Going by the struggles of massive Indian financial sector organizations like banks, NBFCs etc., in terms of discipline around disbursal, risk assessment, collections & NPA management, I feel startups in this space should brace for serious shocks as they scale.
A mistake that founders and investors in this space will likely tend to make is to get carried away by the “fintech wave” phenomenon, approach these businesses like any other consumer internet one, and grossly underestimate the inherent risks and toughness of building a finance business. What I found funny was a few Indian investors boasting about their lending startups portfolio — “our portfolio has disbursed $X bn in loans”. If I stand with a stash of cash on a street corner and ask people to take a loan, am sure even I should be able to “disburse” quite a bit :).
I know everyone is trying to become the Ant Financial (Alipay) of India but many don’t realize how it really evolved as an organic extension to the commerce biz and how the entire set of Alibaba ecosystem use cases feed it with critical data that helps it tremendously. Also, Ant Financial gets a captive user base of both individual users and merchants/ SMBs (along with all their data) via the Alibaba commerce marketplaces (Taobao, Tmall, Tmall Global, Juhuasuan etc.), essentially for no cost as part of a juggernaut. It’s only in last 5–7 yrs that Alipay started following a dedicated Super Apps strategy, going up against WeChat Pay and adding a slew of O2O use cases via investments/ acquisitions. But by then, it had already become #1 in several fintech segments in China (eg. wealth management, credit scoring), courtesy the Alibaba commerce ecosystem.
It’s important for all India fintech/ lending founders and investors to be aware of Alipay’s history & playbook, as well as how tough Indian financial sector itself is and the risks involved. It should reflect in the way these startups get capitalized and operationally built out, including proactive risk management.
I have always been fascinated by Ajit Doval, current National Security Advisor (NSA) to Prime Minister of India. At least from what I have been able to research, he is India’s first NSA to have also previously been an intelligence agent & ground operative behind enemy lines for decades. This makes his talks on defense strategies & decision making really fascinating, as he speaks from his experience on the ground, dealing with extremely high-pressure, high stakes situations.
I recently came across Mr. Doval’s interview called Talking Point. Similar to the Art of War by Sun Tzu, which has fascinating leadership & decision-making insights from ancient Chinese military knowledge & strategies, Mr. Doval gives some interesting insights from his intelligence & military operating experience, particularly around tough decision-making.
Here are some key takeaways from this interview:
What makes a decision tough? — a decision is tough when its consequences are “large” —quantum of impact is large, or impacting large number of people, or consequences remaining for a long period of time.
Objectives (why)→Decision (direction) →Option (how to execute) →Execution — this is the full-stack framework for tough decisions.
Clearly articulate your objectives for taking a decision — take out all adjectives and adverbs, only have nouns and verbs. Make it as simple and crisp as possible. eg. “ I am taking a decision to [ACTION] on [SUBJECT] on [SCHEDULE]”.
Do an objective analysis of your capabilities before taking a decision & choosing optimal execution option — what resources are at your disposal? What is your level of understanding of the subject?
Do an objective analysis of your state-of-mind before taking a decision & choosing option— am I angry? Am I fearful for my life? Am I fearful for my family? It’s almost impossible to take objective decisions under any sort of heightened emotional state.
Each decision option has a cost, associated time and probability of achieving your objectives — you need to choose the option which is most effective on cost and time, while having sufficient chances of achieving your objectives outlined earlier.
Frequently, decisions are right but option chosen is wrong — important to differentiate between the two (my interpretation is that decision is more about direction while option is more about executing on the direction). Wrong options typically get chosen due to lack of experience, knowledge or sufficient preparation.
Manage your fears by articulating them clearly — once you do this, in most cases, you realize that the fear isn’t as big or binary as you thought. Then, mitigate the specificities of this fear via hard-work, preparation and using your knowledge/ expertise.
More important than obsessing over how to take a decision, is being prepared to cope with what happens after a decision has been taken — human brain has limited capabilities and we aren’t crystal gazers. In most cases, vital decisions are taken under stress, anxiety and uncertainty. Given nobody really knows whether a decision is right or wrong, it’s more important to think about how you will cope with the aftermath, in case the decision doesn’t pan out the way you expected.
