Funds control high cash-burn businesses, not entrepreneurs
“We never had the fear of any PE to come and take control of the business because at the end of the day our story is a classic example of capital though partnership and operational skill”
Yogesh Mahansaria used to run Alliance Tire Group which got bought by Japanese firm Yokohama Rubber Co. Ltd. In a matter of three years, Alliance Tire gave investor Kohlberg Kravis Roberts and Co. Lp, 3X returns and 6X returns to Warburg Pincus in six years. The valuation of Alliance Tire when it was sold to Yokohama was $1.3 billion. Edited excerpts from an interview:
You debunked two myths, one that Indian entrepreneurs can’t build global brands and second that India can’t be a manufacturing hub. Can you give some insights as to what was going inside your mind to give away majority control?
Mahansaria: We had a choice either to own 100% and build the business, but we were constrained by the amount of capital that we had at that point of time, or we could cede majority control to a private equity (PE) fund and build a scalable business. My father and I were equally happy to have the opportunity of building a large globally scalable business. We never had the fear of any PE to come and take control of the business because at the end of the day our story is a classic example of capital though partnership and operational skill. PE no doubt brings a lot on the table but they can’t really build businesses. We knew that PE fund was counting on us to execute the plan.
Can India actually be a global manufacturing hub?
Mahansaria: I’m extremely positive on this. The next 20 to 25 years is India’s time to emerge as a manufacturing hub. We have a large growing aspirational population. People want to progress in life and know that they have to work hard. I’ve been in the business for the past 25 years and the infrastructure here is the best. Who would have imagined five years ago that India would be a power surplus nation? Power rates are globally competitive and you have so many new ports and highways building up. We aren’t at China’s level in terms of infrastructure but compared to South-East Asian countries we are far better.
Do you believe in the cash-burn strategy that we see in several new age businesses?
Mahansaria: In the period of time, when you build the business, you may have to lose money but today what I see in business is that there’s no end in sight. These businesses are not controlled by entrepreneurs but by the funds because every six to nine months you need large amount of capital infusion, which is obviously infused by the large funds. If you are burning money for a certain period of time but have the path of profitability, then the situation is fine but today the idea is fading out.
You exited your business and you are sitting on a pool of capital. What are you going to do next? Are you excited to see the wave of entrepreneurship?
Mahansaria: I am certainly excited with the new era of entrepreneurship. I think for India to fulfil its potential we need more entrepreneurs. In this whole wave, lots of valuable businesses are going to get build. It is certainly an exciting time to be an entrepreneur in India. I don’t understand the new-age businesses, but I’m certainly excited about building my next manufacturing venture.
As an entrepreneur what is your biggest nightmare?
Mahansaria: If there’s an unclear mandate in the general election next year, which would make governance difficult then that would not be a good situation. India needs clear leadership and continuity of policies.