Using customers' money for your startup

Beijing has the world’s costliest rental housing, according to a survey of 15 global cities, with average prices more than 1.2 times average salaries, says a report by the Global Cities Business Alliance, a UK-based not-for-profit organization. The rise in rent, in developing countries like China, India, and Pakistan, has provided developers an opportunity to make money out of thin air.

What they do is to purchase a piece of land and then announce construction of residential plaza or shopping mall over it. Advance booking is announced for residential and commercial units. The advance money collected is then used for completing the project. Unheard in many developed countries, realty development is one of the most lucrative areas for investors.

The use of customers’ money for growth isn’t limited to realty sector only; entrepreneurs can use this method to grow their startups in other areas as well. Take the example of TutorVista, which successfully leveraged this customers’ money model of financing. It started when Krishnan Ganesh hired three teachers and provided them with VoIP internet connection, PC displaying a digital whiteboard along with webcam. It quickly became a 100$ per month tuition service.

Dell is another example of customer funded business. Michael Dell, founder of Dell, started by selling customized PCs to small businesses. The core percept in his business was to collect cash before having to lay out money on chips and computers to be sold. 

Customer funding provides many benefits to the startups. Usually, startups receive higher valuations if they performed successfully for an extended period of time, without external funding. Additionally, strong cash inflows, from customers, allow entrepreneurs to focus on proving business model rather than wooing investors.

In this model of business funding, balance sheet shows more current liabilities than current assets. In accounting term it is called negative working capital. Ironically positive working capital is assumed to be good as it poses less insolvency risk to the business.

Not every startup can be run using customers’ funding. Capital intensive projects need to rely on traditional way of financing. 

Foreign investment in Pakistan: boon or bane?

In the last couple of days, Pakistan has witnessed an increase in foreign investment. Many local companies were acquired by foreign multinationals. Dawlance, Pakistan’s white goods manufacturer was acquired by Turkish group Arçelik . Furthermore, in the same week a Dutch based dairy cooperative FrieslandCampina acquired stakes in Engro for around $460 million.

This shows that international investors are viewing Pakistan as a growing market. Its huge population provides huge consumer base. The rise in middle class along with young population makes it attractive location for investment.  Many European countries are having population as much as Pakistan has graduates.

But is there any benefit to the nation of these huge investments from multinationals. In a nutshell we would say yes. But on a deep analysis we would say it is hard to say anything precise unless we take into account other factors.

Let us assume that Turkish group would enhance the quality of the products, manufactured by Dawlance, and would make them attractive to export markets. Definitely, in this case it would be good for Pakistan. Multinational companies have huge research and development departments with billions of dollars in budget which helps them in developing new and better products. Small companies like local ones cannot expend that much on research and development. Furthermore, small companies have issues with protecting patent rights. Hence, from this particular angle it is good that foreign companies are making inroads into Pakistani market.

With better quality and increased foreign clients’ satisfaction, country would be able to earn foreign exchange. This would also help Pakistan to move from exporter of low-tech to exporter of high-tech products.

The ability of multinationals to get a better deal from Govt. in matters of tax rebates is another thing to ponder. In countries like Pakistan, Govt. rules are more favorable to foreign big investors rather than local small investors. The exemption of duties and taxes extended to Chinese companies working on CPEC is one such example.

Exemptions in taxes make it more likely for these companies to earn heavy profits and pay high salaries to its employee. This would mean more and high paying jobs for locals as well as better employee retention for the multinational companies.

But there are more cases in which these companies hire foreign people than local ones. This would mean snatching jobs which could be provided by local companies to local people. Moreover, huge portion of profit earned, through getting tax rebates, by these companies is repatriated back to their country of origin.

Thus foreign investment is good for host country if it leads to transfer of technology; increase in exports, provides employment to local ones, pays taxes and duties to host country Govt. and improves quality of manufactured goods.

Turkish company Arçelik acquires Dawlance for $258 million

Turkish company Arçelik has said it is going to acquire Dawlance, Pakistani manufacturer of consumer durables, for $258 million.

The deal is expected to be closed by the end of 2016, as it requires approvals from Competition Commission of Pakistan (CCP), purchase of minority stakes and transferring of land and buildings to the ownership of the company, it said.

Dawlance had revenues of $220.6 million in 2015. Similarly, its earnings before interest, tax, depreciation and amortization (EBITDA) is $45 million last year. Its net debt amounted to $30 million at the end of 2015, according to Deutsche Bank.

Sources close to the sponsors of Dawlance say the company had been on the auction block for the last five years.

Bashir Dawood is the major shareholder of Dawlance. He is Hussain Dawood’s brother-in-law, a corporate tycoon who controls majority shareholdings in Engro, HUBCO, and Dawood Hercules groups.

Sources say the owner of Dawlance wanted to permanently move abroad. His children have established careers in fine arts and interior designing in Europe and the Middle East and apparently have no interest in managing the family business.