THE WEEKLY

CHASING
EXPERIENCE
CHANGING
STANCE
“I do not know what
the future holds, but I
do know that I'm
going to be positively
surprised”.
~Ratan Tata
CHASING
COVER STORY

EXPERIENCES
Imagine standing on the edge of a cliff, the wind
in your hair, the vastness of the world stretching
anticipated to reach US$457 billion, showing the
potential for steady long-term growth. The World Travel
programs, customer-facing events, staff events etc),
Corporate and government demand is mainly during
out before you, which make you realize how small & Tourism Council’s (WTTC) 2023 Economic Impact the working week or on Saturday; institution and
you and your problems actually are. Below, the Research (EIR) today shows the Travel & Tourism association demand can be on weekends.
ocean crashes against the rocks, while the sector is closing in on its 2019 peak, recovering by
Weddings and Social demand, Indian wedding
horizon seems endless, filled with nothing but more than 95%.
industry is a massive market, currently valued at
possibilities. In this moment, you're free from the
In 2023, the sector is forecast to reach $9.5TN, just around $57.1 billion (₹4.74 trillion) in 2023,
9-5, free from the routine, time is slow here. Your
5% below 2019 pre-pandemic levels when travel was reflecting a significant 26.4% growth from the
heart races, not from fear, but from the
at its highest. 34 countries have already exceeded previous year. Weddings and Social demand involve
exhilarating freedom of being at the edge of
2019 levels. mainly destination weddings, residential and non-
something grand—maybe for the first time in your
residential weddings and other social / celebratory
life, you are feeling alive. As per WTTC’s forecast, by 2032, India will have the
events.
According to American Express' Global Travel 3rd largest travel and tourism contribution to the GDP,
worth US$457 billion. In the same period, the sector Diplomatic Travel comprises government leaders and
Trends Report 56% of people are now prioritizing
is also likely to generate over 126 million more jobs representatives of other countries, often
travel over other spending, driven by a need to
globally, with almost 65% concentrated in the Asia- accompanied by large trade delegations, and
explore, experience, and savour life after years of
Pacific region, with 20% in India. diplomats posted to India using upper-tier hotels
restrictions. Many are now embracing a life where
work-life balance means enjoying breathtaking during the transition period.
Key Demand Drivers
views and spontaneous adventures. It’s a growing Transit Demand comprises persons on overnight
collective realization that life is too short to spend Demand for hotels arises for various purposes. The transits during air or road travel to a domestic or
it stuck in routine, and to be honest!! Why not? key demand drivers are: international destination.
This change in socio-cultural trend have many Business Travel comprises inbound and domestic Each demand segment attracts domestic and
positive consequences for several sectors, but visitation for business related purposes. This includes inbound travel of varying measures, also dependent
mainly the biggest beneficiary of this YOLO culture travel on corporate account and by individual business upon the hotel and destination character. Demand
is tourism and allied sector. The demographic and travellers in primarily business-oriented locations. quantum, profile and rate paying capacity is also
geographic lottery of India, positions especially Demand often predominates between Monday and impacted by seasonality factors which may apply
Indian hospitality sector in a position to be one of Thursday, slowing down towards the weekend or differently to business and leisure hotels – for
the largest beneficiaries of such development. public holidays; domestic business travellers at example, higher rate paying leisure travel
upscale and mid-priced hotels often stay through till predominates in winter; business travel
INDUSTRIAL OVERVIEW Saturday. Business travel also slows down during predominates on weekdays and business hotels are
vacation periods. more reliant on leisure and other demand on
The Indian travel and tourism sector made a weekends.
significant recovery in 2023, contributing around Leisure Travel is discretionary in nature and comprises
₹19.13 trillion (US$230 billion) to the country's long and short stay vacations, staycations at city Policy support
GDP, which was nearly 10% higher than 2019 hotels, weekend stays for recreation and
In the 2024 interim Budget, Finance Minister Ms.
levels. This growth was largely driven by domestic entertainment, leisure attached to a business trip or
Nirmala Sitharaman allocated Rs. 2,449.62 crore
tourism, though international travel spending has to a trip for weddings and meetings. Greater (US$ 294.8 million) to the tourism sector, a 44.7%
not yet fully returned to pre-pandemic levels. In affordability, changing attitudes towards lifestyle, and
increase from the previous fiscal year.
2024, the sector's contribution is expected to improved connectivity have encouraged staycations
reach ₹21.15 trillion (US$254 billion), with and weekend stays at hotels with good F&B, The Ministry of Tourism launched the Swadesh
employment growing to 43 million jobs, or about recreation and entertainment facilities. The ability to Darshan Scheme to develop theme-based tourist
1 in 11 jobs in India. attract weekend leisure demand at city hotels is vital circuits, sanctioning 76 projects. Upgraded to
to high occupancy levels for city hotels. Swadesh Darshan 2.0 (SD2.0).
According to some estimates (conservative) The
sector is projected to grow at an annual rate of MICE – corporate, government, institution and The Ministry of Tourism has undertaken
7.8% over the next decade. By 2032, travel and association events (conventions, conferences, Destination Based Skill Development training
tourism's contribution to India's GDP is retreats, incentives and promotions, training programme at various places in the country to
train, local people residing near the tourist sites
and destinations.
