Author: Avishek Gupta

I help drive sustainable development by financing the growth of professionally managed entrepreneurial ventures that solve key social and environmental problems. Having financed and observed over 250 ventures from close quarters, I understand the challenges that such ventures face in scaling up. I have the knowledge of process, financing and technology solutions that can help overcome those challenges. Separately, I have the experience of building businesses that finance early/growth stage companies. Most recently, I was involved with growing Caspian Debt to a full-fledged operating company from an initial 3 member fund investments team.

Reading List – 19th Oct

1.) Talking about the book “Permanent Present Tense” (Basic), by Suzanne Corkin, the article tells us the story of a man who inspired the story of “Memento“, the English movie.

Article: Memory

Some interesting definitions/lessons from the article:

Retrograde amnesia- victims are unable to retrieve some or all of their past knowledge.
Anterograde amnesia – victims can’t lay down new memories but memory of the past is more or less intact.
Transient global amnesia – a situation when one person has both retrograde and anterograde amnesia.
Episodic memories- memory of discrete events in his life
Semantic memories- general knowledge of the world, including the meanings of newly encountered words
New memories live in the hippo-campus of the brain

2.) A short piece on psychological pricing argues that pricing at INR 19.99 and not INR 20 has science behind it.

Article: Psychological Pricing

Some interesting definitions/lessons from the article:

Prices ending in .99 have higher sales conversion rates than prices ending in one cent/paisa higher!
As we’re reading prices, we either round down after the whole numbers in our minds or essentially forget what comes after the beginnings of prices.
When we see a price ending in 9 or .99, we believe the seller has priced the item at the lowest point possible and that we’re getting a great deal.
While pricing ending in 9 is perceived as bargain, those (products/services) who position themselves as elegant and special avoid pricing that ends in 9 and often price their products/services with even numbers!

3.) The article talks about the possibility of increasing the speed of internet access by atleast 10 times by using the ubiquitous light bulb!

Article: Li-Fi

Some interesting definitions/lessons from the article:

The amount of data that can be transmitted depends upon the frequency of the electromagnetic wave. The lower the frequency of the wave, the less it can transmit.
Energy-saving compact fluorescent bulb flickers between 10,000 and 40,000 times per second. The human eye can not perceive the flicker.
Light could be a key source of internet connectivity underwater where wi-fi does not work.

4.) How does honey kept sealed in a jar last for so long?

Article: Honey

Some interesting definitions/lessons from the article:

Honey has very little water. Water is necessary for survival of microbes which lead to spoilage.
When the bees regurgitate the nectar from their mouths into the combs to make honey, an enzyme mixes with the nectar, breaking it down and releasing hydrogen peroxide. Hydrogen peroxide is an agent that does not let microbes survive.
Honey will not spoil till it is not allowed to absorb water from the atmosphere.
Honey sucks water out of things it comes in touch with and hence used for healing wounds in ancient days.

“For what it’s worth…

“For what it’s worth, it’s never too late, or in my case too early, to be whoever you want to be. I hope you make the best of it. I hope you see things that stop you. I hope you feel things that you never felt before. I hope you meet people with a different point of view. I hope you live a life that you’re proud of and if you find that you’re not, I hope you have the strength to start all over again.” –Benjamin Button

How can Decision-making be Improved?

Found an interesting paper written by Katherine L. Milkman, Dolly Chugh and Max H. Bazerman on the topic.

The paper broadly talks about System 1(intuitive) and System 2 (explicit, effortful) of decision making and points out three ways of moving from System 1 to System 2:

a.) Gather historical data and analyse.

b.) Look at the situation and the implications of your intuitive decision as an outsider.

c.) Weigh the implications of a decision that is exact opposite of your current decision to see if your current decision has merit.

The paper can be found here.

Proliferation of “Chinese” goods!

When I went around looking for some memorabilia at the Liberty Island, US hoping to take something back home, I was surprised to see all items having a “Made in China” stamp. I repeat … all. I was stumped. I wanted to carry something back that represented the US and here, everything that represented the US was actually Chinese!

A few years earlier, I lived in a remote village in North Bengal for two months. The village was 10 km away from a metalled road and had only mud houses. There was no electricity and none of the households had a toilet. Guess what the villagers used for pumping water into the fields for agriculture? Chinese pump sets!

Low cost wins. Not just against remote access and utter poverty, but also against pride.

Developed vs developing world

Is there a way to differentiate between a “developed” nation and a “developing” nation by asking a single question?

I think yes.

When you want to find out if a particular place belongs to the “developed” category just ask a fairly rich local “What is your preferred mode of travel within the city/town anytime during the day? ”

If the answer is a train or a bus or any other public transport, you know you are in a developed country.

(I guess it is simplistic but more often than not the logic is correct.)

Impact Measurement

In the recent times, there has been a lot of discussion on social performance measurement. From CSR initiatives to charity foundations and from investors to social enterprises, everybody has either adopted or has been talking about adopting social performance measurements.

At the same time there is a group of people who think it is all a fad with complicated measurement systems trying to “measure” qualitative factors which are extremely difficult to quantify and hence extremely subjective. How do you measure “well-being” for instance?

