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Running through the phases

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The company has gone through three different iterations in the last six years. But the story of chaos starts in 2015 when Zivame managed to raise Rs 250 crore ($38 million). Those were heady days; e-commerce was hot and investors were willing to pour lots of money into it. And when you have lots of money, you need to think harder about what to do with it. Fair to say, Richa Kar and Zivame were in that phase in 2015.

Let’s take you through what happened.

What are the different phases?

Phase 1: Zivame gets cash and uses it to scale up operations. It gets top brands in the country and internationally to list on its platform. The company advertises heavily and starts seeing traction on its private label. Kar is excited. It trickles down to the employees.

The private label sees a huge demand and helps make good money. In late 2015, Kar has another idea. Wanting Zivame to be India’s answer to Victoria’s Secret, she opens an experience store in Indiranagar, an upmarket neighborhood in Bengaluru.

“The idea’s to encourage women to come to the store and treat it as going to the hairdresser. Spend an hour picking lingerie, finding the right size and then help these women buy online,” says a former Zivame employee. Now, the experience store has only Zivame’s private labels, both premium and the economy versions. Kar sees the opportunity to build Zivame into a bigger brand than it already is. She goes for private labels, just like competitors Clovia and PrettySecrets. The investors turn skeptical. But Kar insists that the company pivot.

Phase 2: “The private label was doing well. Women were choosing it over some big brands,” adds the former employee. Kar gets the green light and pivots in September 2016. Zivame becomes a single-brand, private-label retailer. Then, the stitches come loose. The company goes on to another spending spree. It changes the website, becomes content-heavy, picks artistic photographs, and hires more people. But then the sales start to drop.

“Women came to Zivame because it had a mix of international brands and private labels. They would buy three pieces of big brands such as Jockey, and while doing that, order one of Zivame’s too. Without the big brands, customers weren’t very keen,” the former employee explains.

It gets worse though. By this time, Flipkart has bought Jabong, cornered the apparel market, and turned up the volume on discounts. And those who are loyal on the Zivame platform start getting annoyed by the customer service. The popular products run out of stock before Zivame can replenish them.

“There is a nuance to moving to an inventory-led model — the lead time in production,” says the former employee quoted above. In the marketplace model, whenever Zivame would start to run out of stock, it would order more. “Jockey, for example, would make fresh stock available within a week. In an inventory model, you need to produce and ship. Often it takes longer than a week,” the former employee adds.

Kar’s reaction is to increase production and open stores in malls and high streets across Bengaluru. “It created chaos. The inventory managers at the warehouse would say, ‘no more stock’ but there were pieces available at the stores. Customers would be confused,” the employee explains. “Women would find sizes and fits in stores and wonder what the point was in encouraging them to buy online?”

Why are the investors anxious?

Then the investors at Zivame get anxious, and the pressure on Kar grows until they started asking for numbers. Kar’s COO, Sinha, asks the investors to switch back to the marketplace model.

Meanwhile, competitors see an uptick in their revenue while Zivame dabbles with a private brand. “One of the major problems that Zivame faced was changing their DNA,” says one of the biggest investors at Zivame’s competitor. He explains that everything changes during the switch from a marketplace to a private label brand. “Something as essential as hiring changes.

You don’t hire smart kids from business schools; you need to hire from design institutes,” All of this increases the cost to the company. The burn increases. “Design and supply chain takes months to perfect. You can’t just switch and start making money,” he adds.

 

India’s Amazon. India’s Alibaba. India’s Tencent?

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Flipkart was once touted to be India’s Amazon. Right up to the moment that Amazon itself entered and became India’s Amazon.

It was then touted that Flipkart would become India’s Alibaba. But now everyone agrees that India is not China, and such comparisons are far from justified.

And now that Tencent has invested into Flipkart, could these planned acquisitions foreshadow an attempt by Flipkart to become India’s Tencent?

Asia’s most valuable company

With a market cap of $400 billion, Tencent is Asia’s most valuable company in part because nearly a billion people use WeChat, Tencent’s mobile messenger, every month. In China though, WeChat is more than just a simple messenger, it is a veritable platform—a “super app” that aggregates all types of online services from plain e-commerce and travel to ride-hailing and food delivery.

