Thinking Like a Capitalist (Even When Broke)
Capitalism has got a bad rap in the past decade because of the media, but what is really capitalism?
When you have resources that are more than what you need today, that extra resource is capital. If intelligently managed, the capital can produce compounded returns with time and take a momentum of its own.
In 2018, I was broke. I had a few lakhs of debt on my credit cards too. I went through a nasty divorce and I was also emotionally depleted. My health and fitness weren't at their peak, but it was good enough for me to be productive with work.
But I had something that most of my friends in my age group didn't have. While they were busy with life chores and managing their personal relationships, while juggling a corporate job, I had TIME.
No job, no responsibilities, plenty of time. Time was my capital. Time is the most mathematically limited resource we have. If Bitcoin is limited to 21 million, time is limited to 24 hours in a day.
At that time, I could have gotten a job, but I decided to go a little bit deeper into debt to meet my personal expenses for 6 months to 1 year. I was not costing much to be alive. And I reaped time in return. I started reading plenty of books and focused all my energy on running my startup from the ground up.
I created courses, blog posts, YouTube content, email newsletter and used the rest of my time to interact with my students. As I started getting a better understanding of who my students were, I started making better content.
This started generating some cash flow. But I did not take the cash and use it to upgrade my lifestyle. I was living in a small room in a 2bhk shared with another flatmate. I could've easily upgraded my life and moved into a better house now that I found some money but that wouldn't have been the best use of the capital at hand.
Within a year, I had some money that I could reinvest back into growth. I paid off my debts and started investing the remaining money into ads, content, team, and branding.
The best way to grow your capital is to allocate your capital intelligently. Capital allocation takes an understanding of economics, a lot of mind space, foresight, calculated risk-taking ability, and conviction in the investment.
There are only three ways a business can create capital:
- Capital through cash flow
- Capital through the sale of equity
- Capital through debt
And learning to allocate this capital intelligently is the name of the game.
I don't use the capital to "have fun". Because for me the fun part is growing the capital.
Using capital to buy depreciating assets, or spend money on anything that doesn't grow the total capital is stupid because there is no fun in seeing your capital erode.
If I had taken a job in 2018, and let's say I would've made at least $3,000 a month in salary, that's $18,000 in 6 months and $36,000 in a year.
If I am NOT taking up a job and trying to build a business that may or may not succeed, I am literally investing $36,000 into the business. I am my own angel investor.
Considering my personal expenses wouldn't be more than $1,000 per month, I am also foregoing the opportunity cost of having invested $24,000 in 2018 and letting it grow till today.
If I had bought Bitcoin in 2018, it would be more than $150,000 today.
So what I don't have today is $150,000 of capital, and that's what I invested into building the business in 2018. Opportunity costs. I have no regrets now and at that time I did have conviction in what I was building, and failure was not an option.
Today, the brands I have built are worth way more than $150,000. Now that's an intelligent allocation of capital.
I wouldn't say that it was a risky move because the risk is under my control. Whether I make the business work or not is in my hands and I could navigate the "return on my capital" through thought and hard work.
You cannot control the return on your capital with your investment in the markets because it is not under your control. The graph doesn't move according to your will.
A business is the only possible way to use it as a store of capital, but also have some control over the return on your capital.
You are still subject to market forces, global economic outlook, and a lot of other factors, but there are a lot of things under your control.
For example, you can control:
- Who you hire and who you fire
- Your personal productivity
- Your decisions about product, marketing, design, and so on.
- Where and how to invest your capital (of time, human effort, and money)
- When to grow fast and when to slow down
That's why a business is one of the best active forms of capital that will bend and bow to your whims.
Today, the brand value of LearnToday (my ed-tech), Digital Deepak (my personal brand), PixelTrack (my agency) can easily run into a few million dollars. And such a return wouldn't have been possible without my hard decisions of the right "time capital" allocation in 2018.
Nothing else, not the stock market, not crypto, not real estate will give the kind of control and returns that a business can give.
The biggest mistake that most founders do is that they do not allocate the capital properly when capital is abundant. The abundance in the capital can come from external investments or through cash flows.
Creating a system that will grow the capital takes time. You cannot make a baby in one month by making 9 women pregnant. As quoted by Warren Buffet, supposedly.
When you throw capital into building a system that is supposed to grow the capital that is thrown at it, and if that system is built in haste, the price of building it without "ample investment of time" is that the returns produced by the system for the future capital will be less.
What do I mean?
Many startups rush growth. Let's say startup ABC builds an XYZ product and invests $5m into it. If the ideal time that the product needs for maturity is 3 years, and if the product is built in 1 year in the name of "move fast and break things", then you have a product that is not a good "capital multiplier".
If the product is built well, has a great product-market fit, great customer experience, then any capital thrown at such a product will produce higher returns. Investments include customer acquisition cost, operation, and delivery cost. It will attract more customers, become the category leader, and with time would require less capital to acquire customers, serve them and transform them.
If the product is not built well because it was rushed, the $5m invested into the product creation will eventually produce meager returns on further capital thrown at it. Poor customer experience, poor reviews, and bad operations will make it an inefficient capital multiplier. With time, the product might die, as many startups die, and erodes the original capital invested in it.
Building a business is a delicate balance of capital allocation. Allocation into branding, advertising, marketing, team, product, design, operations, and customer support.
A business is an organism and founders need to have a sixth sense of the health of the business. Every part affects other parts. It's like poking the frog's leg with a needle. It is not just affecting the leg, but the whole frog jumps.
Nourish the business with capital... it includes time, intellect, human effort, and then money.
Cheers,
Deepak Kanakaraju
(CEO, LearnToday.com)
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