 INDUSTRY SIZE  Economy segment (Eco) are typically 2 star Foreign chains now operate / franchise about 47%
hotels providing functional accommodation and of the chain affiliated hotel rooms in India; their
According to recent estimates, India has over limited services, being focussed on price ownership share is very limited. Foreign chains
360,000 keys including branded hotels, consciousness. expanded by aggressively pursuing management
independently run hotels and aggregators (such as contracts, offering multiple brands mainly in
Oyo, Treebo and FabHotels). Of this, the current Segmental Composition Luxury, Upper-Up, Upscale and Up-Mid segments,
branded inventory market size stands at and supporting the development of hotels with
In branded context, there was a concentration
approximately 180,000. larger rooms inventory and function spaces.
towards luxury to ultra luxury in FY01, which has
diluted substantially as upscale, upper midscale and Several domestic chains were initially asset heavy
Midscale & Economy (M-E) hotels gained traction and have gradually shifted to an asset-light or
and wider footprint. According to Horwarth HTL, a hybrid model (combination of owned properties
similar trend is broadly expected for the next 3-5 and management contracts).
years, with Luxury-Upper Up supply share continuing
to gradually decline, with supply share gains in the Asset light model in making
Upscale and M-E segments.
An asset-ownership based model has several
In absolute numbers, the Upper-Up, Upscale and Up merits particularly in terms of (a) asset
Mid segments added about 25k rooms, 31k rooms appreciation; (b) larger earnings gains under strong
(Source - Horwath HTL) and 27k rooms respectively between FY01-FY23. market conditions, as the gross revenue and
Upscale and Up-Mid supply growth started from profits belong to the hotel chain; (c) advantage in
Major supply growth occurred between FY08-FY15, FY06, particularly as Upper Midscale hotels opened creating better returns, if land banks are available
fuelled by strong business conditions from FY05 across main cities and other markets. Up-Mid at historical costs; (d) the ability to create and
through initial months of FY09 when occupancies inventory was on par with the Upscale segment by showcase the value and profitability of
and Average Daily Rate (ADR) were strong in most FY12, while all three segments converged in size by differentiated products.
markets. On the other hand, declining demand and FY19.
economic activity from FY10 through FY14 was not Six hotel chains – Marriott, IHCL, Radisson Hotel
supportive of new development commitments, Inventory in 000s Group, ITC, Accor and Hyatt – each have 5% or
leading to slower supply growth for FY16-FY23; this greater inventory share by number of rooms; in
was exacerbated by the Covid pandemic. Yet, overall aggregate, these chains have 50% share of total
Compounded Annual Growth Rate (CAGR) of 9.4% supply. Certain hotel chains have made sizeable
over 22 years reflects material supply addition, investments in hotel assets – while the ownership
although off a small supply base as at FY01. share was 69% at end FY01, this has reduced to
26% at end FY23 as greater private / institutional
About 18,500 rooms were added in FY10 and FY11, capital has invested in the hotel sector and
and about 43,500 rooms in the years FY12-FY15. enabled chain growth through management
Another 43,000 rooms were added between FY16- contracts and franchises.
FY20; and about 20,000 rooms between FY21-
FY23, a sharp decline due to Covid-19 pandemic;
Expected supply (Inventory in 000s) Future Demand
and yet reasonable growth in spite of the pandemic. FY23 was the first year which saw recovery in post
These rooms or hotels, though roughly but for better pandemic world, fuelled by corporate and MICE
analyses can be segmented into a hierarchy travel demand, development of new avenues and
according to room size and amenities provided. rise of religious and adventure tourism further
boosted the subdued demand during COVID.
 Luxury and Upper Upscale segment typically
Foreign Demand – FTA recovery from Top 10
comprise top tier hotels; in India, these are
countries (excluding South Asian Association of
generally classified as 5 star, deluxe and luxury
Regional Co-operation - SAARC nations) was 80%
hotels. Several brands classify themselves as
70% of new supply will occur outside the Select for FY24 and it is expected to make full recovery in
luxury hotels, based on certain criteria (e.g., room
Markets; this trend is actually continuing from FY25. A sizeable portion of foreign travel demand
size) without having the service standards and
consistent guest profile typically associated with some time, the top 10 markets have nearly 62% of is from Information Technology (IT) sector which
rooms supply as at FY23; declining from 69% has presently slowed down and unlike other
true luxury hotels.
supply share at end FY15. thus, supply expansion sectors sizeable workforce is still working remotely.
 Upscale segment comprises hotels which are
will expand overall demand and not have dilutive Hence overall foreign travel recovery is expected to
more moderately positioned and priced, generally
impact on occupancies in Select Markets. About be gradual. We have assumed a growth of 15% and
with smaller room sizes than the top tier hotels.
27% of new supply will be in the Luxury-Upper 30% on FY19 demand in FY26 and FY27
In India, upscale hotels are generally classified as
Upscale segment, 24% and 19% in the Upscale and respectively.
4 or 5 star hotels (typically carrying entry level 5
star quality). Upper-Midscale segments and 30% in the
Midscale-Economy segment.
 Upper Midscale segment (Up-Mid) comprises full
service or select service hotels, typically with Between FY01-FY23, Foreign chains have gained
lesser public areas and facilities and smaller material supply share through multiple brands and
room sizes, which are more moderately diversified hotel development investment and
positioned and priced than upscale hotels. In ownership which suits the management / franchise
India, these would generally be classified as 4 model sought by foreign chains.
star and sometimes 3 star hotels.
 Midscale segment typically are 3 star hotels with
distinctly moderate room sizes, quality and
pricing, and a lower standard of services;
domestic brand midscale hotels often offer more
services than select service international
branded midscale hotels.