Customers who “live” in these apps have no reason to leave the app for any of these transactions, which means that goods and services worth billions of dollars are consumed within WeChat every month.

So we have two possibilities.

One is that Flipkart’s interest to purchase or invest in companies like Swiggy, UrbanClap, and BookMyShow is a Hail-Mary move, driven primarily by the fact that Flipkart is now saddled with more money than it knows what to do with.

The only other possibility is that Flipkart hopes to acquire or partner with these companies and cobble them together into its own version of Tencent’s super app.

If so, it seems like a long shot. There have been multiple attempts to create such a super app in India. Snapdeal attempted to aggregate services through partnerships, Google is trying the same with its Areo app, and other startups such as Tapzo are burning money tilting at the windmills to buy customer loyalty in their own version of an “all-in-one” app.

None of these attempts have seen any degree of success, primarily because there is no compelling lead use-case that serves as an anchor to initially seed and engage the users. Considering that Flipkart is an e-commerce site and not a messaging service like WeChat where customers already spend large parts of their day online, Flipkart’s purported endgame of attempting to become India’s Tencent is more likely to end up as a zugzwang than as a checkmate.

The largest media company in India is waking up to it. Soon, Times Internet, a subsidiary of Bennett Coleman & Company (BCCL) will launch an online subscription-based media product. The editorial team is being put together as you read this.

On Monday, restaurant discovery and food delivery startup, Zomato announced the launch of its subscription-based product Zomato Gold in India. Gold, which the company calls “an exclusive members club”, is expected to simultaneously launch in Bengaluru, Mumbai, and Delhi-NCR in the coming days. It is the company’s second subscription product after Treats, where it charges users an annual fee of Rs 249 for a dessert with every order. A Zomato spokesperson said that the company has registered over 50,000 users for ‘Treats’ as of October.

Launching of its own variant

Three months ago, online travel agency MakeMyTrip launched its own variant of a subscription-based service called MMT Black. It didn’t stop there. Close on the heels of Black, a free, invite-only, spend-based offering targeted at high-frequency travelers; the company launched MMT ‘Double Black’, where users pay an annual fee for cancellation benefits (full refunds) and a priority resolution guarantee.

Flush with funds, Flipkart, the Indian e-commerce unicorn, is also expected to restart its ‘Flipkart First’ subscription-based loyalty program in the coming weeks.

A simple question must be asked here. What’s going on?

 

It is not easy to be the best

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If Swiggy is part of the Flipkart family (in a manner of speaking), as its income and number of orders grow, Flipkart will benefit. “You have to remember, Flipkart’s biggest use case is electronics and phones. You can’t keep showing growth in that one vertical,” the investor adds. It means that Flipkart’s orders are high-value, but the low frequency. With Swiggy it gets low-value, high frequency, which helps it get a bigger share of the wallet.

Efforts made by the Flipkart

“Flipkart has kapda (clothes with Myntra), now roti (food with Swiggy), all it needs is makaan (house) and it will complete the three basic necessities in one app,” he says.

The utilization of fleet: What is the one pain point that bothers Swiggy the most? It is still to utilize its delivery personnel optimally. This means that during off-peak hours, it’s delivery agents don’t have too many deliveries to make. Despite all of Swiggy’s marketing tricks, which include offering free deliveries, customers don’t specifically want breakfast or the evening snack. But Swiggy has to pay its delivery personnel just to keep the app online so supply is maintained in case there is demand. That’s where Flipkart comes in.

The e-commerce major recently relaunched its grocery business in Bengaluru. Flipkart has realized a flaw in its process here. Ekart, Flipkart’s logistics arm, doesn’t have the nuance to deliver food products. For Flipkart, product delivery is either fragile or non-fragile. It has neither the technology nor the know-how of delivering food.

Flipkart is the master at batching (where one delivery agent completes more than one order on a single trip), but all this starts to come apart when food has to be delivered because certain types of products can stay outside refrigeration only for so long. Enter Swiggy. Flipkart could use Swiggy’s idle fleet during the afternoon and early in the morning. Just like Amazon and BigBasket. If the experiment works, all Flipkart has to do is unveil the grocery service in every city Swiggy is present in and start operations.

