March 2021 - Notes by Logoraman

Learnings from life – Part I

This is one post I have been trying to pen down for quite some time. While these are some of the learnings I have had in my life they are by no means some golden rules for anyone to follow as they are a result of my unique experiences.

There are no play-books. If you want to blaze your own path in life, understand that there are no play-books to follow. Most of our life from childhood onwards we are asked to follow different play-books. Most of the times these are based on journeys taken by people who ended up being successful. These people, their lives and journeys are often cited as examples of a path to take to achieve success and we end up blindly following them. Variables like your nature, your network, your interests and abilities are not considered and these often determine your success. So the next time you are presented with a play-book to follow, sit back and ask some questions. Find your answers and chart your own path.
Don’t wait for permission. We are conditioned to ask for permission from the time we are a toddler. Hardly any decisions we take are under our control almost till the time we start college. We are taught to take permission from parents, teachers and elders to do pretty much anything in our childhood. This is mostly done to keep us out of harms way however almost 18 years of this habit naturally tends to make us reluctant when it comes to big decisions. We are always looking out for the ‘elder’ to ask for permission. This reluctance limits our chances of success. As they say it is often easy to ask for forgiveness than for permission.
Learn to delegate. Delegation work to someone is something most of us come across in our 30s. This is mostly when most people reach middle management and have people reporting to them. Till then tasks were delegated to you and you have become pretty adept at finishing things you were assigned. Delegating work though is a different ball game and most people are uncomfortable with it at least initially. Start by delegating smaller tasks whose outcome don’t matter so that even if it gets messed up you can either redo it or no one cares. Try to give away at least 20% of your daily tasks to people reporting to you and take it from there.
Strong opinions loosely held. It is good to have opinions and having strong opinions allow you to commit to decisions and directions. Interestingly opinions change over time as you gain more experience and more often than not you will see contradicting evidence to your opinions. When that happens swallow your pride, take it as a lesson learned and change your opinion.
Data based decision making. In God, we trust everyone else must bring data. This is one of the posters that hang in our office. It is very easy to get lost amongst anecdotes and stories. The loudest mouths and storytellers can weave stories to push their points sometimes misleading the decision-making process. With data, everyone is looking at the same picture and drawing conclusions from it.
Reading books. Reading is crucial and it can help you get ahead in life. However many people get into the trap of counting pages or books they have read. Recently I have come to think of reading as a means to gain knowledge, provoke deep thinking or inspire actions on topics you care about. By that definition, an article you read, a documentary or a movie you watch or an annual report of a company can all have the same effect. I no longer set targets or maintain a long list of books I need to read. There are 3 – 4 topics of interest for me at any point in time and I try to consume any content on those topics be it books, videos, articles or tweets. Re-reading books that I liked in the past is another thing that I have started doing. I take copious amounts of note and consume additional content on the topic like author interviews, summaries, reviews of the book to build on top of the initial reading.
Habits vs Goals. This is an idea popularised by Shane Parrish, James Clear etc in their blogs. Although I still do set goals for myself on an yearly basis most of these are broken down into daily habits or tasks that are part of my daily routine. For instance fitness for me is a daily 30 minute session rather than getting a 6 pack abs or getting the fat content to < 10%.
Start with something. A blank canvas can sometimes look like a chance for infinite creativity or a steep hill to climb. The key is to get the first stroke in and work from there. There is an interesting concept called ‘The 5 second Rule’ that I came across in Mel Robbins site. It essentially says ‘If you have an impulse to act on a goal, you must physically move within 5 seconds or your brain will kill the idea’.
