Sunday, March 13, 2016

The Risks of Free Money

Free Money Is The Biggest Risk To Business, Entrepreneurship and The Economy

I have loved the world of business and entrepreneurship ever since I was a small boy and would sell second hand comics in school in Iran. The principles have always been the same – have a product or service that people want and desire and sell it at a price they are willing to buy, while making a decent profit.

With the money earned, keep building up your cash flow and keep reinvesting and growing the business. Along the way build systems and a team that can handle the growing business. Only once the systems, the employees and team become stronger, get external investors and financiers to add the fuel of finance to grow the business.

Imagine now instead of this, billions of dollars are given to someone and this person doesn’t have proper systems in place. Doesn’t have a strong team and most importantly doesn’t have customers willing to buy the product at a price where a profit can be made, what will happen?

Every time there is a bubble, a lot of free money starts floating in the market. It has happened throughout history; in 2000 for instance there was a huge internet bubble globally – it happened with Isaac Newton hundreds of years ago where he ended up buying tulips at the same price of a house. Recently in India a bubble has been growing in the space of e-commerce and new start-ups in various areas from grocery deliveries to hotel room aggregators have raised billions. 

When a lot of money suddenly comes inside these companies, without proper systems, infrastructure and appeal to clients – instead of the money being used towards building a sound business – the money starts going in wrong directions.

Excessive money is spent on advertising and when that doesn’t work unrealistic discounts are offered simply to be the cheapest and to attract buyers. While buyers might benefit in the short run, in the long run it is not a suitable model as any business where you have to continue being the cheapest is not unique.

In desperation a lot of rash hiring is done and unrealistic goals are put in front of these employees. When these goals can’t be fulfilled, there is mass firing and these employees face immense stress and hardships.

I respect initiative and business and wish al these businesses the best. But imagine giving small eight year old huge chunks of money, without ensuring the small boy has the knowledge and information on how to spend the money sensibly.

That is what has happened with several of the businesses and I am sure there will be immense pain because of this free money. As a Happionaire and business owner, I have refused money several times – especially when I feel I will not be able to use the money productively.

The more times, I have refused money; the more people have respected me and the easier it becomes to actually raise money when you need it.

In the end there will be a few winners in the space of e-commerce and these will become future market leaders in market and country that offers immense potential and opportunity.

Keep learning and keep sharing your ideas! 

Yogesh Chabria


PS.: I enjoyed reading an interesting post by Anirban Blah on writing and the North East.  I am happy he is writing again - the way everyone should. 


Akash Mehta said...

I think this makes a lot of sense Yogesh ji - indeed for a real business what is important to make a profit and sell in an honest way rather than adopting all gimmicks and blowing away investor money.

Suresh said...

I don't agree with your Akash or with Yogesh, with all due respects. Great businesses need money, how do you think a company like Snapdeal or Oyo can grow without money? Don't you think you are stopping business and young people from starting businesses?

Anonymous said...

Suresh - what you are saying is like let a company blow money away just because someone has an idea? Snapdeal fired hundreds of people. Oyo is not paying money to hotels. Is this what you want?

Anonymous said...

Mr. Chabria, I'm from the part of the IMF and loved the simple way in which you have explained the subject of what is happening in India. A refreshing change reading it.

Bhim said...

Hi Yogesh,
You've Brilliantly summed up the status of our current e-commerce scenario in our country. I can't agree with you more on - "The principles have always been the same – have a product or service that people want and desire and sell it at a price they are willing to buy, while making a decent profit."

if as an entrepreneur, we can keep the above motto then things will certainly will fall in place.


Anmol Agrawal said...

Great article. Thanks for writing and sharing it.