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As long as Chillr was riding on IMPS it didn’t have competition

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And now it is in the middle of seeking a sale. It has two big suitors in the form of caller identity service, Truecaller, and one of India’s largest private sector banks, HDFC Bank, confirmed three sources close to the development.

It could be a few months till full details like valuation emerge, as the two companies involved will need to do due diligence and put a price tag on the deal.

Nonetheless, Chillr’s potential sale is a signal of things to come. Kunal Walia, the founder of boutique investment banking firm Khetal Advisors, says consolidation in this space is inevitable. Because:

  • Peer-to-peer payments are still a small market with very low margins, leaving little room for many players
  • There isn’t much differentiation in service
  • Paytm* is a market leader with an unassailable lead
  • The original “WhatsApp for Money”

Chillr launched in 2015 with a simplified and easy-to-use layer over a banking transfer standard, Immediate Payment Service (IMPS). IMPS allowed people to transfer funds to others using an account number linked to a mobile number.

But then, only a year later came other funds transfer standard, Unified Payments Interface (UPI), whereby money could be sent to another person using just an email id-equivalent called a ‘virtual payments address’. UPI was vastly simpler than IMPS.

Then, in November 2016, the Indian government demonetized over 85% of the currency notes in circulation. As most cash got sucked out of the economy, people flocked to digital payment startups. The government too got into the act and launched BHIM, a money transfer app based on UPI.

Impact of the demonetization

The one-two combination of UPI and demonetization became a survival test to pick out the fittest. Chillr didn’t exactly finish first.

Chillr’s original vision was to become the “WhatsApp for Money”. For Indian startups seeking funding, “Whatsapp for X” was the new “Amazon for X”. Except that Whatsapp and Amazon were both not just present in India, but dominant as well.

Anyhow, with that kind of a pitch, Chillr was able to raise $6 million in a Series A round from Sequoia in 2015, within just eight months of its launch. One reason for the funding was a dearth of quality peer-to-peer payment apps, other than wallets of course. What also helped Chillr was that at a time when fintech startups had almost no standing with banks, it launched with HDFC Bank as its first partner bank. This meant the bank’s 40 million-strong customer base were potential Chillr users. If they chose to.

Most didn’t.

Even then, Chillr managed to reach almost 2.5 million transactions worth about Rs 500 crore a month. But with 75 employees, the Mumbai-based company has come to a point where its funding is drying up, said a former senior employee.

Walia says companies like Chillr are what he often calls as ‘Businesses in Search of a Business Model’ (or BOMB). “The success or failure of Chillr is not so much a comment on the P2P space in India as it is on the lack of a clear strategy that allows any significant margins to be made from such a play,” he says.

So, at a time when WhatsApp is itself coming for your money, what chance does Chillr have in being a payment app?

 

 

Dance of the Unicorns

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Binny Bansal’s email to Flipkart’s employees is perhaps a good place to start this story. On Thursday, SoftBank announced that it has invested close to $2.5 billion in the company. This investment is an extension of Flipkart’s funding round in April this year, when Tencent, eBay, and Microsoft invested in the company. Needless to say, Bansal was enthused. To quote from his email:

Why this investment though?

“This is truly a watershed moment for the Flipkart Group and India. This is the largest ever private investment round in an Indian technology company. And coming from a visionary investor renowned for backing innovative, winning companies, it is a big vote of confidence in Flipkart. At the same time, it augurs well for India because we are among the few economies globally that is able to attract such massive interest from top-tier investors.

As I’ve said earlier, the ball is in our court now. With razor-sharp execution, we must continue to transform commerce in India through technology and India-specific innovations. As the leader of Indian e-commerce, the onus is on us to make its benefits reach the farthest corners of India.”

