Entropy

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Physics provides the best models to understand the physical world. But sometimes, it also provides the best models to understand the metaphysical.

Entropy refers to the rate of change that can be seen in a system. As the entropy in a system increases it becomes increasingly difficult to predict the next few moments. The more you heat a pot of water, the more bubble formation takes place and it becomes increasingly difficult to find patterns.

The only reason the earth as a planet is alive is due to its ability to hold onto heat. Heat creates entropy. Entropy creates change and that is essential to the existence of life. Mars by comparison lacks an atmosphere and hence does not have any heat in the system, the lack of entropy means nothing lives on the planet. At the other extreme you have a planet like Jupiter, where the entropy is too high, much like the boiling pot of water, making it impossible to support life.

Sorry for the long convoluted way in which this post is going, it came to me when I was watching ‘The Martian’ on the plane.

In business and in relationship entropy is important to move things forward.

If you own a startup and far too many days, you find that nothing much has changed, you know that you are already deep in trouble because the system lacks entropy. Its as if the engine has no heat in it.

Alternately, overheating is also a problem. So, it should not be a case, where things are changing much too rapidly. This removes the possibility of the system reaching any kind of stable state. The business would be in a constant state of change and there is no way to find a model that works efficiently and sustainably.

If your business depends of building relationships, the same axioms hold true. Many B2B companies start to take their accounts for granted since they are already with them. They do not make substantial changes to their products, eventually they lose the account to a more nimble and agile competitor. To the contrary if you keep suggesting too many changes to the client, eventually the client is going to grow tired and cease the relationship.

The challenge is to find balance. Is that not the problem with everything in life?

 

Why are food delivery businesses so troubled?

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Most delivery related startups in the food space have been having trouble over the past year and by the looks of it, we seem to be ushering in the new year with news of more firings. Why is it that all the guys in the food delivery business seem to be experiencing problems?

 

The cause of their troubles is to do with a more fundamental questions; what is a startup?

 

According to me;

Startups are businesses that have an asymmetry between manpower needed per unit of additional income. 

 

If you run an agency engaged in building websites, there are only so many websites that you can build simultaneously with a team of 10 developers. In order to increase your income, you need to be able to do more which means bringing in more people. There is hence a symmetry between the human resources needed to grow income. Of course, you will find efficiencies as you scale, but those will be to the tune of 10%-20%; not 70%.

 

Unless, some part of it can be automated.

 

Time Vs Cost

 

The current trouble with the delivery business is that they do not possess this asymmetry at all. They run much like the website developer where one needs to recruit more people to take on more deliveries. This fact coupled with the challenges  of recruiting and retaining manpower has resulted in ballooning salaries.

 

Currently, the delivery boys are getting paid to the tune of Rs. 25,000 per month (base+incentive). This implies Rs. 1,000 per day being paid to delivery boys (assuming 5 days off). Let us suppose a 10% delivery charge on the products that these boys deliver; implies, they need to be delivering goods worth Rs. 10,000/day. If an average parcel is priced at Rs. 1000, they need to make 10 deliveries a day. In all that I have heard, on an average they do about 8.

 

To make matters worse, the average price of the parcel is rarely Rs. 1000. Invariably the average price is in the range of Rs. 150 – 300. This implies that the financial model is stacked firmly against the business. They need to pick up 4 or 5 parcels at the same time to make it work. The reason they cannot pick up as many distinct parcels is because, they need to meet the 30 minute delivery deadline.

 

When you have to deliver food, you are not just taking a package from point to point, you are in fact on a timer to fill an empty tummy. The longer the tummy stays empty, the angrier it gets.

 

Cluster Vs Cost

 

The only way to make hyperlocal business work to the advantage of the service provider is to undertake the business in an extremely clustered manner. Much like the postman, if a delivery boy can cover hundreds of addresses in a small area, and the pick-up locations are also in the very same area; the cost of logistics would come down dramatically and also the time taken to deliver. This will in turn cause an increase in the capacity that one can carry, since the time taken to pick up multiple order will be much lower.

 

Now this requires a company to have almost a monopoly position in the market to have such a large user base.

 

A company can focus on building a monopoly or DRONES.

 

Going back to the beginning of the article, we spoke about asymmetry between manpower needed and income. Drones can create this asymmetry by automating the delivery part of the business. A drone can fly from point to point on auto-pilot. Software can take care of pick-up, destination, and flight as well. They use electricity and hence are far more cheaper and hopefully, drone traffic will be lower than road traffic.

 

There is certainly an initial capital expenditure in terms of acquisition of equipments but thereafter the cost of operations are significantly reduced. The cost of manpower is almost completely eliminated. Also the nature of manpower required will change. Instead of skilled individuals who are riding bikes, the company would have engineers who program drones.

 

Scaling the business to multiple cities and gaining a monopoly position would become much easier since the only factors holding back growth would be capital and scalable software architecture.

 

It may seems like science fiction but autonomous drones are the way of the future. The sooner its realised, the sooner these company can start burning their cash on the right things.

 

Markets are different; just like people

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Let us say you met a stranger; from Japan and from the United States; would you greet them the same way?

It would be very normal to put your hands forward and shake hands in the US but not in Japan. That is the degree of difference involved in inter-personal exchange between two people from two different countries, imagine dealing with the entire market.

Markets are wildly different. No two are similar and hence the insights on dealing with one is completely useless when it comes to dealing with another. It is very important to have fundamental insights on the market in order to successfully undertake business in that market.

It takes time and a considerable amount of interaction (with the market) in order to be able to understand the underlying fundamentals and the dynamics of change that are prevalent in the market. This is the keystone to understanding how to succeed in the market.

A considerable amount of the startup movement in India is based on the trends that are prevalent in the west. This results in a lot of copying of businesses models that are practiced in the west.

I often speak to groups of entrepreneurs across the country, who are building mobile apps. I usually undertake an exercise; I ask the group, how many of them have spent money to buy an app. Invariably, less than 10% put their hands up. I find it amazing that these people who have themselves not spent a dime on buying an app are seeking to build apps which others would buy!

The western markets are extremely consumeristic by nature. Therefore they are more than willing to spend money on products and services just as long as they feel that they are getting some value from it. This is not the case in India. As a consequence, turning apps into profitable businesses is extremely difficult in India.

This is but, one of the examples of struggles caused due to the blind porting western concepts to India.

In fact, it seems that even the investors suffer from the same fallacy, as illustrated by Mahesh Murthy in his article.

The fundamental issue here is that the Indian market is different from the Western markets. They are made up of different people, need to be addressed in differently. The nature of value creation that needs to take place in India to build a strong and valuable business is different from the kind of value creation needed to build strong businesses in the west.

Also, due to the lack of extreme consumerism in India, the time that it takes to build a stable and profitable business is much longer than in the west. This aspect is amply emphasised in the article referenced above as well. It is important to have patience and plan for the long term in order to build a business in India.

There are many areas such as the sale of copyright or intellectual properties where western models do not play well in India. Selling digital content like music and movies is extremely hard in India; it is very difficult to make people see value in buying something that is so intangible. Even Apple prices Apple Music differently in India as opposed to the US, $2 per month as opposed to $10 in the US.

It is important to look at every market individually. Markets are made up of the people that are a part of it. These people possess a history, a culture, a language and an approach that is unique and needs to be appreciated. Spending time to understand how markets behave is one of the most crucial steps in building a business.

Don’t look at the successes in one market and try to replicate them blindly in another. If you have a successful business in one market, approach every new market as if you were starting a new business.