saw the book pop up multiple times on my GoodReads, and when I got the Kindle sample last week, I noticed that all my friends on GoodReads had given it a five star rating.

So while I normally don’t read autobiographies (the only other one that I remember liking is Andrea Pirlo’s), the recommendations made this one hard to resist. And it was a brilliant read. Finished the book in two days.

It’s a story very well told, written in an engaging style that makes you sometimes wonder if it is a work of fiction. Knight has eschewed the boring details and focussed on the interesting, and impactful, stuff, and the book is full of stories about the early days of the firm (it basically “ends” with Nike going public).

What struck me about Nike’s story is the number of times it nearly went under (which is what possibly makes it such a great story). In the light of those challenges (lawsuits, supply issues, constant working capital troubles, leverage), it is a wonder that the company survived long enough to thrive! In that sense, while it makes sense to draw business lessons from Nike’s story, I sometimes wonder if it’s simply a case of survivorship bias.

For starters, for nearly twenty years after founding, Nike remained a closely held private company, with little outside investment. While the company was mostly profitable (except on one occasion when it broke up with a supplier), it was forever cash poor. Well into its fifteenth year of operations, Knight talks about the company “not having money” for stuff like advertising (for example).

Instead, the company relied on heavy leverage, borrowing as much as it could from any bank that would deal with it (which was basically all banks in Oregon – in the 1960s and 70s, there was no inter-state banking in the US). Several times, the company came close to running out of money, when banks refused to extend its credit. But then it survived.

Griffin’s review of the book shows all this as “learnings” – innovative sources of financing, high growth, dealing with crises, but to me it looks like a lot of bad financial management. Too little equity for too long, an obsession for control (finally Nike went public only when Knight figured he could issue dual class stock), high leverage and all that.

The other thing that struck me about Nike is that even in the late 70s, when the company was 15 years old, it seemed like a bunch of buddies of Knight running it – there wasn’t that much of professional management around, and this could again be attributed to the business being continuously short on cash. I guess times are different now, and equity financing is more available, and firms can start hiring professional managers early, but a 15 year old company being seemingly run in a chaotic manner seemed odd.

Finally, back in business school, we were told that when applying to companies such as Nike or Adidas, we should highlight whatever sporting achievements we might have on our CVs. That struck me as odd – what impact could having played cricket for my hostel wing possibly have on how I could sell shoes?

Reading the book, though, it seems like a culture issue. In several places in the book Knight talks about the firm being driven by a “passion for sport”, with the early employees all being sportsmen. Culture permeates, and you hire more people like you. There is this vague sense of brotherhood, among people who have played competitive sport, and that’s hard to permeate for non sportspersons. And the culture goes on. Whether this lack of diversity is good for the company is another matter!

The Derick Parry management paradigm

Before you ask, Derick Parry was a West Indian cricketer. He finished his international playing career before I was born, partly because he bowled spin at a time when the West Indies usually played four fearsome fast bowlers, and partly because he went on rebel tours to South Africa.

That, however, doesn’t mean that I never watched him play – there was a “masters” series sometime in the mid 1990s when he played as part of the ‘West Indies masters” team. I don’t even remember who they were playing, or where (such series aren’t archived well, so I can’t find the score card either).

All I remember is that Parry was batting along with Larry Gomes, and the West Indies Masters were chasing a modest target. Parry is relevant to our discussion because of the commentator’s (don’t remember who – it was an Indian guy) repeated descriptions of how he should play.

“Parry should not bother about runs”, the commentator kept saying. “He should simply use his long reach and smother the spin and hold one end up. It is Gomes who should do the scoring”. And incredibly, that’s how West Indies Masters got to the target.

So the Derick Parry management paradigm consists of eschewing all the “interesting” or “good” or “impactful” work (“scoring”, basically. no pun intended), and simply being focussed on holding one end up, or providing support. It wasn’t that Parry couldn’t score – he had at Test batting average of 22, but on that day the commentator wanted him to simply hold one end up and let the more accomplished batsman do the scoring.