We are still wrapping our heads around what this means for Flipkart. The simplest explanation is more money. Where Flipkart had $2 billion in cash, it now has $4 billion. What Flipkart does with this money is a good question to ask and we will get to that shortly. More importantly, it is the SoftBank angle you must consider. Perhaps you already know that Softbank has poured in $900 million in Snapdeal. As things stand today, that money hasn’t amounted to anything. Now SoftBank might be a behemoth but even for a firm of this size, $900 million is a lot of money, especially so when this money has come out of its own corpus and not from the $93 billion Vision Fund that SoftBank is now shepherding.

While it might seem that by making a bet on Flipkart, SoftBank is essentially writing off its investment in Snapdeal, the imperatives of the Vision Fund (from which the Flipkart investment has been made) are at an altogether different level.

The world has never seen a fund of this site dedicated to making investments primarily in unproven technology startups.

But the magnitude of the fund is a double-edged sword. On the one hand, SoftBank can enter pretty much any deal it chooses to but on the other, it can’t afford to miss having a stake in any of the hot sectors/startups that could emerge as the totemic companies of tomorrow, essentially ending up with an index fund of the most important startups in the world.

Billion-dollar unicorn exits won’t even begin to nudge the needle for SoftBank—they need Decacorn exits of $10 billion-plus to reach their target returns. Given that there are only a handful of companies that are likely to be in this range over the next 10 years, SoftBank has to invest in pretty much every single one to achieve its target Internal Rate of Return. If this means investing in competing startups in a hot area, entering a company at a late/overvalued stage, or ignoring its previous bets to pick the likely numero uno winner in a hot sector, so be it. This dynamic probably explains why SoftBank chose to back Flipkart at this stage.

But, what about the other erstwhile Unicorn?

The situation inside Snapdeal is tense. And employees are talking. “I don’t think Kunal has it in him,” says a senior Snapdeal official, who has spent more than two years at the company, and is still one of very few, senior people left. “You almost want to believe that Snapdeal 2.0 will work.

But it requires a complete change, no baggage of the past. Rebuilding the organization from scratch. There’s money on the table, so you hunker down and just execute.

But I don’t know if Kunal is up for it. I don’t think Rohit can do it either. Actually, I don’t think he has it in him at all. Snapdeal 2.0 requires someone completely fresh.”

 

The three wheeled dreams

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In June this year, Ola and Uber’s drivers went on strike again. Most cars were parked. The drivers wanted their incentives back. But neither cab-hailing company was willing to budge. The honeymoon was over. Despite the strike, within Ola, senior executives were sanguine.

Customers Inclined Towards Ola

“Ola knew the drivers would blink first,” says a senior Ola staffer who asked not be quoted. And the drivers did. They came back to work the next day. “There was a trend Ola noticed in Bengaluru during that strike, customers started using Ola to hail autos,” says the executive. What was curious that Ola expected Uber to get into autos as well. But nothing.

“It was a market, which Uber was not interested in and so Bhavish Aggarwal (CEO of Ola) decided to get aggressive about it,” says one of the Ola staffers quoted above. It would give Ola the impetus it needed to increase ride numbers.

What does Ola get from the auto adventure?

  • New users who feel they can’t afford cabs. And upgrade them in time.
  • Convince existing users to try this option for short rides, leaving the taxis for longer rides during peak hours, which will make Ola more money.
  • Get volume and push the 1.5 million rides a day to 2 million by the end of FY18 and open up a gap with Uber once again.
  • Add supply without a lot of investment.

Currently, the average auto ride distance is 4km. Almost 10-15% of Ola’s 1.5 million daily rides are from autos. The average revenue earned from an auto ride is Rs 50. Ola takes 10% of that and pays the drivers no incentive. Ola wants to play the low-margin, high volume game. But it gets a little murky. Ola discounts the ride for the first 4km to encourage customers to use the option more often. But these discounts are illegal.

The Indian Motor Vehicles Act says that autos can’t overcharge or undercharge the fares set by the state government.

“The fare that Ola has subsidized is not only in violation of the Motor Vehicles Act but is also against the Antitrust and Competition guidelines,” says Karan Joseph, a Bengaluru-based advocate. He explains that in this case, Ola can’t get away by paying a fine. The penalty here is that the auto driver will lose his permit. At the same time, Ola is also creating an economic atmosphere where it undercuts the other auto drivers who are not on the app.

