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Raising small: The power of optionality


Given the fact that funding is the dimension along with a startup’s perceived position in the totem pole is decided, it is easy to fall for the temptation of raising as much capital as possible when the opportunity presents itself. But when venture capital becomes vanity capital, it forces a startup down unhealthy paths, most notably the path of chasing growth at all costs.

Minjar consciously eschewed taking in more funding despite having the option to do so. What the company sacrificed in terms of capital, it made up in terms of optionality—having the flexibility to choose getting acquired at the time it did. Larger VCs who might have invested larger amounts into Minjar would have required the company to aim for a much higher exit.

One interesting rule of thumb that can be generally applied is for founders to try and choose investors whose total fund size is congruent to the size of the exit you can realistically target. Minjar had the option to raise funding from larger investors but chose Blume Ventures (a $60-million fund at that time) and smaller VCs; a decision that served it well in retrospect.

The Craft Behind the Math

Besides the numbers, Minjar’s startup journey is a fascinating story as it demonstrates the craft needed to build and exit a startup. Delving beyond the cosmetic layer reveals a treasure trove of titbits. Little jigsaw puzzle pieces that can be assembled together in an emergent manner to reveal the full picture.

While it would be wrong to treat these pieces as prescriptive recommendations for all other startups, they nevertheless offer a valuable opportunity to peer into the mind of a startup founder and learn from his journey.

Discipline counts

The downside of raising lower amounts of capital is that the startup has to be really disciplined while spending money to build the business. This takes both time and effort and requires the company to be frugal wherever possible. Values that Rayapati and his team embraced as first principles. For instance, despite largely targeting customers in the US, Minjar did not hire people there.

They engaged a consultant to help out for a brief period of time, but more importantly, ensured that one of the founders was always present there to handle customers and partners. This meant that Rayapati or Anand initially shacked up in the US, either at a friend’s place or at an Airbnb, to keep costs low. Once the company gathered some traction, they rented an apartment to stay in but continued to operate in a bare-bones manner with no US employees.

Of course, it is trivial to say that discipline is important – the real world is far more complex. Operating with a small amount of money is a challenge while your competitors are raising much larger amounts and cornering talent and skewing market economics with discounts and low-ball pricing. The fact that Minjar managed to actually achieve success without sacrificing discipline is both rare and credit-worthy.

Going contrarian

This facet of selling in the US without having any employees there reveals another interesting aspect of Minjar. That of going contrary to popular wisdom when the situation demands it. Most VCs will tell you that if your primary market is the US, you have no choice but to shift base there and hire local employees for sales and marketing. Not only did Rayapati and the team not hire people there, but they also sold to enterprise and mid-market customers without having a US sales team.

How did they do this?

Rather than adopt the conventional strategy of selling products, Minjar originally started off as a services company offering managed services solutions around cloud hosting. These services not only served as a customer acquisition funnel for Minjar to sell its product offering (Botmetric), it also helped the company build and refine product features and requirements.

Interestingly, a large VC offered to fund Minjar with the condition that they drop services and focus exclusively on products. Needless to say, Rayapati did not accept this offer and chose to go contrarian with good reason.

Almost out of Zomato, but Pankaj Chaddah will not talk to you


Did you read the email before he sent it?

Of course. We’re co-founders. We worked together for 10 years.

I thought, maybe he wrote it independently…

No, why? When he wrote it he asked me to read it. He had to ask because I have to run whatever is left.

So, when you were reading it, how did you react?

Nice email.

Goyal talks about the email his co-founder Pankaj Chaddah sent to all of Zomato announcing his resignation. On 1 March. As soon as he sent that email, Chaddah put out some tweets, primarily to quell any speculation that would come after.

The next day, there were a few newspaper inches dedicated to Chaddah’s exit. And that was it. The news disappeared quietly into the long weekend. It was all very strategic. Very Zomato.

In a world where founders are celebrated, sometimes even raised to demigod statuses, Chaddah is an outlier. It is that unique part of being a co-founder. The other guy. You are sometimes forgotten.

What goes with Zomato?

Think about it, when you say Google, you think about Larry Page but not always Sergey Brin. Microsoft is always Bill Gates and very rarely Paul Allen. How about Apple? Steve Jobs, sometimes Steve Wozniak but almost never Ronald Wayne. Closer home? Ola is Bhavish Aggarwal and not Ankit Bhati.

