Belief No 1 Part 1: Investing in Downturns
The ability to discover the right formula for success despite the worst makes all the difference and creates the best of entrepreneurs. So, for example investing in a downturn may not necessarily be the bad thing to do. Mr Inderjit Singh – The Art and Science of Entrepreneurship
To recap the 3 Beliefs of Entrepreneurs: Click Here
In a downturn, everyone suddenly becomes cautious on the investments they make. The general idea is that cash is king and it is best to keep your money safe, for a rainy day. This is a good idea especially if you need cash to run your household for the future. But a downturn is not all that bad, there are many opportunities available. Thing is you need to know how to see those opportunities and take advantage of them.
Many of these opportunities present themselves in the form of gaps in the market, or in terms of companies going out of business (to be purchased for cheap). As we had written in an earlier lecture, you need to run an efficient company (both money and process wise) so that you can safeguard yourself during a downturn. Many companies fail to do this, thus they get hit when the markets are in trouble. Many of these companies are really good businesses, but are affected because of market factors. They end up selling for cheap and are actually good and viable businesses. As a downturn affects everybody, it is also likely that your competitors will also be weakened, giving you an advantage in such a situation.
Best thing to do is to study the services of the other players in the market. See what they are doing well and what they are not. Try to plug those gaps by building a better product/service and running your company more efficiently, by keeping costs as low as possible. This will give you a great advantage compared to others. Take the time to study other companies and note some of the critical issues which can help you with your business.
On the other hand, in a downturn, you will begin to find many gaps that other companies have missed. If you can spot these gaps, they can be turned into viable businesses. Look for the problems in the market; understand the worries of the people. One good example was that during the Financial Crisis of 2008, many people realized that their jobs were not secure in big corporations. Instead they started to see opportunities in startups. They saw that it was viable to start a small company and scale it up while avoiding the issues faced by the big companies. While we have seen startups emerge all the time, it was this downturn that helped many to realize that there were other opportunities available in the market and that starting companies with their ideas may be the right career choice. This was the boost that brought along the second wave of the Start Up Revolution.
Below is an excerpt from Mr Inderjit’s Book – The Art and Science of Entrepreneurship. He shares his experience of starting 3 companies during major downturns in the global market.
“In my own experience, three of the companies I founded, which are among best performers of my portfolio of companies today, were started during downturns. One, I started together with my brother exactly when the Asian monetary crisis hit the Asian region, in late 1997. The impact of the Asian monetary crisis was so severe for companies in Asia that many businesses started failing simply because there was a big loss of confidence, even if the companies were really still viable. The bankers pulled the plug prematurely, and such companies collapsed. Many companies also defaulted on payments to creditors and banks because of the sudden devaluation of currencies, and those who borrowed in US dollars suddenly had terribly poor balance sheets. Many companies gave up and started to fold as they saw bad things all around.
During this period, however, my brother and I had a great plan. My brother also had a great network of business contacts in many parts of the developing world, an area in which, until today, he remains an expert in. Coupled with a great team that had many years of similar experience, we found immediate business opportunities. The only thing lacking for us was the availability of the right level of financing. No bank was willing to finance the company even as we showed confidence in our ability to execute the plan. Everyone just saw the potential of failure, while we saw the possibility of success. As I described in an earlier chapter, despite all the odds, but with a lot of personal sacrifice and risk, we managed to get the financing from only one bank! Now, nine years later, we continue to grow Tri Star profitably.
I started the second company in 1998, right in the middle of the Asian crisis, and also at the bottom of the semiconductor cycle. Everyone thought I was mad to start a company when there were already so many players in it, who had been around for much longer and were much bigger. Very few people believed that a start-up and a small company could ever survive, and that any new entrant could ever succeed.
As I mentioned in an earlier chapter, at that time, many of the existing players in the industry were performing very poorly and almost all of them were bleeding badly, draining cash from their respective companies. Well, the company that I started in 1998, called United Test and Assembly Center (UTAC), went on to break many records and became the ninth largest in the world in a span of two and a half years, with a financial performance matching the best in industry. Again, this company was started against many odds and at a time when many felt I would fail, as many incumbents would have easily “killed” the new company in the industry. Today, the company continues to do well as it was a fundamentally strong one that I had created at a time people considered the worst time possible to start a semiconductor company.
Now, UTAC is listed on the Singapore Stock Exchange, and continues to do well, having caught up with the bigger player that had existed way before I started UTAC. Again, we saw opportunities when others saw the possibility of a great disaster for any similar start-up. The opportunity we saw was the continued trend towards outsourcing by the big Integrated Device Manufacturers (IDMs). Many thought that because of the weak environment, many of these IDMs would decide to pull production back to their own factories, but what we saw was that precisely because of the weak environment, the IDMs would prepare for the next downturn by outsourcing more so that their own internal factories would be buffered from the weak industry condition as the business cycle turned downwards.
As for the third company, I started it at a time, when again, many would have considered it poor timing. This is my current company, which I started during the 2001 recession. When we started raising funds from venture capitalists (VCs) in July 2001, we made good progress because we had a great plan and a great team assembled to execute the project. However, just before we signed on the dotted line for the VCs to commit their funds, along came September 11. All deals were off, and many VCs cancelled all the deals they were considering.
My management team faced tremendous pressure in the face of great uncertainty, but we believed we could create a great company. It was in any case the worst downturn the semiconductor industry had seen. Instead of seeing the possibility of failure, we saw many opportunities, and while others saw it as an impossible task, we were confident of executing it. What opportunity did we see this time? We saw that in a weak environment, there would be many struggling companies, and it would be a great time to acquire some of them. Our initial strategy was to jumpstart our company by acquiring one such company that fitted in with our long-term strategy of building a global company.
Five years later, we are doing just fine, and have created a very strong company. We survived not one but two downturns. The second downturn in the industry occurred just when we thought we were going to have a good upturn, in the second half of 2004. But yet again, we survived, and are still going strong. We made not one but two acquisitions, one in each of the first two years of our existence.”