Joseph, however, explains that state governments of Karnataka, Maharashtra, and Delhi are all trying to come up with a peak pricing fare. “They are not talking about minimum pricing either. Maybe they will. But this is all to do with cabs not autos. These commissions may now have to consider autos within that as well,” he adds. This might end up sabotaging Ola’s plans to increase volume.

Where Is The Solution?

But such concerns might be a temporary headache for Aggarwal. Especially, as SoftBank looks likely to become one of Uber’s largest shareholders. All the Ola CEO has to do is hold his nerve and wait for consolidation to arrive.

“Both these countries have a local first approach. They will not let Ola break into their countries very easily,” says one of the former Ola employees quoted above. “There are taxi unions that have set rates and Ola won’t be able to reduce it,” he continues. Ola, however, is looking at Nepal and Bhutan as extensions of India. And it doesn’t plan to burn too much cash.

“I find this move strange. Will they spend money just for Indian tourists? How many tourists will you get? 10,000 a season? Too much effort for nothing,” he adds. The move, he and other Ola employees say, borders on tokenism and will add very little value or volume.

This international expansion will add, at best, two medium-sized markets. But won’t bring in the huge numbers that will increase its lead when it comes to Uber. Enter autos.

 

The intriguing story of a young company and a promising product

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It was sometime in the last few months of 2014 when the chatter started.

It began with Tiger Global’s interest in Unicommerce. If you remember 2014 and Tiger Global, this should stick with you: Tiger was the big daddy in town then and if its head Lee Fixel said, ‘I want to put money into you’, nobody really said no. And Lee Fixel was interested in Unicommerce.

To invest almost $10 million. Talks went far. In November 2014, Inc42, the startup focused digital media outlet reported that Unicommerce had raised $10 million from Tiger Global. Even as all this was happening, news started trickling in that Snapdeal wasn’t happy with the deal. In fact, the company itself was interested in acquiring Unicommerce.

Snapdeal Acquiring Unicommerce

Just a month later, in December 2014, Mint reported that Snapdeal was in talks to acquire Unicommerce. If you are thinking, whatever happened to Tiger Global, well this is what The Economic Times said, back then: “Online order management and fulfillment platform Unicommerce is in talks with Snapdeal for a potential acquisition, according to multiple people familiar with the development.

Two of the sources told ET that Unicommerce returned an investment of $10 million (Rs 62 crore) from Tiger Global to pursue the potential acquisition bid from Snapdeal, one of India’s top three online marketplaces. An acquisition, if it happens, could value the company at up to $10 million, according to people privy to the talks.”

Ken could not independently verify the return or exchange of money.

What came to light though by studying the company’s books of accounts is this. April of 2015 was the time when Unicommerce’s books first mention an acquisition by Snapdeal. In a board meeting held on 10 March 2015, the Unicommerce board approved the merger of the company with Snapdeal. According to documents filed with the Registrar of Companies (RoC), the amalgamation scheme (a schedule to merge two companies shares) was put for approval at the Delhi High Court.

Two points are of note from the High Court order, dated 20 October 2015.

Firstly, Section 4.3 of the document.

“There is also an averment to the effect, in paragraph 14 of the application that, the directors of the transferor and the transferee company have no material interest in the matter except to the extent that Mr. Kunal Bahl and Mr. Rohit Bansal, who are the promoters of the transferee company are also shareholders of the transferor company. It is stated that both Mr. Kunal Bahl and Mr. Rohit Bansal, separately, hold equity shares to the extent of 4.41% in the transferor company.”

Larger Conflict Of Interest?

While the potential conflict of interest with Bahl and Bansal being on both sides of the table is declared, whither Nexus? If anything, Nexus had a much larger conflict of interest given that it owned ten times as many shares in Unicommerce as Bahl and Bansal did individually and, like them, was both a major shareholder and a director in Snapdeal too. Curiously, the declaration completely skips this material disclosure.