Now, think of Zomato. It is Deepinder Goyal. Almost never Chaddah. It is just how it works. Zomato has been synonymous with Goyal for a few years now. Very few noticed Chaddah until he was gone. But that’s you. And that’s me.

Inversely, for the 2,000+ employees of the Gurugram-headquartered food tech unicorn, Chaddah was the one with the magic wand. He taught them how to make money off uploading menus on the internet. He taught them to sell. And for many, he was what made Zomato tick. The 200-something replies that clogged Zomato’s email server after he sent the farewell letter tell their own tale.

But as soon as this announcement was made, Zomato had a shakeup. Gaurav Gupta was made COO and Mukund Kulashekaran was made chief business officer (CBO). A position that previously didn’t exist in Zomato. “He can’t be replaced by anyone person, what he did has to be now done by many people,” says Goyal. Suddenly, employees had to wrap their heads around a lot of changes.

“It is a big blow to Zomato. For some who had been observing him, there were hints that he was leaving,” says an executive at Zomato; he asked not to be identified because he is not allowed to talk to the press.

For others, it was a rude shock.

“When he first told me, I could not believe it for a few minutes. It was very emotional,” says Pramod Rao, head of marketing at Zomato. Rao and Chaddah have been friends for 11 years. They played football together. They play in a band together. They take vacations together.

For those outside the inner circle, the email created some unease. “Maybe a little prior notice would have been welcome, but it was his choice. The email had an air of finality to it,” says another executive at Zomato, who also asked not to be identified. “If Goyal is the brains in the operation, Chaddah is the muscle.”

Chaddah is an important person to talk about. But, see, Pankaj Chaddah will not talk to you.


How is the financial assistance been provided?


But then MonkeyBox attempted something new. The B2B model, which resembled a catering business.

“I would say this was one of our biggest mistakes. So often parents and well-wishers would tell us that you are doing so well for kids, why don’t you pick up a large corporate order?” Rao says.

Financial Assistance

He thought about the utilization of kitchens. “In our B2C model, after 1 pm, there is no utilization of our kitchen,” he recalls. Rao explains that schools run for just 200 days a year so the kitchen’s effective utilization is just around 50%. “What do we do for the rest of the days? How do you get out of that?” he says.

That led them to attempt the B2B business. Last year, MoneyBox started working with a school, where the business model was that the school paid for the full contract and the startup would cater to 2,500 students providing them breakfast, lunch, evening snacks and dinner.

“This should have been a good thing, right? It brings in more business to Monkeybox and enables more optimal utilization of infrastructure,” he says.

But the devil is in the detail. Rao recollects, “The problem with this model was that pricing is very low, about Rs 120 for all meals. That’s not a lot of money and since you get a bulk order, you don’t have much pricing power.”

The other problem was that one had no control on how much the kids could eat. Which then meant the food had to be a spread of sorts. So, MonkeyBox was basically shipping “containers of food”.

He explains that in the B2C model, the cooking would be done to match the needs of each day’s orders. “We were shipping the food in the reusable tiffin boxes which would come back and so we would know if kids are eating it or not,” he says. What was eaten and what came back would serve as feedback points to fine-tune the menu. “But in the B2B business, there was no feedback mechanism and wastage was high,” he says.

If that wasn’t enough, the B2B business had several other issues. Unlike the B2C model, where payments were made upfront, on the B2B side, payments were made after 60 days, which meant that MonkeyBox now had a working capital challenge. The fact that MonkeyBox now had to hire and deploy additional staff to serve food in schools, further increased costs and hurt unit economics. So much so that from a point where the company was comfortably generating positive gross margins, the unit economics had deteriorated to a negative number, leading to heavy overall losses.

“We were losing 50 bucks per day per child on this. So in just one month, we lost about Rs 30 lakh (~$45,000) plus on this,” Rao admits.

What after the halt in the service?

But shouldn’t MonkeyBox have noticed this early enough and pulled the plug on this new service? They did. The company stopped this service in January but by then, it had lost a significant amount of money in the process.

However, there was a larger problem at hand; the imperative to achieve the VC-level hypergrowth. MonkeyBox had raised around $2 million of funding, a relatively small but still meaningful amount of capital. Given the traction that it has achieved on the back of this modest fundraise, it felt that it was an opportune time to go after hyper-growth and reach a point where a follow-on funding round could be raised.