No one is thinking about you as much as you. A lot of our time is spent on thinking about what others think about us. This fear or concern is natural as we are social beings and for many years in our history, our survival depended on how likeable we are in the group that we are part of. However, this thought can make us self conscious unnecessarily. Accept the fact that there will be people who will like you, hate you and not care about you. The vast majority will be the last group.
People remember how you made them feel. Treat people nicely irrespective of their social status or in whichever levels of man-made hierarchies they fall into. It doesn’t cost anything.
Avoid toxic people at all costs even if it benefits you temporarily. Some times in life you will find yourself in the company of toxic people. The fact that both of you are on the same side and consequently want the same thing is no excuse to put up with these people. At the end of the day, they are a big energy sap for you both physically and mentally. The warning signs often come early in your interactions and it is best to avoid these people.
Plan your day in advance. I go by the adage, “No one plans to fail but fails to plan”. A day planned in advance allows you to avoid distractions and gives a clear sense of purpose. Write down 3 big things you want to accomplish the next day before you go to sleep. That is all it takes.
Take notes… a lot of it. I have filled my share of moleskines and notebooks with copious amounts of notes and margin doodles. Some of these notes I never refer back to and I was concerned about that for a while even questioning the habit of taking notes. But lately, I have come to realise that they serve not just as records you can go back to but also as a way to structure thoughts and assimilate information when you take them. That alone justifies taking notes.
Figure out what you would enjoy doing even if no one paid you to do it. Life doesn’t happen in a straight line, there are many ups, downs and about turns. Not everyone discovers their passion by the time they are out of college. People end up in careers they might not enjoy but pays the bills. Once you are stuck at the wrong job it will slowly start affecting your happiness and your well being. It pays to take time and consider your options while choosing a career path.
Who wants what? Negotiations happen everywhere and not just in business. It helps to know what the motivators for the person sitting across you are. Money? Respect? Speed? Use that as leverage to arrive at a favourable outcome for both parties.
Anchor effect is powerful in negotiations. Name your price first. Make it at least 2X or 0.5X depending on which side of the table you are of what you would be happy to walk away with. Once this number is in everyone’s mind it is difficult to get it out and you have a better chance of closing the deal at your desired number.
How you do anything is how you do everything. This one comes in handy especially when you are hiring people. Traits like attention to detail etc are so ingrained in people that no matter what tasks they do it shows. Candidates who turn up a shoddy presentation for an interview citing lack of time is suddenly not going to become perfectionists once you hire them.
Don’t be embarrassed or afraid to talk about money. Yes, everyone is doing it for the money.
Trust – The world goes around because of trust. Whenever I get into any sort of relation – business or personal – I begin with 100% trust on the other party. Second guessing every action by someone is a sure shot way to strain the relation and get into all sorts of trouble. Calibrate the trust as you move along.
Unlike the digital world, real-world is not binary. A binary world is easy to understand. There are clear rights and wrongs. However, the real world is messy. There is black and white on opposite ends and a huge grey area in between. Almost everything you deal with will fall into the grey area. So, get comfortable operating in this zone.
Good, bad, evil are all relative. One man’s freedom fighter is another man’s militant. As long as you are not hurting people or on the wrong side of the law everything is game.
Your success is not limited by your intelligence. Don’t despair if you are not the smartest guy in the room. Often times your success is the result of a combination of intelligence, hard work, patience, EQ etc.
Mental models and cognitive biases are good to understand but hard to implement and watch out for. A simpler way is to understand the basic human tendencies and use that as a guiding post. Read about the 7 deadly sins. Most humans are fallible to these. Learn how to avoid them, spot when other’s actions are poisoned by them.
Every now and then, stop doing and start thinking
The #1 productivity hack is to get up early. Early depends on a number of factors like are you single and staying alone? do you have roommates? are you married and have kids? Very simply it means to wake up at least 2 hours before anyone else at home wakes up. This gives you two hours of uninterrupted work time and believe me you can get 80% of work for the day done in this time.

