Disclaimer: not an invitation to buy, sell or hold any mentioned businesses or stocks in this article. This is a guest post and the author’s opinion does not necessarily reflect Recompound’s opinion.
Entrepreneurship 101: stories from my childhood
I grow up being surrounded by entrepreneurs. Most of whom are pretty good, I would say.
As a child, one of my favourite Sunday activities is to be a shopkeeper for my Mom’s tire shop. I love observing my Mom talking to customers and then writing a kwitansi (invoice) for the customer with the old-fashioned pen and paper invoice (you know those with three layers of white, yellow and red; and you have to put carbon papers between each piece of paper so that your writings get copied down to the layers below).
Please bear with me through even more nostalgia.
I would observe as customers try to negotiate prices with my Mom. My Mom would start with offering IDR 450.000 for a tire. Her customer would ask for a discount to IDR 400.000. She would then flip through her price list, press a few buttons on her calculator, and counter-offered 425.000, saying she’s only making 25.000 from the cost of the tire. The customer would be happy to accept after hearing that.
After the customer left, I would ask her how much is her true cost and she would whisper back to me. As to the truth, it will remain just a secret between me and my Mom.
Whatever the true cost of that tire is, I learned the first principle of running a business as a little kid:
Lesson 1: To run a business, you make sure that you charge a price is higher than your cost.
I guess it’s true that leading by example is the best way of teaching. Because that is exactly what happened to me and my siblings. We took our observations and put them into practise in schools. Here is a story of my older brother.
My siblings and I grow up in an era where our entertainment was collecting Doraemon comic books. Once a week we would beg our parents to buy us one copy of the newest Doraemon; and persistent begging has brought us about 50+ volumes.
It seems that the enterpreneurial traits of our parents were so virulent that my older brother started a comic book rental when he was in primary school.
He would rent out our Doraemon comic books at IDR 2.500 if the comic was returned by the end of the school day, or IDR 5.000 for next-day return. For a cost of 0 (because he didn’t buy the comics with his own money), he made some pretty good money which he then used to buy other toys. He ran his illegal comic rental shop until his teacher caught him and called my Mom, who reacted by laughing and boasting it to her friends and relatives.
Lesson number 2: minimise your cost as much as possible.
Another story from my childhood. In my primary school, students were encouraged to bring their own packed food from home. I was always so envious of my friends who would bring Indomie, fried rice, or nasi uduk; and I would be staring disappointedly at my roti meses (sandwich with chocolate sprinkles).
Every evening, my family would make a stop at a bakery near my tuition spot to get a loaf of sandwich bread for our breakfast the next day. I remember going to this particular bakery for a good few years before they finally closed down. I then asked my Dad why the bakery closed down. And he answered, “Their business wasn’t so good. They didn’t have lots of customers.” So why did they close down? “No customer, no income. So they lose money from keeping the stores open. When the money runs out, they close down.”
That was the third principle of business: when you don’t make enough money as a business, you lose money and close down.
As I grew up, I started to be exposed to more complex business operations. One of my relatives run a very successful Chinese dim sum restaurant. One day when my family was having dinner at his restaurant, he came down and sat with us. He shared that he is going to open another noodles restaurant in a newly-built shopping mall; the concept was going to be like so and so and so. What was interesting to me was that he said that there was going to be 5 “owners”. His 4 friends would be supplying capital and he would be supplying the cooking expertise. I remember asking my Dad why did that cousin need to bring 4 other friends when he was the one with all the cooking and restaurant-running skills. And my Dad said:
He doesn’t have enough monetary capital to start another restaurant. So his friends are providing the capital and in return, he gives them some ownership of the new restaurant. I later learned that the fancy term of this is equity fund-raising.
(Sadly the noodles restaurant did not do well and closed down after a year).
This next and last story occured when I was no longer so young. I was already in high school and my oldest brother had graduated from university. He was just starting his entrepreneurial journey as well. My oldest brother is not a good student — he disliked school and skipped so many classes that my Mom had become best friends with his teachers. But my brother is a damn good salesperson — he likes talking to people, making people feel happy and buy stuff from him.
So what does he do? Sell.
He started by becoming an agent for a renowned oil company, selling machinery lubricants to factories. Slowly, he started gaining more connections and getting more requests for bigger items like machinery spare parts, tires, etc etc. The nature of his business (like many others) is that his customer would not pay him immediately upon receiving the goods. His customers would ask for a 6-month period to pay my brother. Meanwhile, my brother’s supplier would only give him 3 months to make his payment.
Then my brother reached a point where he did not have enough money to buy the goods he wanted to sell to his customers. So he turned to my Dad and borrowed some money. Given the kindness of my Dad (with a bit of sweet-talking and nepotism), my Dad lent my brother the money with 0 interest, who paid my Dad back after 1 year. And so here goes the fifth lesson in entrepreneurship:
Another way to borrow money is through loan. Traditionally, people take loan from families, banks, and (notoriously but this still exists) loan sharks. These days, the world gets more creative and we have things like P2P lending.
The wonders of GOTO
Now that I am already an adult and have learned about mathematics, economics and entrepreneurship more formally, I become even more amazed by how practical and smart these real entrepreneurs and practitioners are. They see business opportunity, they try to serve that market and earn profits. If the business doesn’t work, either it is a bad business or there is a bad management; plus you can’t incur losses permanently, so the logical thing to do is to close down. If you need working capital, you can borrow money and either pay back that money with interest or pay the lender with some shares. At the end of the day, their goal is simple: to make money.
Now the strange thing about a lot of companies these days — or if you prefer the gen-Z word, start-ups — is that these companies seem to be able to withstand losses for many many months and years. When I first learned that Uber is not making profits, WeWork is burning money, and closer to home we have Gojek, Grab, Tokopedia, Shopee, Ajaib, etc etc — it seems crazy that these companies are violating all the principles of entrepreneurship I learned as a kid. Let me recap.
To run a business, your objective is to make profits. Given that $profits = revenue - cost$ this means you have to make sure your revenue is bigger than your cost
Try to minimise your cost as much as possible
If you are making negative profits, fix it. If you can’t fix it, you should close down.
If you need working capital, you can borrow money and pay your lenders with shares of your company.
Or you could go the traditional way and just pay back the money in full, with some interest.
I got curious when I heard people saying that “Do you know that Gojek is still unprofitable?” While I already kind of know that many start-ups are unprofitable, I wanted to know what is causing this unprofitability. So I went to take a look at their annual reports and collated this table.
This is the biggest company in Indonesia has been losing money at the magnitudes of trillion rupiahs. A record loss of IDR 19 trillion in 2019 (USD 1.2 billion). I guess it’s apt that they call themselves a (burning) unicorn 🦄🔥🤯
Distortions everywhere
Being a student of economics who learn from textbooks, I can’t help but to bring out a few jargons. (Maybe a side objective that I have is that so that when you share this knowledge with your friends, you will sound a little bit cool and smart). The jargon that I would like to introduce is the idea of distortions.
Demand (price) distortion
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