Expansion: Currently, Swiggy is present in eight cities. The company, however, plans to increase its footprint and start operations in Ahmedabad and Chandigarh. “According to our internal research, Ahmedabad as a market is bigger than Kolkata,” says a Swiggy employee who didn’t want to be identified as he is not allowed to talk to the press. The other seven cities see frequent orders, albeit at a low ticket size (Rs 250-280).

Impact of the ticket size

“Kolkata has low frequency but high ticket size (Rs 380-450). The city is still very much used to eating socially and not alone,” he explains. This is where Flipkart comes in. Swiggy plans to leverage Flipkart’s reach inside these newer markets. “There are nuances of a city Ekart has access to. It knows routes within cities only an e-commerce company will know,” says an entrepreneur who tried and burnt his fingers in food tech.

“One of Swiggy’s strengths is the heat maps of customers and restaurants. A part of that data can be obtained from Ekart,” adds the Swiggy employee. There is enough data with Flipkart, which can help Swiggy set up cloud kitchens and delivery hubs. It can start to find the intersection of Flipkart’s customers with its own, and then start to cross-sell, thus lowering the cost of acquiring customers.

Cloud kitchens: On Tuesday, Swiggy launched Swiggy Access in Bengaluru, which allows restaurants to start delivery kitchens in neighborhoods where they do not have a presence. Swiggy will provide the space and curate restaurant partners who are willing to work out of the shared space. It plans to expand to other cities and has shortlisted 40 restaurants for the service. The restaurants will work on a commission share basis with Swiggy which will also deliver the food for them.

Swiggy’s focus on building kitchen infrastructure will also help its biggest bet of the year—its own brand of food from The Bowl Company, House of Dabbas and Blaze Artisan Sandwiches#. The focus on making its own food helps Swiggy increase the margins by 45%, says a partner working with the company. Swiggy is treating its in-house food brands as a separate vertical, headed by InnerChef co-founder Rahul Samat who joined Swiggy in 2016. He is a part of the strategy and new initiatives team at the company.

 

A Heart That Beats For Supply

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“My personal thesis of what the product is has changed,” says Biswas. He believes that it is not about creating a horizontal for users, but a supply horizontal, and today, Dunzo is primarily a supply company.

A realization like this most often comes after the bad experience.

Late last year, the cancellation rates on tasks for Dunzo was at a peak of 60% -70% because of the non-availability of riders. “It is a horrible way to run a product,” says Biswas.

Wide range of the services provided

It looked at outsourcing the supply to companies. But that exercise didn’t last for more than a week, says Jha. As Dunzo does a variety of tasks, it was not able to drive a consistent experience from outsourced riders who are best at handling one kind of task.

So it hired its own fleet. The idea is to create enough demand so that it has a predictable supply.

It is also trying ways to earn from both the user and the merchant. So it is trying to build a merchant network. For products where users don’t specify a store, if Dunzo directs traffic to a store, merchants pay it anywhere between 4-9%. Today 7-8% of the transactions are through Dunzo’s partner merchants. Biswas wants to take that up to 35%. This is something its closest competitors, like Delhi-based DoneThing, have already done. Karan Saharan, a co-founder of DoneThing, says, today nearly 50% of its tasks are routed through its partner network. While Done Things charges a base fee of Rs 100 for any task, Dunzo wants the user to pay as little as possible.

“As a business model, we don’t want to make any money on logistics. Because if we can price logistics optimally, it can increase our targetable audience,” Biswas says. Today, Dunzo does not lose money on logistics, adds Biswas. But it still loses some on fixed costs like support costs. It is hoping to recover all costs by focusing on bringing in revenue from merchants.

Its obsession with getting its riders to do more tasks is also making it look at different use cases. For instance, bike-sharing.

If GoJek, as a bike-sharing company, also delivers goods, why can’t a company that delivers goods bike-share? After all, Biswas says people keep asking whether Dunzo can ferry them from point A to B. To that he says that cost-wise all it needs is taking insurance for the rider.