Making progress through continuous improvement and step changes

“Go to bed smarter than when you woke up.” ~ Charlie Munger

This quote by Charlie Munger embodies one of the principles I try to follow in life, which is to get a little better everyday. Progress is vital in any aspect of your life be it professional or personal. Some times progress is made through continuous improvements and other times by adopting radical step changes. The journey of continuous improvement is like a marathon and radical step changes are like 100m sprints.

One thing I have come to realise is that life is a long marathon interspersed with many short sprints. It pays to be aware of which method to use to make progress in any aspect of life. But first let’s try to understand what works for and against each of these methods.

Continuous improvement is unsexy

Simply because there is little to show immediately for the effort whereas step change gives you the bragging rights. There are no pivotal moments or momentum shifting events when it comes to continuous improvement. Step changes gives you a pivotal moment..like BC/AD…the time before the change and after the change. It makes it easier to anchor your conversations around the event.

Sprint vs Marathon

Continuous improvement is all about the daily grind. You have to summon the energy to do things every day even when the results don’t tell the story. A step change is more like a rallying cry for the leader to pull his team around and lead the charge. It’s like a sprint where you have to spend your energy in a short bust.

Agility

Continuous improvement works like mini loops or cycles where you make a change, observe the feedback and slowly progress to the next loop. This makes it difficult to make any large direction change whereas step changes by nature are suitable for making quick direction changes. Because of this with step changes you get the agility and flexibility to explore more opportunities.

Silent Compounding vs Radical Innovation

Continuous improvement is like compounding. It happens silently in the background. No one notices it daily. Step changes however are different. They stir things up. People take notice. Books and case studies are written about it and business legends are created.

Choosing between Continuous Improvement and Step Change

When you have a long term horizon continuous improvement is a better method as the benefits compound over a period of time without disrupting. Step changes are a bit disruptive, so whenever you adopt a step change in one aspect of your life more often than not some other thing breaks or suffers. So for long term horizon things like health, relationships, learning etc a continuous improvement strategy helps.

Instead of deciding to wake up at 5AM, hit the gym 7 days and go on a diet in one go to loose 8kgs in 8 weeks. Expand your time horizon, think of it as a lifelong marathon and not an 8 week sprint. If you wake up at 8, may be start waking up an hour early first. If you haven’t set foot in a gym ever, may be start going on alternate days first. Instead of going in to a calorie deficit diet from Day 1, may be reduce the portions and avoid soft drinks first. This way while you are trying to get healthy the other aspects of your life like work, relationships etc can go on smoothly instead of being sapped out of energy by putting it all on getting healthy.

Step changes can be useful in getting things accomplished where the time horizon is short. Want to set up a new home office or tidy up your room? Want to clean up your code base or hire a new team, in such cases step changes help so that the real work can start.

Tips & Tricks

Here are some tips and tricks before we wind this down

If you need to radically improve an aspect of your life, start with a step change upfront
Follow a step change with a calm period. This allows you to get used to the new normal
Run multiple experiments before committing to a new direction and then aim to become a little better everyday
Monitor progress daily and avoid the temptation of churning things up every day

Business Valuation in 5 minutes

This is a 5-minute read on Business Valuation for Start-Up Founders looking to understand the basic mechanism behind valuation.

Basics of Business Valuation

There are 3 common approaches for valuing a business

Cost Approach – What is the cost to build a factory or what is the cost to build a new factory in place of an old one
Market Approach – Compare with the valuation of listed companies in similar space or based on a private deal that has happened recently
Discounted Cash Flow – Value derived by projecting the cash flows of a business into the future and getting the Present Value of these future cashflows

In any valuation exercise, a registered valuer will use at least 3 methods, assign weightage to the value attained through each method and arrive at a Fair Value.

In India, a valuation certificate can be issued only by a SEBI registered Category 1 Merchant Banker. Earlier this could be issued by Chartered Accountants as well but not anymore. Charges for the same can run from a lakh to even up to 15 lakhs depending on the size of your business and the valuation firm.

Before we get into the 3 most commonly used methods of valuation, we need to understand what a Valuation Multiple is.

