Generation Anti-frugal

A rant against burning cash with no end & to no end

No male tennis player born since 1989 has won a grand slam. No Indian tech company founded since 2005 has earned profit. The first statement is precisely correct. The second statement is roughly correct. Sadly, the first is likely to get corrected long before the second is.

‘Roughly correct’ needs a few caveats. I define ‘Indian tech’ loosely, to include any business that has an element of tech in it. Anything that founders or funders refer to as something-tech is in. I define ‘profit’ in an old fashioned way to refer to the residual after ALL costs are subtracted from operating revenues, for the most recent 12-month period. Ignoring inconvenient costs or multiplying Deepawali day numbers by 365 do not count. Neither does interest earned on temporarily idle sucker-money count as revenue. ‘No company’ implies ‘no meaningful company’, with a filter for materiality. There must be tiny, bootstrapped, profitable tech companies someplace, but these would constitute an insignificant fraction of the relevant consideration set.  

Facts are fine, but, why the prediction at the end? My gloomy prognosis is rooted in something Warren Buffett called “institutional imperative”. An institution’s entire way of life gets set early on. This is disproportionately influenced by immediate context, especially by peers who are seen as role models. Given the social nature of this process, entire cohorts of companies end up with similar characteristics and approaches. History suggests that such corporate traits are surprisingly persistent, lasting for decades if not indefinitely. Since people don’t change, groups of people with intricate interlinkages are even less likely to change.

Indian IT industry is fortunate to have had Infosys as its initial bellwether and NR Narayana Murthy as its role model. The great man not only built a wonderful business all around, but set a standard for governance that was excellent by any standards and spectacular in the context of 1980s India. With Wipro and TCS also cut from the same cloth, this industry still sets the benchmark for quality, profitability and governance even after four decades. Satyam scam was rightly seen as an aberration that the industry quickly put behind. This is perhaps the only industry where a company acquired another without even a site visit, let alone due diligence.

Hindustan Unilever and Asian Paints played an analogous role in India’s branded consumer goods industry. They set a high bar for attracting superior managerial talent, creating a culture of professional excellence and grooming a whole generation of business leaders. Just like Infosys in governance, Asian Paints was way ahead of its time in separating family ownership from professional management. These two companies set the norms that were then adopted by a new generation of fine consumer businesses such as Dabur, Marico and Godrej. They paved the way for another great industry to emerge, with enlightened promoters, professional management, enduring brands, good work culture and satisfied shareholders. Norms, values and culture dating back to 1980s continue to guide these industries four decades later. Such is the power of formative influences combined with institutional inertia.

The same forces also work in the opposite direction. Without naming names, an equivalent historic analysis of Indian media and pharma industries reveal lingering consequences of less ideal role models in the early days. Some of the bellwethers in these industries continue to be in the news for wrong reasons, despite the rest of Corporate India having improved governance. Question marks still abound on related party dealings, iffy business practices, questionable diversifications, dodgy accounting and pledged shares. It’s worth asking: “Who is the Asian Paints of these industries?”. The unfortunate answer is: “No one, because there never was one”. I deliberately chose these sectors as illustrations, rather than real estate, to only compare industries which don’t self-select for a criminal bent of mind. So, these differential outcomes pertain to nurture rather than nature. This is a corporate equivalent of a broken-window theory to crime. Small differences early on have led to large divergences in how neighbourhoods feel are after a few decades.

Getting back to the present, our profligate tech cowboys have only witnessed a context where money has been easy, copious and gullible. A whole generation of founders and managers have spent 15 years without having to balance their books. On the contrary, living within ones means is seen as an anachronous vice that ruins the OPM fuelled party of hyper growth and even hyper valuations. As each unicorn wannabe looked to its predecessors for inspiration, they doubled down on burn-rate. A single company burning through over a billion dollars without any sign of being done is neither unusual nor shocking. This tech cohort has set shared norms around aggression, fund-raising and extravagance that are a complete outlier compared to anything witnessed earlier.

Most worryingly, many batches of young managers now have a very warped idea of how to manage a business. If a trainee at HUL internalized brand and distribution, these managers internalized discounts and cashbacks. They learnt to take money off investors rather than make money off customers. If organic burn couldn’t deliver growth, go wild on acquisitions. If that blows up, announce a ‘pivot’. Push the limits on accounting and business practices. See investors as cheerleaders rather than checks and balances. If any investor balks, find a new one with FOMO. Tie compensation to options, up-rounds and la-la land. Dilute equity till no one knows whose company it is anymore. This DNA is so well-entrenched that it traverses organizations. When senior employees from one start-up leave to found a new company, they outdo their erstwhile employers in how fast they burn cash. If HUL had groomed leaders, these companies have groomed spenders.

Eventually, the world will run out of fools and their money. However, this corrosive culture will likely outlast the mythical beasts that spawned it. With such a horribly tangled web of egregious behaviour, there’s no easy place to start for a catharsis. There’s no one person to drive it either, since no one in the system has true skin-in-the-game. Merely making a few Adams leave Garden of Eden (albeit in their German cars) will not help. Businesses are more likely to implode than re-emerge in a (smaller) self-sustaining form. Even after a prolonged purgatory, it’s unlikely that this cohort will produce enduring, high-quality franchises of the kinds I mentioned earlier. A few may end up notionally profitable, but that’s a low bar for someone who’s blown through over a billion dollars. In light of  the “institutional imperative”, our anti-Murthy generation will leave an anti-frugal corporate culture as its lasting legacy. As Bertrand Russel said, “The chains of habit are too light to be felt until they’re too heavy to be broken”. 

(Originally published in January at