In fact, Nexus is not mentioned even once in the entire document that was submitted to the court. While it is moot if this was deliberate and/or malafide, most people would call this a major disclosure lapse.

Even more so, when you see it in conjunction with Section 4.5 in the same document relating to the consent of shareholders for the proposed amalgamation. This section breaks down the number of each class of shareholders who have consented to the merger. On the side of Unicommerce, it mentions that 1 out of 1 preference shareholder has consented (this one shareholder being Nexus of course) and on the other side, it mentions that 16 out of 35 preference shareholders in Snapdeal have given their consent.

Having an insight into the story of the origin

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Kothari was born in Hong Kong and spent most of his time in the city. And never learned either Cantonese or Mandarin. He got into Wharton School of Economics where he met a young man named Kunal Bahl, who went on to become the CEO of Snapdeal, one of the largest e-commerce companies in India. This friendship continued to blossom after college. Especially when Kothari bought a struggling comic book company called Valiant Comics.

Kothari wanted to make Valiant Comics the next Marvel comics. But it didn’t work out. He withdrew from the company and let his co-founder run it. Valiant allegedly made deals with studios but nothing materialized and he moved back to Hong Kong and there he reconnected with his college buddy Bahl.

Snapdeal: A dark horse

Even as all this was happening, back in India, Rahul Yadav fell out with SoftBank and Nexus Venture Partners at Mumbai-based real estate startup Housing. At the time, Snapdeal was the rising star in SoftBank’s portfolio and when Bahl made a recommendation, it stuck. The Housing board was shopping around for a new CEO. Bahl recommended Kothari for the position.

“They called him a media entrepreneur. And he knew nothing about building a company or repairing what was wrong,” says a former board member of Housing. Kothari, however, came in as the chief business officer (CBO) and was then elevated to CEO.

“While he was the CBO, he had to meet builders and start developing relationships with them. But he didn’t want to do that. He kept trying to redefine his role,” adds the former board member. What role did he want? “He wanted a leadership role within the company. He asked the board for a Co-CEO post,” the board member says. The board refused.

At the time, Kothari was to replace Rishabh Gupta, the interim CEO of Housing. Gupta was a placeholder until Kothari learned the ropes. But Gupta fell out with the board as well and quit. The investors’ patience with the company had worn thin. And then Kothari was asked to do what he was brought in for. Trim the headcount, contain the burn and make the company viable for a sale.

Housing, during Kothari’s tenure, fired close to 800 people. Almost 600 people were asked to leave in September 2015. And another 200 in March 2016.

So, why did Kothari stumble in February 2017? Like in everything else, there is fine print. The first round of firings was not his design. It was designed by his predecessor, Gupta, and the next one in March was handled and fashioned by Ajay Nair, the then chief administrative officer.

“It would be fair to say that he [Kothari] was in his cabin and never left it during that period. He had almost no interaction with anyone who was being laid off. Everything was delegated,” says a former colleague of Kothari at Housing. Apart from signing off on the retrenchment, Kothari did little else. He didn’t make a list, nor could he figure out which department to trim.

Room 2

We are in January 2017. This time in Powai, Mumbai.

“I want to change the impression of the company,” Kothari says to the person sitting in front of him

“In what way?” says the senior Housing employee.

“I want people to talk about us again. No one is talking about us. And I think that’s why we can’t get new investors,” he replies.

“But what will we say, right now? What are the talking points? There is nothing new.”

“We must find something to talk about. What’s happening in the company?” he asks.

“You are the CEO, you must know,” the person laughs.

“We must ask someone. Let’s call Ajay (the CAO),” he replies.

It was a short conversation. But the disconnect he felt with the company was obvious to all those around.

 

Grocery is back, and with a bang

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Flipkart, which retreated from grocery within months of starting and closing down a pilot called Nearby in early 2016, wants a second coming. Its CEO Kalyan Krishnamurthy was quoted at an event organized by TiE that the company wants 60% of the wallet share of the consumer who stocks up on grocery and FMCG every month.