Assume that the “as-is” situation will unexpectedly change after your decision — be mentally prepared to cope with a new set of reactions, externalities and realities. Trust your capabilities and resources.
While taking vital decisions, work out a “worst-case scenario” and prepare for it — first, figure out if you can survive the worst-case scenario. Second, work on bringing down the cost of this scenario, to bring it to an “affordable” level where the risk becomes worth-taking. Doing this requires time, preparation and knowledge.
More important than making the right decision is making the decision right — you need to use your commitment & hard-work to ensure that once the decision is taken, it delivers positive results.
For decisions with potentially massive impact, always have a “fallback position” — having a contingency plan is crucial.
In addition to these widely-applicable insights, Mr. Doval also talks about his execution style. I found these points interesting so also including them below:
Solo — prefers being a solo operator. In an intelligence mission, risks go up as dependencies on other people get added, especially due to potential Prisoner’s Dilemma in case the mission blows-up. He might totally believe in a mission, while someone else might be doubtful. Hard to achieve success in a doubtful state of mind, particular as an operative agent. He doesn’t like to expose other people to risks that he, personally, is willing to take.
Surprise — doesn’t use the same operating strategy/ style more than once. This forces him to articulate a fresh set of assumptions every-time, and validate them again. This takes out any historical bias from decisions.
Speed — if you are fast, even if the enemy knows about your mission, you can still beat it say even by a few secs, achieve your goals and escape out of the situation. Key is to strike fast and get out fast.
Secrecy — in any type of situation, being able to hold vital information and secrets within you is critical.
While we consume majority of our content from successful founders, investors and business gurus, it’s important to diversify sources of knowledge and refer to learnings from other disciplines. Personally, I have found 2 such diverse areas very useful for both professional and personal learning — 1) creative arts (movie directors, artists, authors etc.) and 2) military (navy seals, intelligence ops, historical warfare strategies etc.).
Let me know if you found this piece helpful, and what non-venture areas do you refer to for fresh insights.
All worth-while things in life — raising kids, maintaining our closest relationships, building a company, getting fitter, eating healthier — tend to be perpetual battles that need to be fought almost on a daily basis. Everyday (or very often), you need to re-assess where you are and where you want to go, assimilate the ever-changing context around you, figure out the best way to move forward in that moment, and execute on it with the knowledge that your goal is a constantly-evolving & moving target.
There will, perhaps, never be a point in the journey where you will say that “the job is done, mission accomplished” as each goal will generate yet another one. This is why it’s important to respect these daily battles, and maybe then, you will start enjoying them and make the most of each day you live.
Today, I was remembering my strategy professor from ISB Prof. Prashant Kale. All my batch-mates will agree that he was probably one of the best, if not the best, professors that year for Class of 2010. In particular, one of his classes where he taught the legendary Southwest Airlines strategy case is imprinted in my consciousness — I even remember exact drawings he created in the class.
The key takeaway from that class was that the competitive advantage of Southwest Airlines wasn’t a single linear element; rather, it was a “Mesh of inter-connected, inter-dependent, self-reinforcing activities” that was almost impossible to replicate by competition. Eg., turning around a plane in 15 mins (fastest in the industry), which required the gate staff to operate at a certain cadence, which in-turn, required the check-in staff to do certain activities at a certain speed etc. Essentially, executing any precedent element well made the next dependent element even stronger; conversely, if one of the elements was poorly executed on, the entire mesh advantage ceased to exist. This Mesh model has been a transformative strategy concept for me, and has been a key foundational element of my thinking.
Illustrating the proverbial “Mesh of Competitive Advantage”
I recently got reminded of this concept again after a decade, this time in an entirely different context of public market investing. I was reading the Q1 2019 Quarterly Investor Letter by O’Shaughnessy Asset Management (OSAM), a top quant asset management firm founded by the legendary public markets investor Jim O’Shaughnessy. This letter is particularly fascinating, as it talks about how to cultivate real edge as an investment firm.