The answer lies in the fact that we have to find proxies that indicate well-being. For instance- number of times the person has fallen sick in the last 6 months. This is just a simplified indication of what measuring is about. The job of finding the right proxies is critical and often learnt from experience. We should not land up with a wrong proxy and try to push results in that direction doing much disservice to the actual intent of the social programme or enterprise.

We need to identify a simple verifiable metric and we have to track it in regular intervals beginning with the baseline.

The metrics must be simple to track but verifiable and the tracking methodologies should not be so expensive that it doesn’t justify the the measurement & verification process altogether.

My career has revolved around the issue of “Income Generation” either through providing technology support, training to small entrepreneurs or through providing access to finance. I keep thinking how I can measure the impact of the work that we do on small entrepreneurs.

What could be that one metric that I could measure to keep understand the impact?

I think the primary indicator to keep track of is “Asset” build up. Assets could be land, building, an additional room in the house, a cow or a a vehicle bought with own money. It is easy to verify and track. In cases where it is part funded by loans, we can find out if his last few repayments were made on time.

What do you think?

Business Sustainability

There are four key ways in which we typically try to do better in business/improve profitability.

Offer a cheaper product with the belief that improved affordability will increase the size of the target market.
Offer a better product (at the same or higher price) with the belief that customers will appreciate the value of a better product and pay the premium to buy it.
Increase revenue by increasing the number of units sold (either through larger production or expansion of geography or a better marketing push) or increasing the price (by offering better products?).
Cut costs. This would help you do better in terms of profitability at the same revenue levels.

While all the above are seen to operate, my personal belief is that a combination of 2. and 3. is the best strategy to adopt. The other two may be good in case of a late life cycle product. While it is another question as to what/how you define late life cycle products, it is certain that such products would either have significantly cheaper substitutes (so cheap that it is close to my manufacturing costs) which weren’t initially found OR the need for the product is fast vanishing altogether (a standalone music system with multiple CD/DVD players?). In either case, the product would soon die and your company would die too unless you develop a better product.

Addendum:

A note by consultants at McKinsey on pricing, gets me thinking on the increasing volume vs cutting cost options. According to them, “a price rise of 1 percent, if volumes remained stable, would generate an 8 percent increase in operating profits—an impact nearly 50 percent greater than that of a 1 percent fall in variable costs such as materials and direct labor and more than three times greater than the impact of a 1 percent increase in volume.”

This means that a 1% reduction in cost has greater positive impact on profitability than 1% increase in volume! It also means that increasing pricing is the surefire way to bumping up your profitability. This is from a study on S&P 1500 companies.

Caution: Know when and how you can increase your prices.

Needs more thought.

Pricing: Loan against property v/s home loan

Simplified Definitions

Mortgage Loan/Loan Against Property (LAP):A mortgage loan is given for an open end use and is given against the lien of a property.

Home Loan: is given for a restricted purpose of buying/ constructing a house to stay.

Typically a mortgage loan is often the most common way of raising funds for growing the business. Banks typically get comfort from the availability of fixed collateral to be able to recover from in case of loan default.

The rate of interest charged on a Loan Against Property is higher (much higher) than a Home Loan.

Historically, default rates of LAP (for business purposes) have been high justifying a high rate of interest.

Why?

Question 1: Is the assessment of loan eligibility for LAP done assuming that cash flows from the business will grow due to utilisation of the funded amount for capex/WC use? If that is not the case, why would the default happen?

Question 1 a.) why can’t we give the loan based on existing cash flows?

People say that the loan size would be too small and not meet the requirement for the capex. My comment on that response would be “Oh common! let’s grow step by step. Give me some other reason”.

Question 2: Why doesn’t the “emotional attachment” story that works in case of home loan doesn’t work for LAP?

Question 2. a.) Does the person seeking a LAP have multiple properties and so property offered on mortgage has lesser “Emotional attachment”?

Guess so.

(Also, the question is how enforceable is the mortgage? In a lot of cases, especially developing countries, legal recourse may just be too cumbersome/ inefficient. So, isn’t the collateral acting more as a deterrent. I guess it is.)

Question 3: Would a LAP given based on existing cash flows AND after taking the owners current residential home as collateral completely change the loan performance?

That is what a number of financial institutions are now trying out with the lower income/informal sector entrepreneurs. Assess loan eligibility based on current cash flows and take the residential property of the entrepreneur as collateral. However, the interest rates continue to be higher going with the notion that LAP has generally resulted in high defaults. Interestingly, last 3 year’s history in these kind of loans show very low (between 0.5- 1 % delinquency in the 90 days past due bucket). Off course, three years is not enough time but these 3 years have been the roughest phase for business in India in general as well. The other key reason for good portfolio performance could be that this type of lending is new and the good quality selection could be due to the initial “start-up precautions” taken by the financial institutions starting this product.

Assuming loan performance does show improvement in this kind of loans, is there a reason to suggest lower interest rates and hence greater affordability?

At last but very important, one oft stated reason for low home loan interest rates is that the purchase of home does not generate additional revenue but LAP for small business does and hence the borrower can pay a premium. For all practical purposes, this reasoning silences all the discussion and the confusion around the pricing by simply stating that the lender wants his pound of flesh! That’s all!

What do you think?