Sino Hero Foods Ltd

I was invited a couple of weeks ago to be a guest speaker at the leading MBA institute of India ISB at an executive education course for young entrepreneurs who have already achieved a high degree of success and scale in the business ventures. One of the key issues that most participants highlighted as one of their core challenges was how to achieve further growth or rather how to achieve sustainable profitable growth. The irony is that if everyone is precisely trying to achieve growth then at some stage some will obviously be pursuing profitless growth while others will be investing in non sustainable growth.

Many participants highlighted that this was indeed the biggest challenge namely cross subsidization of businesses by competitors in order to gain market share at cost of profitability and thereby bringing down everyone’s profit margins. So someone in the tires business was using profits from tires and forcing themselves into the steel business often at a loss or without an appropriate risk/reward assessment thereby making life hard for the existing steel producers.

We are all too familiar with the 'Too big to fail' model that large banks have successfully deployed to gain massive subsidies from taxpayers in the US and Europe. As a friend of mine cynically puts it, " Too big to fail and too evil to go to jail." Cynical, maybe but certainly not quite far from reality. We are reading everyday that banks are refusing to lend to small businesses leading to tremendous financial difficulties and consistently high unemployment rates choking off the engine of growth of the economy. This creates a very hard spot for the small businessman on how to fund growth.

Anyway, as a small business how necessary is size and growth and more importantly growth at what cost is the key question small entrepreneurs struggle with daily. Reality is it costs money to feed the growth monster and real cost of money is very expensive for the small businessman unlike the "Too big to fail banks." A close friend of mine  sold his house 2 years ago in Hong Kong to invest his life's savings in  fuelling growth at his start up business only to see it implode as a consequence of the global financial crisis. Sadly, the house he sold is now worth 50 % more than he sold it so he not only lost his savings but additional profit. We often joke that the lesson is that he would have been far better off financially just sitting around in his pajamas in his house doing absolutely nothing rather than try grow his business. Sad joke but harsh reality. So one rule I always tell any entrepreneur is to NEVER pledge your primary residence to fund a business based on potential growth. Always remember that the so called “ Burn rate” is a very recent VC ( Venture capitalists) fuelled phenomenon to produce high octane growth from startups that in any case have an average of 90 % failure rates. Sounds like a good idea when you are blowing up OPM ( Other peoples money) but not when you are burning your own money.

We also know of enough small businesses who have been in constant debt by using really expensive credit card debt to meet business and living expenses. Very expensive habit ! I understand the necessity of this move sometimes but it makes for very bad business strategy if it is a constant debt trap to be paying 30 % in credit card interest in an environment that banks pay close to zero on deposit accounts. Few legitimate businesses can give a sustainable return in excess of 30 % to justify that high cost of money. Plus if the entire point is to earn 30 % annually in best case scenario to just to cover interest expense seems like another reason to sit around in your pajamas and do nothing ! Rule number Two : Calculate the real cost of money. The answer may shock you !

Finally, there are also situations where the entrepreneur after years of work does build a successful and profitable business but then is shown dreams of joining the ‘Big league” by promises of an IPO (Initial public offering) and listing on the stock exchange and/or some ‘Exciting” Merger or Acquisition provided certain “ Growth targets” are exceeded and then he is offered funding to go meet these targets. Sometimes this strategy is successful and we then hear these stories in all the papers but more often than not a lot of these companies end up in excess debt or unable to meet unrealistic targets and the entrepreneur often lose management control to the investors or the banks and there goes his life’s work.

Sometimes it is OK though not fashionable to accept that no growth or steady ( read boring) growth is better than growth at any cost. It is better to have a small and profitable business rather than invest your hard earned savings in achieving growth that firstly may never materialize or when it does may be too little and too late to sustain the high cost of funding. Profitability after a period of time adds up and creates solid opportunities for organic growth and guess what….. that’s when the banks and investors come knocking and offer you cheaper cash and/or credit lines too ! That’s when you understand the 3 rules of business life

1.      The rich get richer

2.      The big get bigger

3.      Life is not fair

But by now you are enjoying being in slot number 1, so hopefully you can move on to number 2 but it does take time and unfortunately I have not come across any “ secret” to “get rich quick”. But that’s why rule 3 -life is not fair can also pleasantly surprise on the upside too by that unexpectedly large order or that deal that should not have come your way but did and then you can grow on your terms !