Edelweiss Group's Rashesh Shah recalls the crises he faced in setting up his business, and how he turned them into opportunities
Have you seen batman? in the movie, the butler Alfred asks young Bruce Wayne something profound, "Why do we fall, sir? So we can learn to pick ourselves up." Every setback is an opportunity. When we started Edelweiss in 1996, we wanted to be a Category-1 merchant bank. There were more than 440 such banks, we wanted to be the 441st. At that time, the rule was you had to have a net worth of Rs 1 crore to qualify as a merchant banker.
Initially, my co-founder Venkat Ramaswamy and I were only able to pool together about Rs 50 lakh from our own savings. We spent almost six months convincing our families: I took a Rs 25 lakh loan from Citibank and mortgaged my house, and Venkat borrowed some money from his father. We somehow managed to scrape together the additional Rs 50 lakh we needed to apply for the licence. We thought we would be a merchant bank doing IPOs, right issues and things like that. And just as we were making our application to Sebi, the rules changed to a minimum capital requirement of Rs 5 crore!
Our entire business plan went out of the window. I was in shock for weeks. We managed to go from Rs 50 lakh to Rs 1 crore by fighting for each lakh, but Rs 5 crore was impossible. After cajoling and convincing our families for additional capital, I learned that things can change in a jiffy.
The change, however, was a blessing in disguise. We started working on private equity syndication and mergers and acquisitions (M&A). In those days, there was no intermediary, there was no merchant bank focusing on private equity. It made us change our business plan completely.
Only in 2000 did we cross the Rs 5 crore capital mark, and finally become a Category-1 merchant bank. But in those five years, the work we did was pure advisory instead of focusing on equity capital markets. Advisory became our calling card and we became market leaders. We were advising on private equity when there was no private equity in India.
It was the crisis that made us create this new business model. Every setback is an opportunity to recalibrate, and fortunately in India there's always an opportunity. I believe if one window closes, three will open up. You need to have the conviction that there are other windows out there and look for them.
We didn't flick the switch in one day: As the weeks passed and we went ahead with our business, we realised there was a lot of advisory work that wasn't Category-1. Within a year, we were advising at least five companies on private equity and a couple more on M&A. There was a business model there. The experience hardened us and helped us grow. We now see change as an opportunity. Looking back, now it seems small, but back then it was an existential issue.
It was yet another crisis that made us evolve again. During the 2000 dotcom bubble, we saw ourselves as a technology specialist with a focus on BPOs. But, as the bubble burst in 2001, we had to rethink our strategy once more. But this time it was easier. We expanded from a pure advisory investment bank to a broad-based capital markets firm.
It has become a theme for us: Every time there is a setback, we use it as an opportunity to expand the business model by taking big operational risks as opposed to financial risks. Operating risk means hiring the right people and investing in them.
When the tech bubble burst, we had 10 people. A year later, after the business had totally collapsed and 9/11 had happened, we had 40. We acquired a broking arm, we started the futures and options equities and derivatives, and became market leaders in that; we set up an analytics team for equities and raised some risk capital.
After a setback, the normal human instinct is to go back into a shell, hunker down and protect what you have. But we use it as an opportunity to quietly and sensibly discover which new windows have opened up.
By 2003, we were 60 people. From 60 we went to 140, then 300, then 800 to our peak of 1,800 in 2008.
The fact that we had opened those windows helped us scale up when the growth came back. Instead of hunkering down, we said, "Let's take calculated risks in adjacent markets."
There are a number of ways to keep your head and stay grounded in times of extreme growth:
First, staying true to your guiding principles is crucial: Ideas create, and values protect. It may sound clichéd, but I still believe in the principles we wrote when we founded the company.
We spoke to Narayana Murthy of Infosys, who told us to write down the guiding principles we will adhere to all our life. They keep you focussed. Ideas are the accelerator, and values are the brakes.
Second, we believe that any and all growth taking place is a collective achievement and we have strong internal partnerships. If you act like it’s your company, you get carried away with the big high of success, and the big low of failure. Forming managerial committees helps us understand that everything is a collective achievement. You are never as good as people make it out to be in the good days, and you’re never as bad as people make it out to be in the bad ones—the reality is somewhere in between.
Third, making sure you have enough capital keeps you honest. In 2000, we raised capital till our equity became Rs 20 crore before expanding, and we entered 2008 in a fairly capitalised way with Rs 2,000 crore. Our equity now is about Rs 3,000 crore. If you have enough capital and enough leaders there’s the opportunity to be counter-cyclical.