 RISE OF ADVENTURE SPORTS MARKET
India’s appetite for adrenaline is on rapid rise, the
DECATHLON’S REVOLUTION Decathlon’s large-format flagship stores are designed
rush the thrill and pumping oh heart made the Indian to provide the best customer experience, while its
adventure sports market rise from mere 8 mn USD When Decathlon first set foot in India in 2009, it was robust online presence ensures convenience and
in 2017 to 38.43 mn in 2024 (Statista), and it is seen as just another sports retailer in a crowded accessibility. The company’s commitment to quality is
expected to rise even further. market dominated by global heavyweights like Nike, evident in its strict control over the entire supply chain,
Adidas, and Puma. Fast forward to 2024, and from procurement to manufacturing, ensuring that all
With its vast geographical diversity—from towering
Decathlon has firmly positioned itself as the leading products meet global standards. This blend of
Himalayan peaks to lush jungles and mighty rivers—
sports retailer in the country. The French giant has not affordability, variety, and quality is a cornerstone of
the country offers an unparalleled range of
experiences for thrill-seekers. only established a strong presence but has also Decathlon’s success.
redefined how Indian consumers engage with sports
Athleisure, which accounts for 30-33 per cent of
Whether it's trekking the rugged trails of the and outdoor activities. By offering a unique retail
Decathlon India’s revenue, is one of the fastest-
Himalayas, scaling cliffs, or embarking on experience, value for money, and a wide range of
growing segments in the branded garments market.
exhilarating jungle safaris, India promises an products, Decathlon has managed to outpace
Market estimates suggest that the athleisure business
adventure for every type of enthusiast. competitors like Nike and Adidas, setting new
in India could reach Rs 25,000 crore in sales by the
standards in the sports retail industry.
In recent years, India has cemented its position as a end of next year. However, athleisure is just one of
global hotspot for adventure tourism, where Decathlon’s 11 business segments.
Decathlon's Growth in India: By the Numbers
activities like parasailing, skiing, rock climbing,
 First store: Opened in 2009 in Bengaluru. Specialised footwear is another major category,
scuba diving, and camping are thriving. The
 Total stores: As of 2024, Decathlon operates over offering a wide range of shoes tailored to specific
country's extensive river network, particularly in
127 stores across India, including major cities and sports and activities. Whether it’s tennis, badminton,
regions like the Alakananda, Bhagirathi, Indus,
towns. cricket, football, hiking, or trekking, Decathlon has a
Zanskar, and Teesta, has also made it a leading
 Revenue growth: Decathlon India clocked about shoe designed to meet the specific demands of each
destination for white-water rafting.
₹3,955 crores in sales in FY23 up 37 per cent. sport. This product diversity, backed by a scientifically
For many, an adventure trip to India is more than just developed approach, has been a key driver of
an adrenaline rush—it’s a life-changing experience India has not only become a key market for the Decathlon’s growth over the past 15 years.
that taps into the spirit of exploration and discovery. company but also an important manufacturing hub.
Decathlon has drawn up an ambitious expansion
The 'Made in India' products are not just catering to the
Bir-Billing in Himachal Pradesh is known as the strategy in India. Over the next five years, the company
domestic market but are also being exported globally,
"paragliding capital of India" and it fulfils the dream plans to invest €100 million, with the goal of
reaching markets in Europe, South America, Asia, and
of every human to at-least once sail the sky like a expanding its store network from 127 to 195
the Far East. This dual role of India as both a consumer
bird. Paragliding in India can cost between Rs. 1,800 locations, reaching 90 of the country’s top cities and
base and a manufacturing hub has been central to
and Rs. 3,000 for 30 minutes. Buying all the towns. Chatterjee notes that a significant portion of
Decathlon’s strategy.
equipment can be expensive, costing between Rs. this investment will also go toward enhancing the
80,000 and Rs. 125,000, but renting is much company’s digital platforms, including its app and
Over the past decade, Decathlon India has emerged as
cheaper. website, to penetrate Tier-3 and Tier-4 towns.
a leader through its unique business model. The
Currently, Decathlon generates about 12 per cent of
company offers a comprehensive range of products for
its revenue in India through online sales, but
over 60 sports, from equipment and customised gear
Chatterjee is confident this figure will more than
to specialised sporting wear, gym equipment, and
double over the next five years.
accessories.
CHANGE OF STANCE
TO NEUTRALITY
The Monetary policy committee (MPC) kept the
rates unchanged, again. With a vote of 5/1,
Headline CPI inflation moderated to 4.4% between April
and August 2024, down from 5.2% in the previous half
RBI’S OUTLOOK FOR GROWTH
despite the entry of new members, votes were in Domestic economic activity remains resilient.
year. Core inflation, which fell to a record low of 3.1% in
favour of keeping the rates at the same level. Improved performance of industrial sector, upturn
May, edged up again by July-August. Food price inflation
Despite that, we have reasons to believe that rate in investment activity, above normal monsoon,
remained high, averaging 6.9% and contributing
cuts are at the corner. Global cuts, slowing pick up in rural demand, high-capacity utilisation,
significantly to headline inflation. In response to
industrial growth (to an extent can be blamed on healthy balance sheets of banks and corporates,
elevated food prices and their potential spillover
more than decent monsoon), CPI being in and the government’s continued thrust on
effects, the Monetary Policy Committee (MPC) kept the
tolerance zone, RBI has to be little more optimistic infrastructure spending augur well for the growth
policy repo rate unchanged at 6.5%, staying committed
because this pessimism is keeping the potential of outlook. Consumer confidence (the current
to controlling inflation while supporting economic
situation index) improved in the September 2024
growth at check. growth.
survey round. Optimism in the manufacturing
The consolation prize that came out of this meeting sector for Q3:2024-25 improved in the July-
was the changing stance of RBI to ‘neutral’ with RBI’S OUTLOOK FOR INFLATION September 2024 round of the Reserve Bank’s
vote 6 to none, all members were unanimous that In H1:2024-25, headline inflation remained within the industrial outlook survey.
time is coming for transition tolerance band, although food inflation remained high.
