We can ignore reality but we cannot ignore the consequences of ignoring reality”
– Ayn Rand
My attention was drawn to a news item which said that India Nivesh, a newly established discretionary portfolio management service & brokerage outfit to shut shop. To my mind this is just the first of the many such similar reports that are going to come in. The reason is very simple. These are unprecedented times and not many outfits would have modelled this risk. With a global lockdown in place & hardly any operations running, the lack of sales & difficulty of accessing credit would make a lot of businesses unsustainable.
This is despite the fact that financial services industry is highly volatile and is prone to frequent outbreak of crisis like situations. In India we have gone through at least 3 of them in the last dozen years, i.e., one every four years. As Michele Wulcker in her book Gray Rhinos says, “humans are prone to be optimistic and it is this bias that makes them to ignore the risk despite it showing up in the face”.
Currently in my review of business & financial models of start ups I find the same mistakes being committed. Most of these are mere excel extrapolations based on a certain growth rate built around normal operations. Very little recognition is given to the fact that the real world is far removed from the Excel sheets and can’t be modelled on the basis of a linear growth rate. The fact that there are several ways in which disruption can strike one’s business is not woven into the model.