This meant expansion. This meant additional kitchens. This meant hiring.

“On June 20, 2017, we were at 30 people. In just two months, by August, we were at 250. The new hires included folks from top institutions like ITC Gardenia and JW Marriott. The salary bill alone was Rs 60 lakh (~$90,000) per month,” Rao says. The company expanded to five kitchens in Bengaluru, each one measuring 6,500 square feet. Capital expenditure for each kitchen was about Rs 1.2 crore (~$180,000). On top of that, the company spent money on a packaging team, a delivery team, trucks, tiffin boxes, chefs, everything.


Present day – The end of the tango


At roughly the same time, Bahl and Bansal sold shares of their own, amounting to Rs 80 crore each ($12 million) for Rs 1,40,000 per share (~$2100).

If NEA-Indo-US sold their 8,274 shares at a premium of 50% to this same rate (Bahl and Bansal sold their shares at a company valuation of $4 billion and the company’s peak valuation was $6.5 billion), they would have netted Rs 188 crores ($28.52 million). This figure of 8,247 shares represents 30% of NEA-Indo-US holding, and the fund still owns 19,594 shares. On the other hand, Kalaari Capital Partners sold none of the 912 shares it had acquired the previous year.

Series “Bust and Below” (2016-17) – The shotgun marriage that wasn’t consummated

If Snapdeal’s rise to the top was dizzying, its fall from grace was just as swift. On one hand, it was locked in a fierce and expensive battle with Flipkart and Amazon for e-commerce in India, and, on the other, their relationship with their investors had gone completely pear-shaped.

Nikesh Arora’s exit from SoftBank robbed Snapdeal of their internal champion. From that point on, not only was SoftBank reluctant to invest further in Snapdeal, it had written down the valuation of its holding in the company and had mandated that the company get acquired by Flipkart in a deal valued at $1 billion. For a startup that was once valued at $6.5 billion and had raised $1.7 billion in total funding, this was a sharp fall, but for investors like Kalaari, it was a mortal blow.

Since the deemed acquisition value was well below the funding raised, it would stand to make nothing from the sale. However, Kalaari had a board seat and a blocking right in its kitty and Kola managed to parlay this into a side deal with SoftBank where they would receive $30 million for permitting the sale to go through. While this was hardly ideal, it was still better than the alternative of not making anything at all.

Blocking out the sale of the company

Unfortunately for Kalaari, Bahl and Bansal blocked the sale of the company and decided to keep the company independent. Kola stepped down from the company’s board, and in an unusual move, publicly berated the founders for not going through with the deal. She went on record to say that she was “extremely disappointed and shocked by the founders’ disregard for investors and employee interests”.

Over the past few months, Kalaari has been engaged in a dialogue with Bahl to give it an exit, and if sources are to be believed, this deal has now been finalized. Snapdeal will buy back Kalaari’s 8% holding in the company for approximately Rs 70 crore (~$10 million).

If this deal does go through, we finally will have a report card for Kalaari’s investment and performance in Snapdeal:

Total amount invested: $19.56 million

Total exit* (assuming a share price of Rs 2,27,500 for the secondary): $39.12 million

A return of 100% in total. Not great, but not bad either.

But there is a catch.

So while NEA-Indo-US did well, Kalaari Capital Partners II will take a whopping 90% haircut on its investment.

The takeaway here is that even when it looks like a VC firm did almost everything right while investing in a startup—pick the right deal, follow on at the right time, take a second exit when possible—it can still end up in a position where a particular fund vehicle does poorly.

Of course, hindsight is always 20:20, and it would be unfair to judge Kola and co harshly for ending up with a sub-par scorecard. Also while Snapdeal might not have delivered a blockbuster cash return to the firm, it was instrumental in Kalaari being able to raise a follow-on fund, Kalaari Capital III—of $290 million in 2015—while simultaneously burnishing the Kalaari brand (Kola was named investor of the year by Economic Times in 2015).


Paperboat needs to sell more or sell itself


But last month, this skirmish spilled into the public domain when in Mumbai’s western suburb, on a particularly troublesome and gridlocked stretch of the highway, stood a huge billboard. It asked Real (Dabur) and Tropicana (PepsiCo India) to abandon concentrate and join it in giving the customer real fruit in a juice box. The ad was by B Natural. A company acquired three years ago by ITC in its effort to strengthen its non-tobacco portfolio.