RBI in its Monetary Policy Report for October The Reserve Bank’s September 2024 survey showed a
mentioned that, global economic activity has slight decline in inflation expectations among urban
remained resilient despite ongoing geopolitical households. Manufacturing firms expect raw material
tensions and financial market volatility. cost pressures to ease slightly, while services and
infrastructure companies expect input costs to remain
Disinflation in headline inflation has been slow due high with moderate price growth in Q3:2024-25.
to persistent services inflation, keeping core
inflation elevated. While some central banks have Professional forecasters expect headline inflation to
eased monetary policy, others have maintained a rise from 4.0% in Q2:2024-25 to 4.6% in Q3, with core
restrictive stance, leading to divergence in global inflation increasing from 3.5% to 3.9%. For 2024-25,
policy pathways. CPI inflation is projected to average 4.5%, with quarterly
Sovereign bond yields have declined as markets variations, and risks are balanced. In 2025-26, inflation
anticipate policy shifts, while global equity markets is forecasted to average 4.1%, assuming normal
have shown resilience and quickly recovered. monsoons and no major shocks.
Capital flows to emerging market economies
(EMEs) have resumed despite heightened Upside risks to inflation include uneven rainfall,
volatility. The US dollar index peaked in mid-June geopolitical conflicts, rising food and metal prices,
but has since receded with signs of easing inflation volatile oil prices, and adverse weather. Downside risks RBI’S OUTLOOK FOR GDP
and cooling labor market conditions. However, include conflict resolution, weakening global demand, Real GDP growth exceeded 8 per cent growth in the
supply chain pressures have increased since May lower food and commodity prices, improved supply, and first three quarters of 2023-24 before dipping
due to conflicts in the Middle East. Global government measures. marginally to 7.8 per cent in Q4. Real GDP growth
commodity prices have generally softened, but of 6.7 per cent in Q1:2024-25 is reflective of the
recent geopolitical tensions have caused price underlying momentum in key drivers of the
pressures to rise again. economy viz., private consumption and
investment. Taking into account the baseline
Domestically, India’s real GDP grew by 6.7% in Q1
assumptions, survey indicators and model
2024-25, with private consumption driving growth
forecasts, real GDP growth is expected at 7.2 per
and accounting for 63% of the total. Rural demand, cent in 2024-25 with 7.0 per cent in Q2; 7.4 per
buoyed by a favorable monsoon, higher sowing cent both in Q3 and Q4 - with risks evenly balanced
activity, and moderating inflation, supported strong
around the baseline.
consumption. Investment activity also remained
robust, with high-capacity utilization, strong steel For 2025-26, assuming a normal monsoon and no
consumption, and capital goods imports major exogenous or policy shocks, structural
contributing to growth. On the supply side, real model estimates indicate real GDP growth at 7.1
gross value added (GVA) grew by 6.8%, driven by per cent, with Q1 at 7.3 per cent, Q2 at 7.2 per
the industry and services sectors. cent, Q3 and Q4 both at 7.0 per cent.
 Pic- Indian Food Market by Tim Gainey

Monetary Policy Response to Food Inflation Under Alternative Scenarios

The implications of food inflation for approach is modelled by using the Quarterly Finally, Scenario 3 illustrates the impact of a
monetary policy are conditional on the size Projection Model 2.0 (John et. al., 2023). series of repeated food inflation shocks
and duration of shocks to food prices and (from scenario 1) in the case of a perfectly
Scenario 1 models the impact of a transitory credible central bank.
their transmission to headline inflation. The shock compared to repeated shocks to food
direct or first round impact of food inflation inflation. Transitory shocks may largely be Higher credibility leads to better anchoring of
shocks is observed as a change in headline seen through as they tend not to pass inflation expectations of economic agents,
CPI inflation, given the dominant share of through to core inflation, warranting no policy which may lead to restricted passthrough of
food items in the average household response. higher costs to prices and therefore
consumption basket. In the event of repeated warranting less tightening of monetary
and/ or persistent food price shocks, price In the event of repeated shocks to food policy. If the central bank credibility is low,
pressures may spillover to other components inflation, however, there may be spillover to economic agents may develop adaptive
through shifts in inflation expectations (Das, core inflation through elevated second round expectations and therefore inflationary
2024; Patra, et.al., 2024) and correction in effects, requiring substantive monetary shocks may passthrough without friction,
relative prices. These are the indirect or policy action to stabilize prices. warranting more aggressive policy rate
second-round effects of food inflation. Scenario 2 illustrates the relative effect of action to stabilise the economy.