Today, a rider does an average of 1.1 tasks an hour and that earns him about Rs 55. At peak times, a rider does close to 1.5 tasks. Biswas sees ride-sharing as a use case that can increase the number of tasks per hour. But this is a step in a very new direction.

“If you get into bike-sharing too, what do you stand for as a business? Getting stuff or getting to places? It is too early for a business like Dunzo to get into bike-sharing without seeing its core business scale. Two challenges at the same time may be tough,” says Murthy.

Expanding the firm

There is a third challenge, which is the expansion to new cities. Breaking ground here will need a different approach because there will be different unit economics and different usage patterns at play.

“This is a high touch business. Unlike just shipping a product, there are different levels of service associated with every product delivered. Although Dunzo has done a spectacular job in Bengaluru, maintaining that across many cities may be challenging,” says Murthy.

Users now want Dunzo to get more intuitive. Gautam John, a strategy consultant, who is one of the top users of Dunzo says that while it has freed him from mundane tasks, he needs it to be more intelligent in predicting his orders from looking at his order pattern and order history.

While tech can help address many of these challenges, for the heart of Dunzo to keep beating, it needs the money. And fast.

 

Flipkart is striving to increase the service quality

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According to industry observers, Flipkart is not limiting itself to services and products which it has complete control over. Instead, Flipkart First wants to be a broader ecosystem play.

“I do not think Flipkart First wants to be similar to Prime. There is some deeper thought in the second launch of Flipkart First where other ecosystem partners have come in,” says Rahul Chowdhri, a partner at Stellaris Venture Partners.

What were the discounts?

Flipkart First had floated a trial balloon earlier during its Big Billion Sale when it offered membership at these portals at various levels of discount.

The partnership with Swiggy, which is still at a very rudimentary stage, will also rely on cashbacks, but only when a Flipkart First member’s PhonePe-linked wallet is used on Swiggy. The others will follow a similar style. Enter a promo code or use PhonePe to pay for some of these services to get some money back. It is Flipkart’s aim to start building a universe of its own.

The idea is to create a super app, the insider adds, with payments and PhonePe at the center of it.

The “super app” is an idea that Flipkart has been toying with for a while, just like WeChat in China. And with Tencent—the company behind WeChat—backing Flipkart, there is a lot of knowledge readily available.

And for the ultimate aim of the super app, Flipkart has been in discussion with Swiggy to invest between $20-50 million. It has also approached other contenders such as BookMyShow. “More than money, it will give Flipkart the leverage where partners align resources to meet the requirements. Today, it is about food, ticketing, cab bookings. Going ahead, it can include financial services and healthcare,” says Chowdhri.

Looking forward

To reach the super app status, it needs to build loyalty, and that’s why the e-commerce major’s repeated attempts at subscription. And all of this depends on Flipkart’s ability to execute First. Will it succeed? Absolutely.

Flipkart has raised a lot of money now and that will help the company spend its way to the front of the queue. It may even see a faster pick up when compared to Amazon. Also, this time, it can live up to its delivery promises considering that the company has warehouses in the top 10-15 cities.

But there are a few things it will have to change. Flipkart, since its last attempt at a subscription program, has presented a definitive image to its customers: it is a place where they would get the best prices. “Right now, Flipkart is known for its deals on phones and electronics. You can’t rely just on deals to win against Amazon,” says Anirudh Damani, managing partner, Artha Venture fund.

Damani argues that discounts will not be able to buy Flipkart loyalty. But discounts will only attract deal hunters, who need to be chased repeatedly.

There’s just one way to beat that. Flipkart will have to try and be an aspirational brand again, and that depends on its content play.

“If you look at the economics of the Amazon prime program: at around Rs 1,000 per year, it is disrupting DTH providers besides providing fulfillment value. This makes the program highly sticky and potent. Flipkart needs to innovate its premium value proposition,” says Ashish Kashyap, former president of MMT and Ibibo Group.

Why does Kashyap argue that? Simple. Because these services are exclusive to Amazon Prime subscribers and, therefore, cannot be accessed independently. A customer will have to be a part of Amazon Prime to watch the movies.

That is not so with Flipkart and its partnership with Hotstar and Gaana.