Online grocery app Grofers, which has raised over $165 million from investors including SoftBank and Tiger Global, is the only other name in the space which has continued to survive despite multiple pivots and by rescinding markets.

Role of artificial intelligence

According to KalaGato, market research and intelligence platform, BigBasket commanded 73% of the online grocery market by order volume in February. Grofers was a fifth of BigBasket’s market share while ZopNow and Amazon Now had a percentage of the market in lower single digits.

The company started as an on-demand platform for grocery in 2013, aggregating orders on the app, picking it from stores and delivering it to the customers through its fleet. The company lost money on each order, according to an analyst who chose to be anonymous.

Since then, Grofers has tried models including offline kiosks near residential areas to service a high-density area and is finally resting on the inventory-based model, procuring its own fresh produce and pushing private label in the staples segment.

“Unlike mobile, grocery will be a local play. It is important to procure locally for fresh products. There will be local winners and losers. There will be ABC doing well in Mumbai, others doing better in Bengaluru,” says Mukesh Singh, co-founder of ZopNow which has a restricted play across cities, delivering groceries in a three-hour window. He adds that while BigBasket is a stable business model, it is not a winner-takes-all market.

According to Singh, it is a wait of two to three years to make money with the grocery business. Till then it is the well-funded companies that will bear the brunt of educating the market, read as ‘burning money to convert users’.

BigBasket Stays Independent, For Now

The acquisition of Whole Foods by Amazon in June in the US has brought back the focus on grocery as one of the low-value segments, which can increase the number of transactions done by a customer online. Amazon Inc bought Whole Foods in an all-cash transaction valued at approximately $13.7 billion including the company’s debt. With the acquisition, Amazon has entered the offline food retail business with 460 stores owned by Whole Foods.

In the US, the sale of FMCG products online is only 25% of the shopping according to a report by Kantar Worldpanel. China tops the global list as far as online grocery and FMCG purchase is concerned.

In this scenario, it makes perfect sense for BigBasket to align with Paytm Mall, which brings on board the right set of investors to execute the company’s expansion.

Alibaba, which is an investor in Paytm and will also be a part of the BigBasket deal, has seen a similar story work out in the South East Asian markets. Lazada in Singapore, which is backed by $2 billion from Alibaba, acquired online grocer RedMart in November 2016. Alibaba invested $305 million in discount supermarket chain Sanjang Shopping Club in China and acquired an 18% stake for $81 million in Lianhua Supermarket chain owned by Bailian Group in Shanghao.

What BigBasket got right from the start was the inventory-based model of procuring fresh produce, building its own supply chain with the farmers and creating a private label.

“Before we built the supply chain for BigBasket, we would pick up the products from Metro Cash and Carry and Safal. The fill rate (back then) was low at 70%. What fill rate means is that if you order 18 items on BigBasket and you get only 17 of them, the pain is still 100%. For that single item, you have to go to the store. You may as well buy the other items during the trip,” says Ganesh.

He further adds that grocery is a low margin business unless you have a private label which guarantees a 25% to 30% margin. This again needs working closely with mill owners and farmers. For BigBasket, the private label business contributes 35% to its revenues which it plans on growing to 40% by March 2018, according to a previous interview given by CEO Hari Menon to another publication.

 

Tiger, Tiger taking flight

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“If Lee likes a company or a founder, he is ready to pay a premium to seal the deal”, says the founder of a Tiger-backed startup who spoke to The Ken on condition of anonymity. “Lee has no qualms in offering an accelerated valuation in such circumstances”.

An accelerated valuation essentially represents paying a price pegged to a multiple of a forward-looking metric. For instance, it could mean a valuation equal to 10X of next year’s top line. While it might sound like this translates to overpaying, in Fixel’s view it doesn’t.