While the first-round effects are largely repeated food inflation shocks (from These simulations suggest that while
invariant to monetary policy, the second- scenario 1) in the presence of buoyant transitory shocks to food inflation can largely
round effects fall within its ambit. Therefore, aggregate demand conditions as against a be ignored by monetary policy, repeated
prudent monetary policy must assess situation with slack in demand. shocks do pose a challenge. If monetary
persistence of shocks to food inflation, their In the event of robust demand conditions, policy does not respond to the second-round
direct and indirect effects, and the relative the spike in core inflation will be effects of repeated shocks to food inflation,
efficacy of interest rate changes in compounded, warranting more aggressive it risks un-anchoring of inflation
moderating these impulses. monetary policy action. In case of slack
This assumes importance in the broader demand conditions, the pass-through of
macroeconomic context that accounts for repeated shocks from food to core inflation
contemporaneous aggregate demand will be moderate, meriting lesser urgency for
conditions as well as the credibility of the monetary policy tightening.
central bank in anchoring inflation
expectations. This general equilibrium
BOOK
OF THE WEEK
THE CORPORATE LIFE CYCLE
BY ASWATH DAMODARAN
Aswath Damodaran is a Professor of Finance at the Stern School of Business at New York University (Kerschner Family
Chair in Finance Education), where he teaches corporate finance and equity valuation. Damodaran is best known as the
author of several widely used academic and practitioner texts on Valuation, Corporate Finance and Investment
Management as well as provider of comprehensive data for valuation purposes.

Aswath Damodaran, often dubbed as ‘dean of THE STAGES OF LIFE CYCLE According to AD, A healthy growth company should
valuation’, in August this year, published his work in the ideally be spending more on growth than on
form of a new book called, The Corporate Life Cycle: The first phase, the startup, a new business is born out from operations; if most of the spending is on current
Business, Investment, and Management Implications, the dreams and aspiration of a founder/s. Startups face a production, it can signal difficulties in scaling the
he introduced his latest work, by sharing one of his high mortality rate, nearly nearly 70% of businesses fail business.
favorite expressions: "Growing old is mandatory, but within their first year. Those that survive tend to face
Unit economics becomes critical during this phase.
growing up is optional." He emphasizes that aging is decreasing failure rates over time, but by the 15th year,
This concept refers to the profitability of each
inevitable for all of us, and while we may have our roughly 75% of businesses are no longer in operation. This
additional product or service sold. For companies like
complaints, the alternative is far worse. grim reality is presented alongside the challenges of financial
software businesses, where the cost of selling an
capital: startups often burn through money rapidly due to
Over the past decade, Damodaran has drawn a extra unit is low, the unit economics are highly
operating expenses, despite generating little to no revenue.
compelling parallel between the aging of human beings favorable. However, for manufacturing companies,
This early phase typically requires founders to rely on family,
and the aging of businesses, which he terms the where each unit sold carries substantial production
friends, and eventually, venture capitalists for funding.
"corporate life cycle." He believes this framework offers costs, unit economics can be more challenging.
a powerful lens through which to understand how Companies with better unit economics are able to turn
companies evolve as they mature and the wide-ranging profitable more quickly, which is vital for long-term
implications these changes carry. In his book, survival.
Damodaran sets out to explore these ideas in depth.
One of the toughest challenges young growth
companies face is attracting talent when they don’t
A SEARCH FOR A UNIFYING THEORY yet have the cash to pay high salaries. As a solution,
Aswath in the introductory chapter explains the they often offer stock-based compensation—giving
rationale of this work, he says that every researcher is key employees equity in the company. This helps
in search for a "universal theory" that can explain attract top talent but comes with the downside of
everything, a quest that spans disciplines, though it is diluting ownership. Over time, as more equity is given
particularly challenging in social sciences where away to employees, investors, and others, the
human behavior is unpredictable. In finance, the founder’s ownership stake in the company shrinks.
pursuit of such theories began with economic models
and progressed into data-driven and behavioral Negative cash flows during this phase mean that
approaches, heavily influenced by the work of Harry growth companies will continue needing capital
Markowitz and the capital asset pricing model (CAPM), infusions. Typically, this capital comes from external
which introduced theories about risk, return, and investors in rounds of funding that include seed
efficient portfolios. Markowitz's work proposed that capital and later series like Series A and B. With each
investors, being risk-averse, seek portfolios that offer round, the founder’s ownership decreases while the
the best tradeoff between expected returns and risk, stakes of venture capitalists and employees increase.
laying the foundation for modern portfolio theory. This dynamic raises the central challenge for
founders: balancing growth with ownership. Founders
However, as time passed, data-driven approaches must decide how much of the company they’re willing
began to gain prominence. This shift was marked by to give up in exchange for the capital needed to
In exchange for financial support, venture capitalists
studies like Fama and French’s (1990), which used expand. At the same time, they need to ensure that
demand equity, a “pound of flesh” that founders must
historical market data to identify factors such as their top employees are compensated fairly without
concede in order to secure the capital necessary to grow. The
market capitalization and price-to-book ratios that excessively diluting their control. This tradeoff
book portrays this as a natural and necessary part of the
influenced stock returns. With time factors increased, between control and growth defines phase two of a
entrepreneurial process, even though it leads to a loss of
still unable to explain the complete story motivated young company's development, as it lays the
control for founders.
some to look beyond finance for finance. foundation for future success or failure.
