The SMB owner in India
Some observations on the common man that runs the pulse of this country
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In one of my earlier market visits in Lucknow, I’d met a phone dealer, who sold lakhs worth of goods on the same day that they landed in his office. This was fascinating to me - you learn a lot about inventory days and inventory holding cost and when you come across this guy with less than 1 day of inventory, you are astounded.
The small-medium business (SMB) sector makes a big part of our economy. But this post is not about the sector but its heart, the SMB owners.
When you meet SMB owners in India, you often notice some very apparent things
The least educated ones are often among the most successful ones
Everyone has an intuitive sense of markets, customers but might not be able to explain it in a structured or macro sense
Their life is also not as hectic as a typical (tech) startup founder’s life
Why? Let’s find out.
On education
The educated class might easily dismiss this as the willingness to be corrupt, but that’s just a lazy explanation.
There are umpteen problems with the education systems in India (and similarly across the world barring a few countries) but ultimately it comes down to two disadvantages when it comes to entrepreneurship in traditional domains - Indian education makes people risk averse and pro-status quo because of lack of first principled thinking and creativity. Historically, education hasn’t focused on inducing creativity among kids and people outside the system (or rejected by the system) can often think more creatively than others.
The best in these businesses have been sculpted after years of experience, trial and error and calibration. They will try a few things, see what works and then choose a path. Whereas education often focuses on finding the optimal path, induces decision paralysis and ends up doing neither.
In India at least, the willingness to deal with mundane bureaucratic things (corruption being one of them) is also a success criterion and often people outside the education system seem more willing to go through the muck. I dont know the reason why, but it could be related to the sense of entitlement that comes to educated folks in India (because India puts education on a high status pedestal) that prevents people from concerning themselves with ‘insignificant things’.
These factors combined often make not going through the education system an advantage in some ways to traditional entrepreneurship. There’s of course a cyclical effect as well - the fact that some of them have not done well in such a high status system makes them more compelled to ‘prove their worth’ or accrue status through other means and hence they try harder to succeed in business by developing people skills.
On business acumen
Meet a few of these owners and you’d realise that their business savviness is second to none. They know their revenues and profits in and out, know why the customer is paying and wont pay more, how the demand is shaping and everything else about their business.
They give special attention to working capital and cash flow. A lot of these businesses work on credit on either side - they have accounts receivables and payables. Managing them well is key for them to use capital efficiently.
Perhaps, what they don’t give as much attention to is macro factors. They don’t often care as much about how the same industry is behaving in the US or China (unless they have their customers or suppliers there), India’s GDP per capita growth. This is not out of any lack of smartness, in fact, quite the opposite. They are sharp enough to focus on the things their business gets directly impacted by. So while they may not research about the sectoral growth rate, they will know about governmental policies supporting the sector and customer demand and how that will shape the growth.
This also makes sense because micro is the only thing you can truly control, and certain parameters of macro are too vague to be considered in decision making.
On growth and work-life balance
When these owners start these businesses, they work with a strong principle of maintaining positive economics and using the returns to reinvest in their business. As the customers increase, their top line increases, the variable costs scales but the fixed costs don’t and hence the profits increase.
This happens until a point when they hit a local maxima. This is when the top line stagnates or grows marginally further.
Why does this happen?
Let’s say a clothing manufacturer on the outskirts of Mumbai has exhausted its network in Mumbai. Now it is looking to go national.
For the same, they will have to invest in
increasing manufacturing capacity to plan for higher orders. Might even require tweaks to the setup based on the national demand
sales - hire some sales folks who can travel to showcase products and get orders
marketing - publishing in some trade magazines to get higher reach
national logistics and the costs associated with that
improving QC to match national standards
This would require a significant capital investment.
There are two ways to fund this investment to the owner:
Accumulated profits
External funds
If the manufacturer has not been in business for a very long time, the accumulated profits wont be able to cover the investment.
Even if it does, the working capital would be squeezed such that the profits cant be extracted out without disrupting the existing machinery.
So, often external funds is the only answer.
If the manufacturer is not willing to take external funds (and many SMBs aren’t), they have no way but to keep on continuing the same minor incremental growth trajectory1.
Stasis leads to better work life balance. The startup founder’s life is hectic especially because of the pressure on growth - which is either induced because the timeliness and size of the market opportunity, winner-take-all effects in many tech domains, or investor return expectation. The SMB owner often doesn’t have to deal with that. That doesn’t mean that the mental pressure of being an owner and the responsibilities that come with it are not there, just that after a certain growth stage, they don’t take up as much time.
Owing to the factors underlying these three observations, you see that the founder is different, the constraints are different and hence the business that emerges is also very different. If you are an aspiring founder, this difference is worth thinking about.
Read PG’s startup=growth and DHH’s Reconsider for a peek into both these perspectives.
Not all SMBs want exponential growth or external investor pressure and hence reject external funds, which is a completely fair choice.
A tribute to the best voice in the generation through these songs
I think that point is very relatable. most of these guys start a business to run a household (the point of positive economics), and through trial and error hit upon something that works and grows.
Most intelligent decision makers start with consideration of opportunity cost and probability of success, and that's where even the time needed to evaluate various options starts making less sense driving them to safer/assured/defacto options