And that’s where it will have a few problems. Just like Zomato Gold. Flipkart will have to rely on Hotstar and Gaana to continue the high-level of performance that customers now expect from Flipkart. Also, many of Flipkart’s customers are Hotstar users. After all, it is the only streaming service in India with sports, specifically cricket, on it.

 

ESOP’s Fables: Getting the story right

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At 70, when Ashok Soota decided to start over again as an entrepreneur, having worked in fabled wealth creation companies like Wipro Limited and Mindtree Limited, he had some ideas. Specifically around granting stock options to employees. With Happiest Minds Technologies (started in 2011), an IT consulting and services company, he envisioned a venture where employees were committed to building it up right until the Initial Public Offering (IPO).

What are the Employee Stock Options Plans?

“In the previous company (Mindtree) we realized that you issue Employee Stock Options Plans (ESOPs) to employees and they walk away. That way you lose both the shares and the talent. You might not have enough stocks to allocate to a new hire who will replace this person,” says Raja Shanmugam, chief people officer at Happiest Minds who worked with Soota in Mindtree. From being the chief executive officer at the non-profit arm, Mindtree Foundation, Happiest Minds is Shanmugam’s first stint as a CPO.

He says that the company made it clear to its employees from day one that it will go public in the next seven years. In case an employee wants to walk away before that, she has to sell her vested shares back to the company and can benefit from the appreciation in share price during her employment. The grant letter also says that failing an IPO in seven years, employees can retain vested shares in the company until it goes public, as a reward for contributing to the growth of the organization.

This is just one of the ways in which a grant letter for ESOP can be framed with necessary details to safeguard the interests of the company.

ESOP structures in the Indian startup ecosystem are often an afterthought as founders are focused on making the core product market-ready. Structured plans for employee stock options are brought to the table usually by institutional investors when they come onboard. With Happiest Minds, which raised $45 million from external investors within months of inception, the funding set the pace.

Private companies in India, however, can go on till Series B round without a clear ESOP structure in place. In that period, which could be anywhere from two to five years since the inception of the company, founders end up overlooking key issues in ESOP distribution.

Different strokes of ESOP

According to tax and law experts, the stringent laws under the Companies Act make the Indian ESOP structure far more complicated than those in the US or Singapore, and so, these countries are preferred by large companies for registration. For example, rewarding founders and promoters with ESOPs is common in these countries but Indian laws forbid issuing ESOPs to promoters or anyone holding more than 10% equity in the company.

This can be circumvented easily by companies registered outside India. According to Paper.vc data, Kavin Mittal, founder of messaging app Hike, was issued differentiated Class A ESOP shares which carry 10 weighted voting rights per share in 2016. Other employees in the company were issued Class B ESOPs which carry weighted voting rights of 1 per share.

A long-term view of the company’s exit strategy and attention to the optional clause in the grant letters is all it takes for founders to create a structure beneficial to both the company and its employees in the long run.

The following checklist is recommended by tax and legal experts as well as the founders we spoke to:

  • Pledging 10-15% shares of the company as part of the ESOP pool. Too less would mean investors get diluted for subsequent rounds of funding
  • Ensuring that employee share options are protected in case of an acquisition
  • Visibility to the number of vested shares on request or openly in case of very large companies
  • Keeping a track of employees who have bought their vested shares and may or may not be a part of the company anymore. This ensures ease of bringing people together for a liquidity event such as an IPO or acquisition by a larger company or share buyback by the parent company
  • All this amounts to an empty exercise if there is no significant employee pool. An effective ESOP plan needs key hires and employee strength of close to 20
  • Failing these checks and balances, the company can expect zero commitment and often a bad reputation in the startup ecosystem.

 

Moving ahead carefully from search to training

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“In India, internships are for a very short duration. One or two months. If you give me interns (as a company), it is too short to give him an assignment and pick up the skills,” says Govind Gadiyar, a Mumbai-based senior HR consultant. No one takes interns seriously. “Most of the guys you get as interns, they don’t know anything about the business. So companies take the easy way out, and give him some simple tasks, for example, a survey.”