The second phase- YOUNG GROWTH PHASE, focuses on
This gave rise to behavioral finance, which building a business model. Here, founders—who are often In phase three, you're now at the point where you’re
incorporates psychological principles into market technical experts, engineers, or software developers—face a considering scaling up your business. This stage, like
analysis. This approach acknowledges that markets steep learning curve when it comes to structuring their the previous ones, comes with its own trade-offs,
are driven by humans, who display biases and businesses for growth. Many founders lack the operational particularly between control and capital. As a founder,
irrationalities, offering an alternative to the purely expertise required to build sustainable business models, so you face a crucial decision: do you want to retain
rational models from economics. However, he points they must either seek external help from venture capitalists control of the company and limit its growth, or do you
out that behavioral finance often focuses on explaining or hire experienced managers. This is what AD calls the want to prioritize growth and be prepared to own less
past behaviors rather than predicting future ones. "founder’s dilemma," where the founder must choose of the business as it expands?
Finally, the he introduced his adaptation of the between maintaining control of the company or relinquishing
From an investor’s perspective, the scaling-up phase
corporate life cycle, a model with six stages, from some control to ensure the business's success.
is where the real returns are often realized. This is the
startup to old age. Each stage reflects a company’s At this stage, while revenues may start to come in, expenses stage where small businesses have the potential to
growth and challenges, akin to the stages of human typically begin to rise rapidly. This phase often sees expenses grow into much larger ones, providing substantial
life. He describes how companies evolve from startup, outpacing revenue, especially as the company incurs both returns. If you’re a high-growth business, your
where they need care and attention, through stages of operating costs and growth-related expenses. Operating revenues may be starting to accelerate, and if you're
growth, maturity, and eventual decline. At each stage, expenses are the costs required to produce and deliver the fortunate, your margins are improving from negative
the company’s investment, financing, and dividend goods or services being sold now, while growth expenses are to positive. While revenue growth might be much
decisions change. investments made to fuel future expansion. stronger than the growth in

START UP GROWTH ADJUSTMENTS

operating income at this point, your earnings should exemplified this. These companies didn’t just grow; they However, as they mature, the emphasis must
begin moving in the right direction—from losses to grew while delivering increasingly higher profit margins. change to safeguarding their successes. Many
profits. Success at this stage depends on whether the In fact, these six stocks accounted for 15% of the companies struggle to make this transition, as
business can effectively scale, as not every company is increase in market capitalization for all U.S. companies disruptors with fewer constraints can threaten
built to do so. during that decade, demonstrating that true market established businesses. The author aptly notes
success means overcoming the odds to grow as larger that since the rise of disruptors like Amazon, there
It's important to remember that not all businesses entities. are few industries that have escaped this
need to scale up, and choosing to remain a smaller, fundamental shift. The growing presence of these
successful business is not a failure. In fact, some Now, let’s discuss the financial challenges in this phase. challengers means that successful business
businesses thrive by staying niche. One of the issues This is when you begin to reap the rewards of your units, or cash cows, must be more actively
with recent startups has been the assumption that earlier efforts. Ideally, your earnings should start defended to ensure their continued profitability.
every business is scalable. In pushing companies to growing at a faster rate than your revenues. Until now,
scale beyond their natural limits, many have been Phase six of the corporate life cycle marks
you may have focused on revenue growth without
driven to failure. A notable example is Peloton, which perhaps the most painful stage: decline. In this
seeing corresponding profit increases. In this phase,
could have remained a successful niche business but phase, businesses often experience shrinking
however, you should expect to witness earnings growth,
overreached, particularly after its pandemic-era revenues and declining profit margins, leading to
even if it comes at a slower rate than in previous stages.
success. significant financial pressures. While many
This slower growth can actually be beneficial, as it
companies may adopt a mindset of resistance,
As your business grows, the pressure to go public requires less reinvestment. As a result, you’ll start to
believing they can stave off decline, the reality is
builds as founders, investors, and employees—who all see positive cash flows.
that, much like aging in humans, decline is often
own equity in the company—want to cash out. Unlike If you’ve never paid dividends or bought back stock, you inevitable.
cash, equity isn’t immediately spendable, so going may find your cash balances growing significantly at this
public offers a way to convert that equity into liquidity. Identifying a declining business is straightforward,
stage. For successful businesses, this can be a sweet
Additionally, the trade-offs in public markets might be yet turning it around is a formidable challenge.
spot: you still have the excitement of growth, combined
more favorable than continuing to seek venture Businesses may attempt to invigorate their
with the stability of positive earnings and solid cash
capital, as you can often raise more capital while giving operations and reclaim former glory, but this
flows. However, it also requires a shift in mindset.
up less of your company. effort is complicated—
especially for those that have
However, going public isn’t the previously borrowed heavily
right path for every business. during healthier phases. A
The ability to go public decline in operations coupled
depends heavily on your with an unsustainable debt
location. In places like the load can lead to bankruptcy or
United States, it's easier to severe distress.
access public markets, while in
regions like Latin America or
Africa, the opportunities may Many managers in declining
be much more limited. In these companies strive for a revival,
cases, remaining a smaller, hoping for a rebirth or
private company might be the significant revamp that will
better option. Overreaching by restore the organization to its
trying to raise capital in these previous state of growth. They
markets could mean are often buoyed by an
sacrificing too much ownership ecosystem of bankers and
or risking the company’s consultants who encourage
stability. their ambitions and point to
case studies of successful
turnarounds in the past.
Ultimately, deciding not to scale up can be a perfectly Transitioning from a phase where you were cash-poor to
However, the reality is that reviving a declining
valid choice if it aligns with your business's strengths one where you are generating cash surpluses
necessitates a different approach. Only a few company is fraught with difficulties, and many
and market conditions.
companies successfully navigate this change. firms waste resources pursuing a resurgence that
is unlikely to succeed.