OSAM defines the following framework for real investing edge (quoting the letter):
“Real investing edge should (instead) be cultivated at the organizational level.”
“Properly built, an edge should be very difficult or impossible for others to replicate.”
“Ideally, the edge naturally increases over time — something venture capital investor Keith Rabois calls an “accumulating advantage.”
Specifically, OSAM does 2 things that drive the edge — 1) consciously building a Research Graveyard, which essentially means doing lot of research, data analysis and number crunching projects that don’t necessarily lead to immediately improved investing outcomes but increase the overall ideation & knowledge of the firm in a compounded way over the long term; and 2) building tools (data-sets, software and combos thereof) and then deliberately opening them up publicly for other researchers to use (like the way Amazon opened up its cloud infra to developers, creating AWS), whose usage, in turn, has generated some of the best research insights for OSAM.
As a finance and investing person, while both these elements are individually interesting to me, the real deal was this sentence (again quoting the letter):
“These things — software, data, research partners, our graveyard, even the podcast and our twitter activity — all link into and depend on each other, which makes each more valuable and harder to copy.”
“Think back to the ownership data project. Without other connected tools, that would have just been a dead idea — time wasted. But now the ownership data set has become a critical piece of another software tool we use for clients called Portfolio X-Ray. It is now also a new data set available to research partners, who may find something interesting that we did not.”
This is the “Mesh of Competitive Advantage” all over again. A set of activities that, while look replicable in isolation, are almost impossible to replicate by competition as an inter-dependent, inter-connected, self-reinforcing system. This, my friends, is where true competitive advantage comes from!
This is the same reason why, despite having an incredibly transparent investing strategy, framework, terms, processes & activities, other venture firms are unable to replicate the Y Combinator model. This is the same reason why I saw Alibaba winning in China eCommerce (a rhythmic mesh of commerce, payments, logistics, cloud and advertising that is perhaps, impossible to replicate even with infinite capital). It’s the same reason why, as Prof. Kale told us in 2009, Southwest won in the US airline market.
As I think more about this concept in the context of tech startups & Silicon Valley, I believe the following execution elements are important drivers of on-ground success:
Mesh creation has to be deliberate — it’s really hard to defend individual, linear advantage elements in the long run (eg. just having more capital than competition).
Constituent elements of the Mesh need to flow from an authentic place residing inside founders/ leadership teams — what we call as DNA, else it’s hard to sustain.
The Mesh strength compounds over time — demands consistent execution over a long-enough period of time.
This is why true diversity in the team is important — underlying this Mesh of Competitive Advantage, is really, a Mesh of diverse people, each contributing a uniqueness that, combined as a whole, is a super-power. Like the YC Founders or Paypal Mafia.
Would love to hear how you have created competitive advantage for yourself/ your companies.
Side-note: the “Mesh of Competitive Advantage” can also be used to differentiate yourself as an individual professional. Instead of being linear in your career, try to create your own cross-functional, cross-sector, cross-cultural & cross-market Mesh of skills & experiences that, while individually might not look compelling enough, combine together to give you a truly differentiated world-view and approach to life. In today’s age of automation & tech-driven leverage, having this type of Mesh is worth its weight in gold as it can’t be replicated by software; rather, software & tech tools can be used to leverage it up & further magnify its impact.
Related note for parents raising kids in Silicon Valley: given we live in an echo-chamber, with template approaches to pretty much everything (from hiking at the same spots, wearing similar Patagonia vests, to starting up and listening to the same podcasts), it’s important we consciously expose our kids to the non-Silicon Valley world. We would do well to nurture their authentic qualities and original habits, whether they fit with the Valley way of doing things or not. In fact, I would argue that the more contrarian or differentiated these intrinsic personal qualities are, the more we as parents, should encourage them. This will set them up as adults to create their own, authentic “Mesh of Competitive Advantage” that stands the test of time and disruption.