Following the comical exchange

What followed was a comical exchange of one-upmanship. All three exchanged barbs at each other primarily through business dailies. There was talk about taking things to court but nothing materialized.

The juice war, which has been brewing for years, has finally been declared. It is important to focus on this war particularly because of who fights it. ITC (revenue of Rs 55,000 crore as of March 2017 or $8 billion), which needs to strengthen its non-tobacco portfolio as sales of its core product slow down.

Pepsico (revenue Rs 6,540 crore as of March 2017 or $970 million) which has seen its carbonated beverage portfolio take a hit as urban youth move away and Dabur (revenue of Rs 5,357 crore or $794 million), the traditional big boy in the food and beverages category. Oh, and there is one more. Paperboat.

Seven-year-old Paperboat is a Bengaluru-based startup primarily known for its niche ethnic juices. If you’ve missed them on the shelves, the company sources concentrate that are rarely used, such as Aam Panna (sour mango), Kokam (berry) or Jamun (black plum).

How to evolve a business from the same?

It pours them into pouches and not tetra packs. At least, not at first. While the likes of Real and Tropicana sell juices at Rs 20 (~$0.3) for 200ml, Paperboat sells it at Rs 35 ($0.50) for 250ml. Paperboat differentiates itself from the crowd by being “eccentric” in its flavors, which means, so far, it has been shunning the likes of Apple and mixed fruit juice. Until 2017, it wanted to be premium, part of the elite and wanted to build a business within that.

Paperboat is, more or less, quietly distancing itself from its original thought process. It doesn’t want to be just a premium juice company anymore. It wants more. It wants to be part of the $2.2 billion packaged juice market.

The market is crowded and has a lot of competitors hawking their wares. According to strategic market research company Euromonitor, 1.8 billion liters of juice in one form or another was sold in 2017. The sector, in terms of volume sold, is expected to grow by 8% till 2022. There are international companies such as Coca-Cola and Pepsi, along with Indian companies such as Dabur, ITC, Manpasand Beverages, and Parle Agro.

What about Paperboat? Euromonitor counts Paperboat as ‘others’ in the list of companies in this juice market. Not just Paperboat, several others such as Raw Pressery. Add to that, there are more venture-funded companies that are added every day.

Paperboat wants to be a part of this industry now. For six years, it chose the fringes, but in 2017, things changed. It recorded a growth of 12% and managed to generate revenue of about Rs 70 crore (~$10 million). The company had to now go against what it was built for.

It went mainstream. It sold one-liter tetra packs of apple and mixed fruit in search of volume along with the Rs 35 offer. In December, it started to sell these mass market juices at the Rs 20 price range (just like Real and Tropicana). And in March 2018, it introduced a new sub-brand, Swing, which sells at Rs 10 ($0.15). This is Paperboat’s latest strategy. It has helped, somewhat. Neeraj Kakkar, founder, and CEO of Paperboat claims the company clocked Rs 117 crore (~17.3 million) in FY18.

Loylty Rewardz and the perfect exit


The first time The Ken meets the founder and former CEO of Loylty Rewardz, Bijaei Jayaraj, it’s at a popular coffee shop in Powai, a suburb in Mumbai once known for being home to the city’s startup ecosystem. He wells up when he recounts what happened in January.

“They popped champagne, and my son sat there and looked at everything,” says the 44-year-old. Jayaraj says he hopes his son saw why his father had been missing from the first 10 years of his life. There is a pause. And for the first time in a long time, Jayaraj, who usually loves to talk, is quiet.

Not coming in the limelight

Odds are you don’t know Jayaraj. He is barely ever featured in business dailies. He isn’t on Twitter spouting vague motivational quotes. He doesn’t attend startup conferences. Jayaraj disappears in a crowd. But he carries the distinction of being the founder of Loylty Rewardz, a business-to-business startup he founded in 2007.

The company raised about Rs 160 crore (less than $20 million over the years), broke even, became the biggest player in the loyalty space, sold for Rs 300 crore ($44 million) to payments company BillDesk, and helped its investors make a complete exit. All in just seven years. And in January 2018, after spending three years at the company post the acquisition by BillDesk, its CEO rode into the sunset.

But there are few, if any, stories about the man who did it all. Fewer still on loyalty as a sector. In India, loyalty is run primarily by banks and big retailers. Startups trying to crack that sector remain few and far between, which makes this company important.

