Valuation versus brand building

Everyone is talking about the new age of entrepreneurship where startups that are barely out of their nappies are earning valuations in billions – in most cases significantly more than the established brands in the same category space who have toiled blood, sweat, several cardiac arrests and lots of hard earned money to get to where they are. I am not talking about enterprises such as Amazon, Google, Apple and Netflix who have gone through a certain passage of time and a fair share of ups and downs before starting to see profits and lots of it. However I am always sceptical about the plethora of startups who are just a few months old or in a handful of cases a year or so, who are being valued in billions. Their business model has consistently shown losses, has given little importance to customer service and has put in lesser effort towards brand building. One keeps hearing the word “disruptor”. Sounds nice doesn’t it – “disruptor” but one needs to move beyond disruption to build a product or a service that can stand the test of time. In my earlier blog – have we misunderstood the maxim – life is too short, I had touched upon the hurry most entrepreneurs are to make money, get a large valuation and sell out. With very little thought given to brand building and customer service. Unfortunately the belief is in creating something short term and iconoclastic without having the stomach to stay in the game for a long time.

Last week, I came across two contrasting articles – both praising the founder. But there was a difference. One of the founders had over the last 30 odd years, built a brand or rather transformed painstakingly a common commodity such as cooking oil into a market leading brand and was now investing his wealth in building long standing enterprises in health care. On the other hand, there was another founder who was playing the role of a disruptor within the hotel industry with a business model of being a consolidator for all budget hotels less than 100 rooms. A fantastic business model no doubt but will it pass or fail the test of time? The worry is that the founder is likely to get caught up in the game of valuation and valuation only. If you visit the Wikipedia page of Oyo, the only content you will see is the long list of investors since 2014 when the founder initiated the model. Softbank has just committed a $1 billion investment in Oyo rooms valuing it at $5 billion and making it India’s second most valuable startup after Paytm (another new age startup). The article claims that Oyo is now the biggest hotel chain in India, nine times bigger than the no 2, the 115 year old Taj Group (my favourite be it family holidays or business trips). It’s valued more than the Taj Group and the Oberoi Hotel group combined. Since Oyo does not build hotels and nor does it buy hotels but only consolidates, it could become the world’s biggest on the metric of number of rooms operated in the next few years. The Marriott group is the world leader with about 1.2 million rooms, followed by the Hilton group with about 840,000 and Oyo is at 213,000 rooms. But the rate at which it is consolidating every quarter is 10 times faster than the traditional hotel chains. So becoming the global leader is just a few quarters away. But will Oyo be around by the time Taj celebrates its 125 years. For the sake of the young founder, I hope it is. It has a strong business model and is targeting a segment of hotel guests long ignored. My only worry is that patience seems to be in short supply as is typical with the new entrepreneurs and this will eventually offer a lot of value but only to the founder. I hope I am proven wrong.

Well the other founder that I have mentioned above is none other than Mr. Harsh Mariwala. After founding Marico three decades ago and conceptualizing Kaya Clinic, a skin and beauty care firm in 2002, he is busy with another venture – AquaCentric Therapy – a chain of physiotherapy and rehabilitation centers that combines land and water based therapy. This venture has been funded by his family office fund – Sharrp Ventures which manages his investments. It was more than four decades ago, Mariwala quit the crowded traders lane in Masjid Bunder in Mumbai with a goal to make his two highly commoditized products – edible oil and coconut oil – national brands. Today both Marico and Kaya are listed on the Bombay stock exchange with a combined valuation exceeding INR 41,000 crore ($5.6 billion). In his own words – he says that his latest attempt is not driven by valuation. For him long term growth orientation is more important with an emphasis on infrastructure and quality of talent to build such facilities in India. Isn’t this a different language from the new age entrepreneurs, most of whom see this world coming to an end by 2020 and hence just build something, get someone to pump in money, get unrealistic and non-deserving valuation and move on. The money earned is then pumped by them into multiple other similar short-terms businesses and the cycle continues.

 The poor quality of customer service that surrounds us all in various spheres of our daily existence is a proof of this short termism or rather a pusillanimous approach to business. I came across this quote recently and thought it is relevant in today’s new age way of thinking – “The bitterness of poor quality remains long after the sweetness of low prices is forgotten”