To be capital-efficient as a founder (also applicable to life, in general), when evaluating various cost line items or taking on a new cost, have a clear understanding of “Fixed” vs “Variable”. Variable Costs are driven by your intended “velocity” and therefore, can be controlled during tough times via a frugal approach (cut variable marketing spend, let go of expensive contractors etc.). Fixed Costs don’t care about your velocity and will keep eating you up (housing rent/mortgage, office space, full-time salaries etc.). They are much harder to control, given they reflect a certain baseline you have up-leveled your startup (or life) to. Paring down Fixed Costs will require more drastic down-leveling, including completely letting go of certain assets or experiences.
The issue with Bay Area startup environment today is extremely high Fixed Costs (housing, child-care, salaries etc.). These are uncorrelated to the actual state or momentum in your startup so founders have no choice but to live with them. You can’t be frugal with Fixed Costs beyond a point, as they are driven by the external environment, not the choices you make. This, in a nutshell, is the real challenge facing Silicon Valley founders.
Here are some ways to proactively manage your startup’s Fixed Costs at early stages of the Company:
Explore building a non-Bay Area distributed team — to balance output with salary costs, at least until you see the business momentum required to support Bay Area salaries.
Be generous with equity, (relatively) tight with cash — I know this is a hard one, especially while hiring engineers in today’s market. But as founders, we need to be disciplined about this. I would rather wait out for the right candidate who believes in aligning incentives with the real situation of the startup. For instance, if someone is asking for high cash compensation in a pre-PMF startup, this means they are not the right fit for this stage. I am all for doubling-down on higher equity, even higher than market standards, for early risk-taking hires. But every $ of cash being paid out needs to have a solid justification. Anyone who seriously wants to join a really early stage startup, needs to understand and appreciate this viewpoint.
Try converting Fixed Costs into Variable Costs — some ideas could be paying sales people more on % of sales commissions and less on fixed; going for an “on-demand” co-working space with elasticity to quickly scale up/ down; keeping specific functions eg. designers, content writers etc. (these functions need to be chosen really carefully) on contract per “as-needed” basis, instead of full-time etc.
Be frugal on G&A — optimize costs on office space, service providers, vendors, food etc. In particular, Bay Area startups have a tendency to splurge beyond their means on fancy office spaces, lavish off-sites, dinners at marquee restaurants, expensive swag etc. These non-core costs tend to add up and hit your budget more than you might realize.
Leverage free ways of brand-building — instead of spending tons of $$ on brand marketing to drive early awareness (eg. conference sponsorships, which are essentially Fixed Costs), leverage free channels such as blogging, building a community on social media (Twitter, LinkedIn, Quora etc.), podcasts, creating a compelling website, white-papers, research articles, invited speaker slots etc. Early stages of a startup are all about cost-efficient marketing. This can only happen when founders focus on the above channels to build their startup’s brand, their personal brands as well as communities around their product. Austen Allred, Co-founder and CEO of Lambda School, is doing this very smartly.
Would love to hear what ways of Fixed Cost management have worked well for your startup.
Recently, Brian Armstrong (Co-founder and CEO of Coinbase) did a tweetstorm on how there are way too many investors, vs builders/ operators, in Silicon Valley. And how founders in their prime-age are opting to become full-time investors, rather than starting-up again, even after a relatively small exit.
Brian makes some good points about a trend, though short-term in my view, that even I am seeing in the Valley. Here are my thoughts on why this is happening and how it will eventually get corrected (I did my own tweetstorm with these views).
I think this is a side-effect of the last decade of over-liquidity across markets. Companies got over-funded, assets got over-paid for, specific skillsets (mostly engineers) have gotten astronomical salaries relative to their skills & experience. Also, there is no inherent entry-barrier to becoming an angel/ seed investor, provided you have “some” liquidity, especially as cost of starting businesses has come down a lot and early rounds have gotten increasingly syndicated/ fragmented across multiple small investors.
Given excess liquidity, a person who ordinarily would have been an individual angel, is now getting a shot at raising a small fund. While institutions would still keep a high bar, there are enough friends/ colleagues/ relatives willing to commit funds to ride the tech gravy train.