And then, the structural issues. Where internships are more or less capped for one or two months a year. Gadiyar recommends the innovative model adopted by German companies in India, as a potential solution. “German companies have an MBA program for their recruits.

The flow-chart of the operation

How they operate is a sandwich course. Six months of classroom training, and six months on the job. They return to the classroom next year, and again get on to the job. Effectively, that’s one year of work, and one year of study before placement,” he says. What that ensures is a proper hand-holding process and understanding of the business.

This is exactly what Agrawal identified early on, as he plunged into entrepreneurship. “I came across ‘internships’ as a virgin territory, where not much effort had happened in India, and which I could experiment with,” he says.

When it began as a blog, Internshala was a mere destination, where Agarwal would collate relevant internship opportunities for students, and send it over to colleges around the country, as part of the initial outreach. This continues to be its core, or as Shadab Alam, the head of employer relations at Internshala describes: “It’s like Google, but for internships.” Students can post their resumes on the platform, while companies also list their requirements. But while doing so, companies must fulfill key criteria to be listed on the platform: they must pay a stipend.

Startups, which usually don’t like spending a good chunk of their early funds in hiring, are most likely to look for interns to get the initial work done for a lesser cost. And that is where Internshala has emerged as a go-to place. “We found that the overall product is very good, and it is preferred for the competition. We did convert a couple of those leads in the company,” says Harsha Mudumby, the lead R&D engineer at Bengaluru-based Reverie Language Technologies.

While the average monthly payment for an in-office internship program on Internshala is around Rs 7000 to Rs 8000, virtual or work from home interns can expect an average pay of Rs 2.5-3000 a month. Internshala also offered an internship at Reliance Industries Limited last year, where the three students placed earned Rs 50,000 a month.

Amplification of the revenue

While its search-driven business continues to be free, it is looking for other avenues to generate revenue. For instance, in 2013, the company launched an incremental product called Internshala Trainings, which involved virtual (online) courses (on the lines of MOOCs), ranging between 4-6 weeks and around areas and subjects that could help students find internships and jobs. This would include subjects like web development, Android, Python, Advance Excel, Digital Marketing and Internet of Things, among others. These courses are delivered virtually through video and written content.

The company says that when it began training, it had around 150-200 students as its initial takers. Since then, it has grown to become a money-spinner. In 2016, it trained around 10,700 students. That number today stands at over 20,000 and is projected to cross 30,000 in 2018.

“We launched training with an objective to help students acquire skills that would aid them in their internship search. Students often used to sign up for physical training centers in cities that were expensive and inaccessible for many,” says Agrawal.

These training programs are paid and are priced around Rs 2,000-3,000 on average. “There are certain programs, like say the Internet of Things, where we have to provide our students with learning kits. So, we charge them additionally for the kits,” says Alam. Today, Training contributes to about 65% of its revenues.

 

Understanding the growth pipelines

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In many ways, these factors represent the “plumbing” for new disruptors to emerge and grow. Trivial as it may sound, the adoption of supermarket-style aisle displays is a major factor that’s cited by many VCs.

“Distribution is always the biggest challenge, particularly if you’re launching a new category,” says Shahdadpuri. He uses the example of products targeted at babies, to illustrate the point.

A surprising interaction in the supermarket

“Very few Indian supermarkets have space dedicated to these products, except maybe for nappies. In most other countries, there are multiple shelves or aisles for baby products. I was in a Mumbai supermarket recently and saw snacks for babies kept next to Pringles chips!”

The last major factor cited by almost all investors is the distinct difference in the profile of first-time entrepreneurs starting consumer product businesses.

“Till now, it was only MNCs and large Indian family houses that built new consumer brands. But now, the classic flip to entrepreneurial profiles has happened, with MBAs and pedigreed professionals becoming first-time founders,” says Singh.

This change radically alters the way products are being conceptualized or brands are being built.

Where a large company would commission consumer research and dive down into demographic data, many newer brands start with much smaller but better-defined niche segments. And instead of a top-down approach to market sizing, a better way is bottom-up.

Analyzing the categories

“Yoga Bar (a brand of protein bars) was not even a category that existed in India,” says Singh. He illustrates the way it might approach building a customer segment comprised of gym-goers.

