Value = (SxP/C) n

Amongst the several life learnings that Covid provided, an important business-building lesson that we got reminded was of value building. It’s in the intuitive formula of (SxP/C) n.

Scale (S): Nothing beats scale in business. Scale can take shocks; the best one’s survived Covid by just writing off a part of what they had built hitherto. The biggest ones always found a way out of the enormous set of resources at their disposal. They attracted capital; first, they were the safest people to work in/ with, they bounced back the fastest. A business of no scale is no business.

xP (Scale multiplied by profitability) – Scale cannot come at the cost of profitability (hence it’s multiplicative), especially in a downturn like Covid. (The lack of) It makes you miss the largest pool of capital (i.e., debt). (The lack of) It makes you run to cut costs (all the big layoffs were by loss-making businesses in Covid). (The presence of) It may be a badge of honor for start-ups, but it is why businesses were conceived in the first place. It’s a necessity.

/C (Scale times profitability divide by Capital) – Making scale or profitability with the abundance of capital is relatively easy but fraught with danger, especially in these times. Covid dried up capital availability and if businesses needed a ton of it, then bounce back was tougher. Also, the more capital we take, the more we have to return and hence more uneasy the head. And more the capital you take, the less financial discipline you will inculcate, a behavior that costs heavily in a downturn. To us at OfBusiness, Capital is a necessary evil, but an evil nevertheless.

() n: A never-ending chain – Scaled businesses that were built profitably with less capital will attract more capital (both debt and equity). More capital, in turn, will build more scale that will ring in more profits, which in turn will bring more capital. The virtuous outcome will be like the never-ending chain of polymers, symbolized as () n.

Thus, value in the business for us at OfBusiness is best symbolized by (SxP/C) n.

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