So am not surprised that many are jumping on the professional investing bandwagon, instead of starting-up/ operating companies. What many wouldn’t realize is:
This asset class has a 10 year feedback loop. You might end up concluding after a decade, that you aren’t really that good as an investor.
While raising a “small” first fund from personal well-wishers is relatively easy, scaling up to 2nd fund and beyond, esp. getting institutions to buy-in, is much harder.
Once you raise other people’s money, you are locked-in for many, many years. Not easy to switch career tracks.
Unlike a startup, it’s really hard to “pivot” or “reset” a fund. If your thesis/ strategy turns out to be faulty, or your Partner team chemistry doesn’t work out for some reason, you are still going to be stuck with these mistakes for a relatively long period of time.
In professional investing, showing commitment & consistency over a long period of time is critical. Yet, this is really hard to do, especially when you have decades of your career ahead of you.
In the end, market forces will weed out short-term players and restore balance. This could start once the current boom cycle turns around and liquidity becomes tight.
My personal philosophy — the world is shaped by “Builders”, not “Investors”. Why would you want to be a full-time cheerleader, when you can play the actual game?
Read an excellent article today by Clint Korver of @uluventures on the importance of diversification in venture portfolio construction. Sharing some key highlights that I found really interesting:
Venture returns (R) are driven by 2 main factors — # of investments in a fund (n) AND probability (p) of an investment being an outlier return-generator. [UPDATED] in discussions with a few readers, I realized that a 3rd factor, ownership % in the winners (o), is also a key determinant in eventual returns (this was missed out in the original referenced article). Therefore, have updated the equation to R=f(n, p, o). To optimize R, ’n’, ‘p’ AND ‘o’ need to be optimized for.
Excellent chart on “chance of an outlier” — x axis has # of investments vs y axis has chance of at least one outlier for a specific portfolio size. Successful VCs need at least one outlier to have a well performing fund.
3. Summary from the chart in below table — to quote “Even the Superstar investor, who is 50 percent better than the top tier VCs, only has a coin flip of a chance of an outlier with a small, concentrated portfolio of only 10 companies.”
4. Interesting that @uluventures has chosen 50 as optimal portfolio size. This is really big, given just 2 investment partners. Strictly by data, assuming they are “top-tier” in terms of picking ability, they believe they have 90% prob. of having at least one portfolio outlier.
5. While 50 is still a huge portfolio, given failure rate of companies, incoming follow-on investors as well as organically graduating to the next stage, @uluventures can still smartly manage their workloads. This has been my experience as well at Operators Studio.
6. Whatever your “picking ability” might be, it’s just a smart choice for any venture fund to adequately diversify. While large firms do it organically by having multiple investment partners to do a sizable # of deals, smaller venture teams would need to do it more consciously.
7. Side-note: loved the reference to @AlignedPartners and their strategy of taking relatively lower risk profile bets (capital efficient, less dependency on external capital, more ownerships for everyone on exit). Resonated a lot with my approach for Operators Studio.
Overall, am a believer in thesis-driven diversification that is done consciously and thoughtfully, especially at the angel and seed stage (where I operate). Of course, if a venture investor can marry diversification (n) with top-notch picking-ability (p), [UPDATED] as well as maintain high ‘o’ in the winners by doubling-down on them, magic happens!
[UPDATED] Remember the brain tattoo R=f(n, p, o)
Would love to hear your thoughts and experiences on diversification of early stage venture portfolios. Are you a believer in diversification? Or do you focus on “being focused”? When does diversification become “spray-and-pray”? How should an angel/ seed investor go about balancing ’n’, ‘p’ and ‘o’ simultaneously?
Am super-pumped to welcome Nishant Gairola to the Operators Studio team, as a Student Associate. He is currently pursuing his MBA at IESE Business School in Barcelona, and has been a serial founder for a decade, building multiple companies from grounds-up.
Nishant will support me across core investing tracks for Operators Studio, including ramping-up deal flow, evaluating interesting investment opportunities and supporting current portfolio companies on their most pressing challenges. Nishant and I will also work together to further refine OS positioning, value proposition & differentiation in the global angel/ seed investing space, including cross-border themes. Finally, with his presence in Spain, OS will now have access to the European market, in addition to my deep US-China-India networks. I am particularly excited to explore Eastern European markets, as I have met some special engineering & founder talent from there over the last year.