“A Yoga Bar has around 20 gm of proteins at a price of around Rs 100 per bar. Its target will be health and fitness-focused people who go to the gym regularly, say at least 15 gym visits in a month. These are customers looking to supplement their protein intake.

Now 15 gym visits are a potential spend of Rs 1500 per month or around Rs 20,000 a year. Are there 10,000 such gym-goers in Bengaluru, among a population of 8-9 million? If I extrapolate, can I do 20,000 in Mumbai and Delhi too? By expanding to the top 10 cities can I find 100,000 such customers? There. That’s a Rs 200 crore annual market!” he says.

A favorite category among many investors is the pre-natal to the 12-months-post-birth segment that comprises both moms and their babies. “The amount of money spent there is ridiculous. It’s a huge segment but big brands are not doing much,” says Shahdadpuri.

The way such consumer segments are targeted, engaged with and grown are very different from traditional mass marketing.

“The insight is that newer brands are not driven by GMV (gross merchandise value), but by repeats,” says Singh.

Why can’t a really large MNC or Indian brand copy Raw Pressery, I ask its founder Anuj Rakyan? Surely they can execute what he does at a lower cost and better efficiency, given decades of experience and a well-oiled distribution and sales machine.

“For large FMCG players, their supply chain is at the center of all product development. Unlike us, for whom the customer is at the center,” he responds.

“A typical FMCG develops a cold-pressed juice and then figures out how to get it to 50,000 stores. Or how to increase its shelf life to six months. Or how to store it at an ambient temperature that can be easily achieved. And to sell it at, say, Rs 65 MRP. What arrives at the end of that process isn’t something that customers would call juice,” says Rakyan.

Then there’s the fact that success means different things to startups versus large FMCG companies. Large companies need new products to sell in millions of units very fast, while the startups are able to do so with just tens of thousands.

It is in between the two that the opportunity and danger for startups lie. Grow too slow and you lose momentum and investor interest. Grow too fast and you risk overheating and losing focus.

Fireside Venture’s Singh sees four distinct stages that consumer product startups must cross, with distinct strategies and teams for each.

 

What it feels like when you start from the board?

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“Alibaba started the investments again. And the Foodpanda deal can be directly tied to that,” he says. This has now broken the duopoly. Foodpanda has had a few, if not many, loyal customers apart from discount hunters who frequently checked out the app. Now with Ola, and it’s $200 million, the company effectively breaks into the market as a third strong player.

Operating three neighborhoods

It also means that now restaurants will be able to play one against the other to get better deals and the metrics may start to distort once again. Swiggy, meanwhile, had seen this coming and has been focusing furiously on its cloud kitchen—The Bowl Company, which now operates out of three neighborhoods in Bengaluru, does over 2,000 orders a day. It will continue to expand across the city in the next six months. And if things work well, it will expand to other cities such as Mumbai and Delhi NCR. Its acqui-hire of the cloud kitchen, 48East, is another step in that direction.

“This is the trickle-down effect of that big Alibaba deal,” says the executive. He says this will also empower other investors to look at cloud kitchens as a model to grow the business.

Also playing the cloud kitchen game is Freshmenu. Though small, Freshmenu is an exciting company. Its success in Bengaluru is enviable. The company hit 1.2 million orders in the quarter ending December. The average order value rose to Rs 300. The encouraging 1.2 million orders are split 70-30 in favor of Bengaluru.

So, Mumbai and Delhi NCR (New Delhi and Gurgaon), together, draw 4,500 orders a day. Out of which Mumbai completes 3,000 orders a day, across nine kitchens. Freshmenu has been around for four years now. It has raised over $21 million from Zodius Capital and Lightspeed Ventures. And has been adding kitchens at a breakneck pace.

“We plan to add 10-15 more kitchens this year,” says Rashmi Daga, founder, and CEO, Freshmenu. The company claims it has broken even on an EBITDA (Earnings before interest, taxes, depreciation, and amortization) level in Bengaluru.

How did Freshmenu get to break even in Bengaluru?