In terms of capital and ownership challenges, this phase
This brings us to phase four. You’ve successfully Financial challenges become evident in this
is characterized by increased self-sufficiency. You are
started your business, developed a viable business no longer reliant on external capital, and your investor phase as key trend lines move in the wrong
model, and scaled it up to a significant size—at least in direction. Revenue shrinkage and margin
base is likely to change as you mature. Young
relation to your industry. You’re still growing, but the pressure are indicators that signal decline. It is
companies typically attract a different type of investor
challenge now lies in determining how much more than those that have become more established and are essential to recognize that not all companies
growth is achievable. Keep in mind that growing a experiencing a downturn are necessarily in
generating significant earnings and cash flows. As your
million-dollar company is far easier than growing a cash flows grow, there may be mounting pressure to decline; a bad year does not equate to a terminal
billion-dollar one, and you’re now in that latter category. return some of that cash to shareholders. state. Instead, a decline is typically characterized
As companies expand, many tend to slow down their by a prolonged period—often three to ten years—
growth, but a select few manage to maintain healthy In the fifth phase of the corporate life cycle, mature of negative trends, frequently driven by broader
growth rates—these are the market stars. growth companies encounter distinct challenges as macroeconomic changes.
they transition into a more stable and established
During this phase, it’s crucial to remember that phase. This stage requires a significant shift in mindset As the company reaches this last phase of the life
revenue growth alone does not guarantee success; it cycle, it shares survival challenges reminiscent of
from aggressive growth to a defensive strategy aimed at
must be paired with profit. You’ll want to see not just protecting market share and competitive advantages, early-stage startups. Both phases grapple with the
revenue increase, but also an improvement in profit question of viability; however, navigating decline
often referred to as "moats" in the realm of value
margins. Companies that can sustain growth while is generally perceived as more arduous. While
investing. Historically, these companies have focused
enhancing their profit margins are rare gems. Between on expanding into new markets and maintaining high startups possess the potential for rapid growth,
2010 and 2019, six standout stocks—Facebook, declining companies are often mired in a struggle
growth rates.
Amazon, Netflix, Google, Apple, and Microsoft (often for survival.
referred to as the "FANG" or "AAM" stocks)—exemplified

STABILITY MATURITY DECLINE

 THE ART OF SHORT SELLING

THE MAN WHO

SHORTED ENRON
Since Hindenburg Research released its biased WHO IS JIM CHANOS? One notable example he shared was Boston Chicken,
report on the Adani Group, the term short selling has where feedback from a restaurant franchisor helped
become a buzzword in India’s financial circles. For Jim Chanos is one of the most well-known short Kynikos Associates scrutinize the company’s flawed
many Indians, this was their first real exposure to sellers in the world, famed for his ability to spot business model. Chanos categorized common themes
the concept. The idea of profiting from a company’s overhyped companies with deep financial flaws. His in short selling, such as debt-fueled booms, consumer
falling stock price felt unfamiliar, and in some most notable success came in the early 2000s when fads, technological obsolescence, and structurally
cases, even uncomfortable. he predicted the downfall of Enron, a major American flawed accounting.
energy company.
Even among those who understood short selling, He also discussed the challenges of short selling,
the reaction was largely negative. In India, where While many investors were dazzled by Enron’s rapid including limited access to management and a lack of
retail investors traditionally view the stock market growth, Chanos dug into its financial statements, support from the sell-side. According to Chanos, short
as a path for rapid growth and wealth creation, the uncovering accounting fraud and inflated earnings. sellers thrive in environments where retail investors
idea of making money by rooting for a company’s His bold short position paid off as Enron collapsed, chase overvalued stocks, which leads to inefficiencies.
failure didn’t sit well. Many saw it as manipulative or cementing his reputation as a sharp and fearless He cited the case of the PALM/3COM IPO, where
unfair and even anti-national. critic of corporate mismanagement. Palm’s stock price was inflated because short sellers
couldn't borrow shares initially. Once shares became
Yet, short selling is a legitimate strategy used Over the years, Chanos has made a career of calling
available, the stock began to normalize.
globally, often to expose overvalued stocks or out companies whose stock prices don't reflect their
companies with weak financials. true financial health. Chanos’ investment philosophy emphasizes caution,
particularly regarding fads and technological
WHAT IS SHORT SELLING? THE POWER OF NEGATIVE THINKING obsolescence. He mentioned examples like Wang
word processors and record stores, which became
Short selling is a strategy in the stock market where While delivering a speech at the CFA Institute’s outdated faster than anticipated. He also warned
investors aim to profit from a decline in the price of Annual Conference on May 18, 2010, he delivered a about companies engaging in serial acquisitions,
a stock. Unlike traditional investing, where you buy thought-provoking presentation titled “The Power of manipulating accounting figures, and spring-loading
a stock hoping its value will rise over time, short Negative Thinking.” He emphasised on the critical profits.
selling works in the opposite direction. The goal is to role that short selling plays in financial markets,
sell high and then buy back low. Chanos shared his views on regulatory environments,
drawing parallels to everyday business practices. stating that short sellers were essential for the Capital
Here’s how it works: A short seller borrows shares of For instance, airlines sell tickets before delivering Asset Pricing Model (CAPM) to work, as short selling
a stock from a broker and immediately sells them at services, insurance companies collect premiums assumes frictionless markets. While he acknowledged
the current market price. The investor doesn’t own before paying claims, and farmers sell crops before the difficulties of shorting, such as borrowing shares
the stock but is now obligated to buy it back in the the harvest. and managing risk, he also noted the opportunities it
future to return to the lender. If the stock’s price presents. Over 30 years, short sellers have earned an
Chanos argued that short selling is essential for annualized alpha of over 15%, although returns are
falls, the short seller can buy the shares back at the hedging, estimating that 95-97% of short interest
lower price, return them to the broker, and keep the often uneven, with long periods of little activity
exists due to hedging activities. followed by significant gains.
difference as profit.