Excited to be adding such high-quality young talent to the Operators Studio journey. If you are a founder, investor or any professional from the venture ecosystem looking to collaborate with Operators Studio, especially in Europe, please feel free to reach out to Nishant!
This happens everytime!! I have been “pitching” India since 2006 — raising money for it, investing in it, acquiring companies in it, creating jobs for it, getting foreign capital into it. Everytime you sense that the India story is finally coming together (around 2004 under AB Vajpayee when infra finally started improving; in 2007–08 when bunch of NRIs returned to their motherland; in 2014–16 when Modi got a strong mandate for change etc. etc.), the govt. and its policy-makers shoot themselves in the foot? It makes me frustrated, angry, disappointed…even sad.
Over last decade, I have worked to bring several large overseas companies and institutional investors into India — selling the classic “rising up to the top-right” Internet users slide, the “demographic dividend” story that never goes out of style, the “largest democracy in the world” jingoism. For anyone who has grown up in the country, studied in the country, operated in the country and essentially come up the ranks in the country, we know that this high-level analysis completely glosses over massive structural complexities and weaknesses in the Indian economy and legal justice system. In my heart, as an Indian, I want all of this to be not true, but as a global citizen, professional and custodian of capital (which is fungible), it’s hard to not be affected by these developments. At the end of the day, emotions can’t hide the wide potholes in the India story.
I want to be a problem-solver, not a problem-identifier or a jingoistic reactionary. But I don’t know how! I have rarely reacted to such issues on public platforms in the past. But seeing this story truly made my blood boil today morning. Founders are the most giving stake-holders in any society — they take massive risks, put their comforts on the line to build something, create value, technology, products and jobs, generate wealth for everyone (and themselves) but with huge professional and personal sacrifice. Grounds-up founders don’t inherit family businesses or Millions of $$ in a trust or estate — they start-up to build better lives for themselves and in process, improve all our lives as well! This kind of one-sided #angeltax activism and freezing bank accounts just disrespects entrepreneurship and true human enterprise that moves our species forward.
I am, and will always be, a big believer in Indian talent, and will continue to back it all my life. But unfortunately, I am not a believer in the Indian govt., policy and legal systems.
Note 1: I felt the same anger & helplessness when Nirbhaya and 2G scams happened during my last years as an Indian resident.
Note 2: today, as Indian founders battle the tax authorities and essentially the Indian govt., I am for the first time truly internalizing the use case for a decentralized world and crypto.
Note 3: my personal experience with Indian real estate has been similar (non-transparent, corrupt, no way to enforce rules, full of outrightly fraudulent and criminal behavior). Couple of years back, I vowed to not invest any $$ in Indian real estate going forward.
Note 4: it’s unlikely that I will ever invest again in Indian legal entities of startups via Operators Studio.
Recently, I came across two talks by Ruchir Sharma (Head of Emerging Markets and Chief Global Strategist at Morgan Stanley), where he outlined some key geo-economic themes for 2019 & the upcoming decade (Asia Society, NDTV). While I am a big Nassim Nicholas Taleb fan and as a result, don’t care much for macro-predictions or extrapolations by economists, I do like to follow Ruchir’s work mainly because: 1) he presents really interesting data sets, which I can use to draw my own conclusions/ implications, and 2) he is someone who deeply covers both the East and the West. I do think it’s important for both founders and early-stage investors to at least keep an eye on global geo-politico-economic themes as they do impact tech businesses over the long term.
Here are the top 10 themes as presented by Ruchir. I find the supporting datasets particularly fascinating and therefore, have included their snapshots from the NDTV video. Am also including ‘MY TAKE’ for each theme, at least wherever I have a strong view.
Peak America — Is America’s Decade Coming to an End?
This decade has clearly been America’s — as per Ruchir, while the US economy is ~25% of global GDP, its stock market cap is ~55% of global stock market value. Over last decade, while most major stock markets globally have given flat or minimal returns, the US stock market has tripled in value and is at a 100 year high compared to rest of the world.