“Just the sheer number of orders,” she says. Soon after Freshmenu launched in Bengaluru, it took off. The demand was consistently rising. And the company kept opening kitchens to fulfill it. Now, it has reached a point where the city is more or less covered. It, however, has not been able to replicate this in Mumbai or New Delhi.

The problems range from competition from Mumbai’s famous dabbawalas to restaurants and the width of the two cities being much larger than Bengaluru, which creates inefficiencies.

But the company is now on the cusp of something important. If it can turn around its Mumbai and Delhi numbers, it will start competing with the three big boys.

After these top four, there is a significant drop. Faasos and Box8 are still struggling.

Sequoia-backed Faasos has shown signs of improvement because of its new pivot but there is still a long way to go. “This is where things will change,” says the partner at an India-based venture capital firm. He asked not to be identified. “Investors will start to see value in city-based markets once again and you will see either existing players get big cheques or a new breed of founders break out.”

The attitude of several VCs have started to change as well, he says. Investors are looking at food tech companies without technology. “An example would be Paperboat and Bira,” says the executive quoted above.

There is a more granular approach to food-based companies now. The ecosystem is evolving. It may have finally grown up.

Playing to a beat

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In December 2017, an otherwise busy warehouse in Delhi NCR was eerily silent. All the stock was sold, and there was no more coming. A few stragglers stayed to pack up the remaining boxes. Most of the employees had been interviewing with other companies for a month; some had new jobs. They were saying their final goodbyes. JBL was shutting down its FMCG (fast-moving consumer goods) division.

Logistics Services

Launched in 2015, JBL spent the better part of the year building a website and an app that would accept orders, coordinate with logistics services and would do live updates of stock-keeping units (SKUs) in warehouses.

“Typically, distributors meet supermarkets and local stores, take orders and deliver these orders in bulk to retailers in that area. It helps them optimize the cost,” says Navneet Rai, founder, and CEO, B2C2, a B2B business that is trying to build a layer between manufacturers, distributors, and retailers.

Rai explains that these distributors target big orders and don’t have a fixed schedule. “They will deliver these orders only when the vehicle is full,” he adds. It means retailers place orders in massive quantities so the truck is full and they don’t have to depend on the distributor too often. These distributors work on credit and ask the retailers to pay back, typically, within a week.

“There is an inefficiency here,” says a former JBL executive. He asked not to be named as his current company does not allow him to talk to the press. “The time of delivery is too long. Often retailers have to turn customers away. This means they lose customers,” he adds.

This is where JBL helped; it offered just-in-time delivery of goods. With this product, the company went to the market to raise funds. It was selling a simple story; the likes of which Amazon and Flipkart sell successfully. People are getting more comfortable buying consumer goods from the internet.

Process of raising funds

“Now that traditional retail is in the internet age, let us get traditional wholesale and distribution into the internet age,” says a founder in the B2B space. He asked not to be identified as he is in the process of raising funds and does not want to call attention to himself.

“JBL was started with the right idea and then it did everything wrong,” says a former JBL employee. He asked not to be named out of respect to his former employers. Ken reached out to JBL with a detailed questionnaire, but the company did not respond.

By January 2016, JBL was a hot property. It had raised $20 million (Rs 140 crore) from Alpha Capital. Investors were happy and the company started to coax retailers on board. But it realized that it was easier said than done. “Retailers had personal relationships with the distributor. This fresh salesperson was new. They could not trust him,” says the founder.

To establish credibility, JBL went on an ad blitz. And it chose IPL to showcase itself.

“It was a little strange that a B2B business was advertising during the IPL. Typically, top-tier companies do that. But this was a new experience for Sani and he had no idea of what to do,” says another entrepreneur in the business. He, too, asked not to be identified as he knows Sani socially. Sani’s friends tried telling him that this was a waste of resources, he says, but by the time he realized his mistake, he had burnt through a lot of capital.

“The trick in the business is repeated meetings. You have to wear the retailer down,” says Rai. JBL managed to do that and soon it started onboarding merchants. Now came the tricky part: retaining these customers.

“Customers in this business have no sense of loyalty,” says Brijesh Agarwal, co-founder, IndiaMart. “They will be ready to change distributors for a cost-saving as low as Rs 50.”