There are two reasons why this makes ample sense. Firstly, for Fixel, it crowds out the competition as very few competing VCs would be willing to pay such a price. Secondly, it shows the founder that Tiger is in her company for the long haul, rather than optimizing for the short run and looking for an exit in the next year or two—Fixel wants the company to go big and this premium is a signal that he will be there for the long term.

Double-Edged Sword

Of course, this is a double-edged sword in that if the company does not “grow” into this forward-looking valuation, it becomes difficult for it to raise the next round. Most Tiger-backed founders that The Ken spoke to are cognizant of this risk and said that they entered this pact with their eyes open.

Second, let’s consider the volume.

Prior to Tiger, any GP of any VC firm in India rarely took on more than five to six companies individually. Each company would ostensibly then get a high-touch treatment with dedicated focus and time allocations.

Fixel eschewed this limitation by adopting a low-touch approach when it came to table stakes such as reporting and board meetings. He rarely joined the Board of Directors of his portfolio companies and offloaded reporting to others in his team. Given that Tiger makes both public and private investments, it has a large in-house team for tracking portfolio performance and generating reports.

“Tiger has a team in Singapore that helps us generate monthly business scorecards. The format of these reports and the information they present is the result of years of experience in public markets and provide a succinct summary of our business vitals”, says the founder of another startup backed by Tiger.

He requested not to be named. Fixel limits his time to view the executive summary of these business scorecards and intervenes only when he feels that something needs to be explained. This hands-off approach enables Fixel to provision time to helping his portfolio companies in high-leverage items, specifically in terms of connecting founders to potential customers, partners, and follow-on investors.

Now, let’s look at the aspect of velocity. Does Tiger’s quick decision-making style represent a lazy, gut-driven approach to investing?

It is undoubtedly true that once he has engaged with a founder, usually over a Skype call according to sources, Fixel decides very quickly on whether he wants to invest.

Analyzing the various aspects

But what is not commonly known is that prior to taking that meeting, Fixel and his team have spent hours looking at various aspects of the company in great detail. By the time the actual interaction takes place, Fixel usually has an informed opinion on the founder and the company and a data-driven thesis on whether the investment makes sense.

The call itself typically helps Fixel get a sense of whether the founder as a person is someone worth backing and once Fixel determines that, he moves quickly with an offer. When it comes to offers, Fixel has an interesting approach. As mentioned earlier, he comes up with a number that he feels is fair and representing an accelerated valuation and usually, the offer operates under the take-it-or-leave-it dictum with little room for bargaining.

A Mumbai-based entrepreneur learned this the hard way. Fixel had offered him a generous $30m pre-money valuation for a $10m investment into his early-stage company. The entrepreneur figured that he could play him for more as he thought that first offers always offer room for bargaining. He asked for a valuation of $35m.

 

 

What does Estonia have that India doesn’t?

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Tallinn is home to unicorns like TransferWise, a cross-border payments startup. And Avijit Sarkar, founder of CapOne, a Delhi-based company, is taking competition right to TransferWise. In CapOne, Sarkar wants to set up a cross-border payments company by building his own blockchain infrastructure.

Seeking the cross-border payments

Setting up in Tallinn makes it look like Sarkar thought of himself as David searching for the Goliath of cross-border payments. But setting up shop in this tiny Baltic nation was the only way Capone could run. And luckily for him, he is there on the Estonian government’s invitation.

Estonia has been hyped up to be Europe’s silicon valley. But the reality is, with a population of just 1.3 million, it has a serious talent crunch. It can no longer depend on its population to support it is up and coming startup ecosystem. And as part of solving it, the Estonian government in January rolled out a program that eases visa norms so entrepreneurs from other countries can easily set foot in the country.

So far, 220 companies from 40 countries applied to set up in Estonia and 35 of those were Indian. Of the 100 whose applications were accepted, 13 were Indian. These are startups mostly working on the blockchain, logistics, automation-related sectors.

But why would Indian entrepreneurs like Sarkar leave a market as enormous as India to markets that are alien?

It is a question of acceptance, said Sarkar, who moved to Tallinn in January. “It is not easy to run a startup in India. I have found better acceptance in Estonia.”