Interestingly, Ruchir has identified a trend wherein every decade has some sort of a global economic theme that dominates investor interest. However, that theme never gets repeated in the following decade. As per his analysis, the US has ‘peaked’ in both economic and financial terms, and therefore, could see a slowdown starting 2019 and spilling over to the next decade.
MY TAKE: Clarifying the time frame being considered for this analysis is really important. In the short-term — yes, I would agree with Ruchir. With what one sees on the ground (excess liquidity all over, over-optimism at large, tech stocks bull run), it does seem like we are near or at the peak of the economic cycle and over next 24 months, various indicators will definitely tighten. However, over the long term (10yrs+), I continue to be extremely bullish on the US, mainly because of my belief in its inherently-entrepreneurial & innovation-driven economic and social fabric. My personal view is — US will continue to attract global knowledge talent for several decades to come (irrespective of political cyclicality), will lead in IP-driven innovation & deep-tech, and will surely be one of the leaders of whatever wave(s) that happen next (crypto, blockchain, AI & beyond).
2. Rise of Anti-Bubbles
Ruchir defines ‘Anti-Bubbles’ as countries where, despite healthy economic indicators, their GDP is surprisingly, lesser than the market cap of some of the top US tech companies. This, to him, doesn’t make sense. He feels that once the current tech wave slows down, the Anti-Bubble markets that have been unfairly neglected in favor of US tech stocks, will start seeing huge capital inflows.
Just to give a sense of how much global investors have been prioritizing US tech stocks over entire countries — India’s total GDP is less than the FAANG combined market cap.
MY TAKE: ‘Anti-Bubbles’ is a very interesting concept. While I understand where Ruchir is coming from in macro-economic terms, I think there is a larger point here — to me, technology is changing the very nature of the way our world operates & is segmented. Concepts like defined nation-states, insular GDPs, trade borders etc. are being disrupted right in front of us. To keep pace, traditional economic metrics and analysis methods also need to evolve to correctly reflect the updated realities of how markets, economies and societies are going to operate going forward. That’s where the gap is right now!
3. Why Global Interest Rates Can’t Rise Much
Global debt has risen from ~2x GDP in 2000 to >3x in 2018, with China borrowing the most since the 2008 crisis. Given these high debt levels, global interest rates can’t rise beyond a certain level, as central banks need to avoid large-scale repayment failures.
MY TAKE: No particular comments.
4. De-globalization
Trade as a % of global GDP has come down from ~60% in 2008 to ~55% in 2018. There has been a backlash against globalization all across the world this past decade, with protectionism on the rise across countries. Most notable example is the ongoing trade war between US & China.
Interestingly, there are a bunch of Asian countries that are benefiting from this trade war, including Vietnam & Bangladesh. US companies are now shifting their backend supply chains from 100% China, to diversified across multiple manufacturing centers, especially in SE Asia.
MY TAKE: I have a few specific inputs on this theme:
A) Globalization is beyond the control of politicians. Beyond creating short-medium term barriers, they can’t fight the power of technology (the Internet) and stop global citizens from interacting & trading with each other. The real issue is — how do governments create policies to ensure that all sections of society benefit from globalization. Stopping globalization is not the answer, ensuring equitable distribution of its fruits definitely is!
B) The geo-political trend of countries standing up to China is going to get even stronger in coming years. Given China has an openly aggressive international posture politically, economically and militarily, I expect its disputes with rivals such as US, India, Japan, Korea & certain countries in SE Asia to continue.
C) As China transforms its economy from manufacturing-based to consumption-based, countries such as Vietnam, Thailand, Bangladesh and India really stand to benefit from global companies diversifying-out their procurement from China.
5. The Anti-Establishment Wave
There is a clear trend of right-wing political parties coming to power across multiple countries. Interestingly, the average age of world leaders has also steadily been going up.
MY TAKE: No particular comments.
