The Cycle Rickshaw Lender

The three wheeled cycle rickshaw is a unique and somewhat ancient form of transport, deriving its front from that of a bicycle and back from a Tonga or Bullock cart :)

I have a personal liking for these as against the modern day vehicles.

At the heart of the concept lies the human engine which is made up of 'calf 'and 'thigh' muscles, the fuel used is 'carbohydrates' (while some variants also operate on 'fat') which comes built-in with the engine, the by product that gets emitted is 'sweat'…

Apart from efficiency, some other reasons why I personally prefer/enjoy cycle rickshaw rides more are:

1. Speed… (The slow speed actually concurs well with my relaxed and laid back attitude)
2. 
   
   Convertible… so what if I can't afford the convertible model of BMW (The simple design of these cycle rickshaws allows them a convertible roof) What this means is that you can enjoy bits of wind/breeze, sun or rain while travelling, depending on what's in menu for the day.
3. 
   
   Peace of mind… You go at your own pace enjoying the beauty around (both natural and mad made), traffic is least of your concerns (sometimes a blessing) and there is hardly a sense of competition with other vehicles around. This not only reduces chances of accidents (leaving happy accidents) but also makes the overall experience pleasant (in contrast to commuting in metros under loud horns, dark clouds of smoke and mental abuse :))

It was the year 2001, I was finally out in the civilian world..after spending 6 full years in a boarding school. I got started again on what I did best, negotiating and bargaining, applying price value comparisons on almost anything, surveying people (most often the common man … milk man, rickshaw wallas, drivers, shopkeepers and on and on and on), understanding individual perspectives, understanding how people made a living and decoding business models.

The city was Allahabad, the city of god, the city of rivers and sangam, the city of kumbh, the city of Nehru and Gandhi, the city of temples, good chat stalls and awesome food joints. Attributed to the small size of the city, you could reach almost anywhere by travelling a few miles (or few minutes). Above all, the city life was as slow as I could have possibly desired for myself.

Coming back to the cycle rickshaws…
During my initial days at college, I'd make at least 3 round trips a week to various places whether for buying books, groceries, mango shakes in katra, eating out (escaping mess food) or watching movies. Since all these trips were made on cycle rickshaws, what this indeed resulted in was my survey of about 2 dozen cycle rickshaw wallas by the end of my first month and by now I had begun to understand their lifestyle and day to day issues in and out...

A typical cycle rickshaw back then costed around Rs: 4000/- (or $80)
Most of the cycle rickshaw men hired cycle rickshaws from a lender.

The rent for a cycle rickshaw would typically be:
Rs. 12/- per day (6 AM to 8 PM) and Rs. 8/- per night (8 PM to 6 AM)

This meant a rental income of Rs. 20/- (0.5% of the price of vehicle) per day for the lender, potentially translating into Rs: 7300/- for 365 days of the year.

However, let us account for approximately 65 idle days in a year (or 5 idle days every month) of no rickshaw lending activity (attributing to holidays, repairs, demand-supply gap, riots/strikes etc)

This still means 300 days of leasing (a healthy 82% utilization), translating into a rental revenue of Rs. 6000/- (or $120)(or 150% of the price of vehicle)
[Note: This is without accounting for interest from recurring deposit of Rs: 20/- for 300 times in a year]

The lifetime of a cycle rickshaw can be anything between 10 to 15 years (Frankly speaking, it may be used for as long as desired by repairing/replacing wheels, seat cushions or any other accessories and parts on a need basis)

Let us account another Rs. 2000/- or 33% of revenues as expenses towards staff cost, collection charges, provision for non performing assets and depreciation (non interest cost as we have no leverage).
This still leaves pre-tax profits of Rs. 4000/- (an ROI of 100% a year)

Tax liability would be unlikely due to limited quantum of profits that may not cross the tax brackets.

Having said that, I saw potential to increase average revenue per rickshaw by sticking some posters on cycle rickshaws for advertisements by local brands.
In fact, if advertisers would be willing to pay as much as Rs: 20/- per day per rickshaw for displaying their ad banner. I could in turn forego the daily rent collected from these rickshaw drivers hence running a "social" business, which was not only profitable but produced a 100% ROE :)

After I returned to college from my 2nd year vacations with Rs. 40,000/- that mom had given me for starting my equity portfolio, I kept wondering if I should instead start my cycle rickshaw lending business with 10 rickshaws bought using this money. In less than a year, I could have doubled these to 20 with a 100% ROE and 100% of profits reinvested. In the years to follow, I could have had 40, 80, 160 and soon over 300 of my rickshaws in the city.

In fact, if I decided to take leverage(bank financing) with a debt to equity ratio of 1:1, I'd be able to speed up and grow at about 200% a year.

While I day dreamt of my business plan to riches, the unwanted dreams of my engineering subjects such as physics, dynamic systems, operation research filled my nights with horror.

What I did not think of was the market opportunity and market potential.

At 200% growth rate, in less that 10 years, the city would have had more cycle rickshaws that the population :)

In fact, the whole market size for cycle rickshaws was about 300 :) and this market was already fully captured. Though it is easy to find opportune people to lend rickshaws to, but it would have only led to too many rickshaws on road, drop in cycle rickshaw men earnings due to excessive competition emerging from increased supply and lower utilization for lenders including me.

Besides, there were other challenges like barrier to entry, micro management (the lender would have to make daily collections from every person he lent to) and inventory (parking for rickshaws on days of low business) I soon realized that this was not my path to millions ("$$$") and I would have to look for an alternate business plan.

However, the real reason for not starting was lack of gut, a missing business partner and off course, engineering to cope with.

This analysis eventually helped me take back a very important lesson. While it may be good to talk of percentages for growth rate and compounding for evaluating investment returns at a micro level, it is equally important to understand the macro picture (market opportunity / market potential) in addition to having a model for scalability.

I found the same lesson explained wonderfully well by Warren Buffet in his letter to shareholders of Berkshire Hathway for the year 1989:

We face another obstacle: In a finite world, high growth rates must self-destruct. If the base from which the growth is taking place is tiny, this law may not operate for a time. But when the base balloons, the party ends: A high growth rate eventually forges its own anchor.

Carl Sagan has entertainingly described this phenomenon, musing about the destiny of bacteria that reproduce by dividing into two every 15 minutes. Says Sagan: "That means four doublings an hour, and 96 doublings a day. Although a bacterium weighs only about a trillionth of a gram, its descendants, after a day of wild asexual abandon, will collectively weigh as much as a mountain...in two days, more than the sun - and before very long, everything in the universe will be made of bacteria." Not to worry, says Sagan: Some obstacle always impedes this kind of exponential growth. "The bugs run out of food, or they poison each other, or they are shy about reproducing in public."