Chanos emphasized that short selling is not merely Chanos recounted past mistakes, such as shorting
However, short selling comes with significant risks. the opposite of going long. It involves specific AOL during the dot-com bubble, where the firm
Unlike regular stock purchases, where the challenges, such as borrowing shares (and possibly misjudged the churn rate and subscriber value,
maximum loss is limited to the amount you invest paying a rebate), navigating unique regulatory resulting in a loss despite maintaining a small position.
(since the price of a stock can only fall to zero), short frameworks, dealing with psychological stress, and However, he stressed the importance of managing risk
sellers face potentially unlimited losses. If the stock confronting outright bans, like the one Germany in short selling, using position sizing and avoiding
price rises instead of falling, they must buy back the imposed. derivatives due to their added complexity and
shares at a higher price, resulting in a loss. Since counterparty risk.
According to Chanos, these bans often create market
stock prices can theoretically rise indefinitely, the
inefficiencies but tend to signal that the bottom of the Overall, Chanos underscored that short selling is an art
losses from a short position can be much greater
market is near, though prices may still fall further. that requires a specific temperament, stating that
than the initial investment. Short selling requires a
During his presentation, Chanos explained how short good short sellers are born, not trained. Though they
good understanding of market movements and
sellers generate ideas. They often rely on experience, face unique challenges, their role is crucial in
careful risk management. It's often used by more
third-party research, accounting anomalies, and maintaining market efficiency and exposing corporate
experienced traders or as a way to hedge against
conversations with other investors. malfeasance.
potential losses in a portfolio.
UNDERSTANDING THE
DYNAMICS OF YIELD
What is a bond? What is the relationship What are the different shapes of
A bond is a loan made by an investor to a borrower between the price of a bond the yield curve?
for a set period of time in return for regular interest and its yield? Two main aspects of the yield curve determine its
payments. The time from when the bond is issued shape: the level and the slope. The slope of the yield
to when the borrower has agreed to pay the loan In the secondary market, bond prices and yields curve reflects the difference between yields on short-
back is called its ‘term to maturity’. There are move in opposite directions. Once a bond is issued, term bonds (e.g. 1-year) and long-term bonds (e.g. 10-
government bonds (where a government is the it pays fixed interest to the owner until it matures, year). The level of the yield curve measures the
borrower) and corporate bonds (where a business which doesn’t change. However, market interest general level of interest rates in the economy and is
or a bank is the borrower). The main difference rates fluctuate, so new bonds may offer different heavily influenced by the cash rate. The yields on short
between a bond and a regular loan is that, once interest payments than older ones. and long-term bonds can be different because
issued, a bond can be traded with other investors investors have expectations – which are uncertain –
For example, if interest rates drop, new bonds will
in a financial market. As a result, a bond has a that the cash rate in the future might differ from the
pay lower interest. This makes older bonds, issued
market price. cash rate today.
before the rate drop, more attractive to investors
What is a bond yield? since they pay higher interest. As a result, the price
of those older bonds goes up. But, as the price of a
Normal yield curve
bond rises, it becomes more expensive for new A normal yield curve slopes upward, with short-term
A bond's yield is the yearly return an investor
investors, which lowers the bond’s yield because the yields lower than long-term yields. This is typical during
expects to earn over the bond's lifetime. For the
expected return is now smaller. economic expansion, as investors demand higher
investor, it shows the total return, combining the
yields for long-term bonds to compensate for
remaining interest payments and the final amount
they will get back, compared to what they paid for What is the yield curve? uncertainty about future interest rates and inflation.
the bond. For the company or government issuing
The yield curve – also called the term structure of Inverted yield curve
the bond, the yield reflects the yearly cost of An inverted yield curve slopes downward, where short-
interest rates – shows the yield on bonds over
borrowing money through the bond. term yields are higher than long-term yields. It can
different terms to maturity. The ‘yield curve’ is often
When a bond is first sold, the investor buys it in used as a shorthand expression for the yield curve signal that investors expect future interest rates to fall,
what’s called the ‘primary market’. The price the for government bonds. The yield curve for often associated with an upcoming economic
investor pays depends on several things, like the government bonds is also called the ‘risk free yield slowdown.
size of the interest payments, how long the bond curve’. The expression ‘risk free’ is used because
lasts, and the price of similar bonds already on the governments are not expected to fail to pay back the
Flat yield curve
market. This information, including the price paid, borrowing they have done by issuing bonds in their A flat yield curve occurs when short-term and long-
is used to figure out the bond’s initial yield. After own currency. term yields are similar, typically during transitions
the bond is issued, the investor can trade it with between normal and inverted yield curves or in
Other issuers of bonds, such as corporations, environments with low interest rates or
other investors in the ‘secondary market’, where
generally issue bonds at a higher yield than the unconventional monetary policies.
its price and yield can change based on market
government, as they are more risky for an investor.
conditions.
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