6. Fiscal Indiscipline Rising Everywhere
Global avg. Fiscal Deficit as % of GDP has gone up from ~2.25% in 2013 to ~3% in 2019(P). Case in point is India, where farm loan waivers have increased massively since 2016.
China spends 3x of India in terms of capital investments. While India has focused on waivers & subsidies at the cost of govt. spending on infrastructure, China has doubled down on investments & capital spending to drive growth.
MY TAKE: No particular comments.
7. India Still a One-Engine Economy
India’s growth is primarily driven by domestic consumption. As per Ruchir, it’s hard to consistently grow at 8%+ just with a consumption-based economic engine. Like China, India needs an investment-based engine as well, to complement consumption.
Another concern related to India— with rising consumption, household debt is also rising significantly.
MY TAKE: India’s consumer story is probably one of the most attractive investment areas in the world. Most startup activity is also in this space, be it eCommerce, payments, entertainment or food delivery.
Personally, I wouldn’t worry too much about the household debt situation as current debt levels are still far below developed markets and also, India has a strong savings culture that counter-balances the debt issue.
As a tech founder & investor, I would like other sectors of India such as enterprise software, manufacturing, agri etc. to also catch up with consumption, in terms of growth & investment attractiveness.
8. Growing ‘Tech-lash’
Tech has been the least regulated space across the globe, particularly in the US. This is changing now, as lawmakers realize the impact of these technologies and the need to study & better regulate them.
MY TAKE: Personally, I welcome constructive regulations that make tech companies more responsible towards consumers on issues such as privacy, harassment, data security, financial scams etc. The power of tech in our lives is only going to grow; it would be foolish to assume that it can be left unbridled. In fact, clear, non-ambiguous and forward-looking regulations will create a more sustainable environment for emerging technologies such as blockchain & crypto, AR, VR etc. to flourish.
9. Next US-China battle Will be All About Tech
MY TAKE: Frankly, the only country giving serious competition to the US in new-tech is China. Having developed a walled-garden Internet ecosystem that has spawned local giants (Alibaba, Tencent, Baidu etc.) rivaling the likes of Google & Facebook in scale & market cap, China is now focused on becoming an AI leader. I believe issues such as weak IP protection, outrageous data control and walled-off ecosystems, combined with an aggressive international political stance at a country level, will lead to significant headwinds for Chinese companies looking to expand globally. This is where US tech companies will continue to have an edge, followed by players from the EU, India and SE Asia.
10. King USD No More
The dollar has had a fantastic ride over last few years, backed by solid economic & financial performance from the US. Ruchir feels that the USD has peaked and will get weaker going forward.
MY TAKE: am no currency expert so have no comments :).
To Conclude:
My big takeaway from Ruchir Sharma’s top 10 themes for 2019 is that we are at or near the top of the economic cycle in the US. Excess liquidity & tech has been the main driver of this decade-long bull cycle, and given natural cyclicality, could see a cool-down period over next 12–36 months (which would be good for everyone, I think). In the short term, makes sense to proactively manage for this potential upcoming volatility by diversifying, both from a career and personal finance perspective. Personally, I continue to be a long-term bull on the US, primarily because of my confidence in its inherent entrepreneurial innovation engine & continued ability to attract the best global talent.
China has had a fantastic last decade domestically; however, I see major headwinds for it from a globalization perspective. Having seen its tech prowess, talent pool and national focus from close quarters, I wouldn’t discount China’s ability to pull another growth rabbit out of its hat (similar to manufacturing in the 90s and Internet-consumption in the 2000s). Maybe AI?
India continues to have a strong domestic consumption story, and will continue to chug along. It’s a democratic and highly heterogenous country — given fragmentation & high degree of local complexity across multiple elements, it’s hard to see it growing at China-like levels (which can only result from a China-like centralized political system). Which is fine, as India will continue to grow sustainably & by-consensus. Ideally, would like to see the Indian economy unlock one more major engine of growth — enterprise software for the world? Domestic manufacturing? Commercial use of space?
Overall, looks like we are in for an interesting 2019, and the decade ahead!
Source: all data snapshots are from Ruchir Sharma’s NDTV interview.