I’ve seen this happen at various levels, but this usually happens at the intra-company level. There will be one team which will explicitly not work on the more interesting part of the problem, and instead simply “provide support” to another team that works on this stuff. In a lot of cases it is not that the “supporting team” doesn’t have the ability or skills to execute the task end-to-end. It just so happens that they are a part of the organisation which is “not supposed to do the scoring”. Most often, this kind of a relationship is seen in companies with offshore units – the offshore unit sticks to providing support to the onshore unit, which does the “scoring”.

In some cases, the Derick Parry school goes to inter-company deals as well, and in such cases it is usually done so as to win the business. Basically if you are trying to win an outsourcing contract, you don’t want to be seen doing something that the client considers to be “core business”. And so even if you’re fully capable of doing that, you suppress that part of your offering and only provide support. The plan in some cases is to do a Mustafa’s camel, but in most cases that doesn’t succeed.

I’m not offering any comment on whether the Derick Parry strategy of management is good or not. All I’m doing here is to attach this oft-used strategy to a name, one that is mostly forgotten.

More optionality in startup valuations

Mint reports that Indian e-commerce biggies Flipkart and Snapdeal are finding it hard to raise more money at the valuations at which they raised their last funding rounds. One line from the report:

Despite Morgan Stanley’s markdown in February, Flipkart is still approaching investors asking for a valuation of $15 billion, but it hasn’t had any takers yet, the first two people cited above said.

The problem with the valuations is that it includes significant option value. It is common in startup funding to include implicit options in favour of the new round of investors to protect them from the downside of any future decrease in valuation.

Typically designed in the form of “ratchets”, when the firm raises a fresh round at a lower valuation, the investors in the previous round will get additional shares so that their overall share in the investment remains the same (won’t go into the exact mechanics here). This downside protection allows investors to be more aggressive on their valuations of the company, and the company is able to report higher headline numbers.

Ratchets have two problems, both of which are illustrated in the difficulty of Flipkart and Snapdeal in raising more funds. Firstly, optionality in funding means an automatic markdown of funds held by investors in progressively earlier rounds. This is not explicit, but a ratchet is basically existing investors writing an option in favour of the new investors. While the cost of this option is not explicit, it is the earlier investors who bear the cost.

So Series C (and earlier) investors bear the cost of the optionality given to Series D investors. Series B and earlier investors bear the cost of Series C’s optionality. And so on. Notice that this telescopes, so the founders (original owners of equity) have written options to everyone who has invested (of course they also benefit from the higher overall valuation).

Now, if a “down round” (funding round at lower overall valuation than previous round) happens, this optionality gets immediately gets “paid out”. So if the Series D valuation is lower than Series C valuation, Series B and earlier investors (and founders) immediately “pay” the difference to the Series C investors (these options are American, and usually without an expiry date). So Series B and earlier investors (and especially founders) will not like this round. And they will hunt around for offers that will ensure that they don’t have to pay out on the options they’ve written. I suspect this is what is happening at Flipkart and Snapdeal now.

The second problem with ratchets is that stated valuations are inflated. A common share in Flipkart (don’t think one exists. All investors in that firm are effectively either long or short an option in the same stock) is not valued at $15 billion, so that valuation is essentially a misnomer. When Morgan Stanley says on its books that Flipkart is actually worth $11 billion, it is possible that that is the “true value” of the stock, without accounting for the optionality that latest round of investors receive. In other words, the latest round of investors invested at a price, which if extended to all stock, would value the company at $15 billion. But the rest of the company’s stock is not the same as the stock these investors hold! 

The problem, though, is that the latest “headline valuation” (inclusive of optionality) is anchored in the minds of founders and other earlier investors, and they see any lower price as unacceptable. And so the logjam continues. It will be interesting to see how this plays out.

With IPO being way too far off an event for determining if a company has “arrived” I propose a new metric, with shorter horizon. A company can be declared as having arrived if it manages to raise a round of equity with no embedded options. Think about it!