Living the Estonian dream

The old town center of Estonia lulls you into thinking it is a quaint Eastern European city with its long sloping red-tiled roofs and spires. But it belies the fact it has a digital pulse. The average Estonian relies on digital for everything—from consulting with a doctor to paying taxes. Nearly 80% of the country is also cashless.

Estonia does not have huge reserves of natural resources or big industries to boast of. It was a startup called Skype that put the country on the world map. But after a point, the video calling company moved its headquarters out of the country to the UK. So did TransferWise. They did this because they were scaling rapidly, and they couldn’t find the talent they needed from the country.

Why is that? Well, there are just two universities in the country—The Tallinn Technical University and the University of Tartu. And together, they account for about 500-600 engineers graduating each year from which all of Estonia’s 400 startups hire. So as a startup scales and its talent need increases, it has to move its company elsewhere.

“While the quality of the talent pool is high, if we need to hire 200 engineers, we are not going to find those numbers here, so we need to move our headquarters out of Estonia,” said Martin Henk, head of customer support for Pipedrive, a software as a service company, in an interview. Pipedrive is looking to move to Portugal.

This is the biggest problem in the way of Estonia’s ambition to be a top startup ecosystem in Europe. The very active startup lobby ‘Startup Estonia’ is in charge of not just bringing fresh talent from other countries but it also encourages startups to come to Estonia. In what is one of the biggest moves, the program convinced the government to ease rules for startups like doing away with the minimum investment requirement of €65,000. And founders of startups can also get a five-year permit to stay in the country.

And Indian startups are already warming up to this idea.

 

Is the margin for the Instamojo really low?

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As these companies get bigger, sending out numerous payment links is not the most efficient way of doing business. They need a more accommodative solution. Like a payment gateway that can process hundreds of transactions a day.

So far, Instamojo has stayed away from offering a gateway itself because of the low margins in it and also there is nothing new to offer there. But as a result, it’s come to a point where some of those customers who have grown with the platform are evaluating other options.

“We are at a point where the number of merchants is organically increasing and it is easy to get customers, but it is also easy for them to leave,” says Swain.

Overcoming the gap

He wants to plug this gap. Also, he wants to maximize revenues from every SME. “Today we have a 30% wallet share, we want to grow that to 70% in three years.” If Instamojo can’t do that, he says it risks becoming irrelevant. Wallet share is something he brings up multiple times during the conversation. He says that it will be the metric through which they will be measuring themselves.

Even though different fintechs are solving for different payment needs, one thing is common. Which is that the money you earn from all of it does not amount to much. Which is why volumes and value of transactions make all the difference.

Instamojo processes about Rs 100-135 crore ($15.2-$20.5 million) worth of transactions in a month, according to a source. Swain said he cannot confirm it. It charges a flat 2% fee plus Rs. 3 on every transaction and the company earns 1% out of it. But on average, the margins in the payments business are no more than 0.2%-0.3%, say those in the industry. In the five years, it has been in business, despite having lakhs of merchants, its revenue is at Rs 4 crore ($611,060) in FY2016 (of which income from domestic operations is Rs 2.1 crore).

Instamojo’s closest competitor is PayUMoney (a part of the larger entity PayU India). It also services small businesses through payment links. It has 230,000 merchants and processes about Rs 250 crore ($38.2 million) a month. “Retention of small businesses is the biggest challenge,” admits Amrish Rau, CEO of PayU India.

To be able to better retain merchants, Instamojo wants to be a “commerce enabler” rather than just being a payment solution company. This means the payment solution company wants to grow into a platform that can meet all SME needs—credit, logistics, warehousing, invoicing, and GST filing. And all in one app.

Swain says this has been the plan since 2014. So now, it is striking multiple partnerships with NBFCs, logistic companies, to be able to do this. While Instamojo already offers services like shipping, they are not tightly integrated into its offering.

What are the additional services?