Business Valuation Multiples

Valuation multiples are broadly of two types – Enterprise Value Multiples and Equity Value Multiples. If you are running a business, there are two common ways for you to raise money for it. You can either sell shares in your company to an investor or you can take a loan or debt from a bank. If you use both these methods to raise money there will be a certain portion of business owned by the Equity Investors and another portion owned by the Debt Investors. This means that at any point in time the total value of your business or the Enterprise Value is a sum of the Equity Value + Debt Value.

Enterprise Value = Net Debt + Equity Value

So, back to valuation multiples now. Common Enterprise Value (EV) multiples are EV/EBITDA, EV/Revenue, EV/EBIT. Common Equity Value (P) multiples are P/E, P/B, P/CF. To keep things simple we will look at EV/EBITDA and EV/Revenue multiples only for now.

You can go to Google Finance and Yahoo Finance to find out the values for these multiples for few companies to get a general sense of things.

Business Valuation Methods

Like we discussed earlier, a registered valuer will use at least 3 methods in the valuation exercise to arrive at the Fair Value of a business. The most commonly used methods are

Comparable Companies Method
Comparable Transactions Method or Precedent Transactions Method
Discounted Cash Flow or DCF Method

Comparable Companies Method

If you were to value an e-commerce company you would choose companies like Amazon, eBay, Easy, Alibaba, etc as Comparable Companies. The valuation multiples for these companies are readily available online. We can calculate the Median of these values to arrive at the final multiples to be used for calculation.

For eg: If the median EV/Revenue multiple of the comparable companies is 6.5x and the Revenue for your business in the year where you turn profitable is Rs. 1,00,00,000. Then the EV = 10000000 * 6.5 = Rs. 6,50,00,000. Once you have the EV, you can subtract the net debt to arrive at the Equity Value of the business.

Of course, this is simplifying things a little too much. To the multiple, we will have to apply various discount factors like a Small Company Discount as your business is much smaller compared to Amazon, a Lack of Marketability Discount etc.

Comparable Transactions Method

Now, let’s look at the Comparable Transactions Method. In this case we look at the various Private Deals that have happened in the industry and find out the valuation multiples at which those transactions happened. The math remains the same as above. Although it sounds pretty simple it is incredibly difficult to find private deals data that are relevant to your business.

Discounted Cash Flow (DCF) Method

Lastly we have the Discounted Cash Flow method. Unlike the other two methods here we use the financial projections of the business and hence arrive at the Intrinsic Value of the business. Financials projections are usually made out to around 5 years from current financial year and for each of the 5 years you arrive at the Free Cash Flow to the Firm. From these yearly Free Cash Flows (FCF) you calculate the Present Enterprise Value by assigning a discount factor to each years FCF.

For eg: If a Company X has FCF for Year 1 till 5 as Rs. 100, 200, 300, 400, 500, to calculate the Present Enterprise Value, we have to first find out the Discounting Factor for each of the years from Year 1 to 5. The formula for Discount Factor is

Discount Factor = 1/(1+Discount Rate)^Time Period

Discount Rate is essentially equal to the Weighted Average Cost of Capital or WACC and the formula for WACC is

WACC = (Cost of Equity * % Equity) + (Cost of Debt * (1 – Tax Rate) * % Debt)

Cost of Equity = (Risk Free Rate + (Beta * Equity Risk Premium))

Cost of Debt = Avg. Yield on Debt

Risk Free Rate, Beta, Equity Risk Premium, Avg. Yield on Debt are values that change from country to country and Industry to Industry. So based on this data you can calculate your WACC and subsequently your Discount Rate and Discount Factor.

Once you calculate Discount Factor * FCF for each of the 5 years, you can sum up these to arrive at the Enterprise Value

Now you subtract the Net Debt from the Enterprise Value to find out the Equity Value

Equity Value = Enterprise Value – Net Debt

Now to find out the value of a single share you use the following formula

Value per share = Equity Value / Total No. of Shares

Fair Value

Once you have the Equity Value calculated with the three methods, you can assign weightage to the value obtained from each of the methods and arrive at a Fair Value of the Company.

Month: March 2021