But here is the thing with using additional services. Companies have multiple ways to access them. For instance, Roadhouse Hostels uses property management software to create invoices. Will Borah move his invoicing from that to Instamojo? He says moving it makes little sense because he uses specific software that gives him visibility to the payments he receives from multiple sources. While an Instamojo may have visibility only to the payments made through it.

Still, Swain sees this ecosystem approach as the best way to get SMEs to spend more through his platform. “It is a logical extension. If I’m only doing links I could get disrupted. I won’t survive if I don’t build an ecosystem.”

Instamojo wants to get to one million merchants by the end of the year. While one million is a huge and enviable base to have, it is the volume of transactions these businesses will bring that will matter. And that’s where things get skewed.

 

There is a middleman for a middleman

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So, how much of that has happened? The duo argues that these numbers have gone through a sea change since the last documents were filed. But neither is willing to comment on the split between OTAs or traffic generated from their own portals. The argument is that once the tipping point comes and customers start to discover and book hotels from the website, the negative take rate becomes positive, and with more demand, the revenue share with certain hotels increase.

And like every Indian internet company, there is a comparison with China to rely on.

How were the bookings done?

One of China’s biggest hotel chains, China Lodging Group, shows the way. It claims that almost 90% of its bookings came directly and just 10% came through OTAs. In the US, 2015 was the big tipping point when almost all bookings came through online travel agents. Things began to change soon after. The hotel brands and their owners have started spending heavily on brand building and driving traffic directly to the app and the website.

India is somewhere in the middle. Rajesh Magow, CEO, MMT says that about 10-15% of the country’s budget hotel market is organized. And of that, MMT and goibibo have a share of 54%.

“In India, about 75% of the bookings of budget hotels come through OTAs. It changes to 50% when it comes to starred hotel chains,” says Magow.

But directing traffic is not the only problem budget hotel chains face.

One of the sources of inspiration for most of the founders in this space was the perceived success of Lemon Tree and Ginger, the first wave of budget hotels in India. Lemon Tree is on its way to listing on the bourses. While the motivation is more or less right, there are two marked differences.

Knowing the business model

First, the business model is different. Lemon Tree signs a lease for up to 15 years and takes over everything in the hotel. The contracts signed by Treebo and Fab Hotels are much shorter. “These hotel chains will have to bring significant value-add to retain these hotels,” says Anil Madhok, founder, Sarovar Hotels and Resorts. If the chains lose these hotels, getting them back takes a significant amount of effort.

Because, essentially, these budget hotels now know exactly what is needed to list, sell, and demand a slight premium on their rooms on OTAs. “And as much as they [internet hotel chains] try, they can’t wish the OTAs away,” Madhok adds.

And the likes of MMT have started to see the results. “Smaller budget hotels have started to get rid of the chalta hai (yeah, whatever) attitude,” says Magow of MMT. He explains that hotels have realized they need to put in a little more effort into hygiene and upkeep.

Another key difference is the price point. Lemon Tree, for instance, has an average ticket price, according to hospitality analysts, of Rs 4,000 ($61). While Treebo and Fab Hotels are at Rs 2,000 ($31). The duo target totally different types of customers.

For Lemon Tree, there is scope to increase the price point if needed. “The budget hotel chains cannot. They are married to this price,” says Manav Thadani, chairman-APAC, HVS, a hospitality consulting firm headquartered in New York. These companies have gotten into this marriage for a single reason: to target customers who can’t afford to pay extra. There is very little scope to change the price point.

Another way hotels make money is by upselling. “For e-commerce companies, phones don’t bring in big margins but accessories do, so they try to sell those bundled with the phone,” says Sreedhar Prasad, partner, KPMG India. In this business model, there is nothing to upsell or bundle. Breakfast is usually tied in. If there is a laundry service, the money is made by the hotel owner.

But can this be overcome? Yes, and the answer is scale. “The bigger these chains become, the easier it will be to bargain down the commissions with OTAs. For some chains, these OTAs charge almost 30%. Those charges will have to be rationalized,” explains Madhok.