And the fact that Jayaraj saw patterns no one else could make it all the more fascinating. Loylty Rewardz did what it did in an unsexy sector, where nuts and bolts are fairly complex to imagine, and it managed to crack it while fighting companies with far more money. In addition to this, Loylty Rewardz did it all and made profits.

Handling the loyalty programs

But what does Loylty Rewardz do? Simply put, it handles the loyalty programs of almost every national bank, taking on the liability of loyalty points and helping customers redeem them at the end of the cycle.

Every time you use your debit or credit card at a store or on a website, the bank gives you points. These points are redeemable within three years. You can purchase air miles, buy a phone, or even an AC if you have collected enough points. Loylty Rewardz keeps track of these points and helps you redeem them. If you want to buy a phone with the points you’ve accumulated, Loylty Rewardz will find you a merchant. You spend those points and start back at zero.

Behind the scenes, for every point that you earn, the bank pays Loylty Rewardz. The more you spend (because you know at the end of it, you can burn it all to get something for free), the more the company makes. And if you, like a lot of people in India, don’t redeem your points, well, it means Loyalty Rewardz didn’t have to spend money buying you that phone.

It is not exciting, and it requires a lot of operational knowledge. But that’s okay because that’s Jayaraj’s strong suit. That and having the gift of the gab.

First swipe

Jayaraj started his career at Jet Airways in 2006. He was recruited straight out of business school and found himself on the bench.

“I would go up to my manager at Jet and tell him, ‘Hi, I played video games at work for eight hours today’,” says Jayaraj. The manager would frown, shake his head and send Jayaraj away. He did it every day for a week.

Finally, his manager moved Jayaraj to one of Jet’s forgotten departments, Privilege. It was Jet Airways’ loyalty program. It gave fliers miles for every flight taken, encouraging customers to fly often because it meant a free flight in the future. The department was in the process of trying to tie up with banks but didn’t have a sales pitch.


Understanding the complex chemistries


Demand has been a thorn in the government’s side ever since it launched demand-side incentives under the Faster Adoption and Manufacturing of Electric Vehicles in India-I scheme (FAME-I). Under FAME-II, the government rejigged the subsidy structure and introduced import duties on core battery parts (The Ken has written about this previously). The intention was to spur both the demand and supply of EVs. But it ended up subsidizing only premium electric vehicles (like Ather’s scooters), say two industry experts The Ken spoke with.

Impact and dependency of the schemes

Despite li-ion cells having a range of applications beyond EVs, Niti Aayog has pegged transportation as their largest use case— chiefly because of their dependence on schemes like FAME-II to drive demand. This might as well be the weakest cog in this multi-billion dollar effort.

“We haven’t been able to sign a single contract with a local EV manufacturer who can assure demand for lithium-ion cells,” says the Gurugram-based executive quoted above. The company the executive works for has dropped its investment plans, for now, citing demand of barely 100-200 MW (megawatt).

Niti Aayog agrees it’s a concern. “But these are unprecedented incentives and there are enough signals in the policy that demand can be generated,” says a member of the think tank confidently.

Contrary to what the government believes, demand clearly trumps subsidies for global players like Panasonic. While the company has publicly thrown its hat into the ring, the Panasonic executive says that there has been little intention internally to move into manufacturing immediately.

This runs counter to the government’s best-laid plans, which intend to award tenders—by April 2020 at the latest—and achieve a fully-local value chain by 2024.

While this demand-supply issue is a macro problem, the policy falters even at the cellular level.

The heart of a lithium-ion cell is the cathode, usually a complex mix of minerals like nickel, manganese, cobalt and phosphorous. The combination of these chemicals used determines the life-cycle, safety, and range of a battery.

Mass adoption an ideal solution?

There’s still no last word on what constitutes an ideal lithium-ion battery. Its chemistry is critical for India’s mass adoption of EVs.

Currently, the most widely used is the nickel-manganese-cobalt, or NMC, combination. In fact, as one Hyderabad-based battery expert points out, the Indian market is still using NMC 145, a first-generation battery. He wished to comment anonymously as he consults various battery manufacturers.

NMCs are widely used in China, but their pace of research and development on li-ion cells means a constant improvement in specifications. At $135 apiece, Chinese NMCs are cheaper than other battery types but aren’t the best option when it comes to India, as road temperatures are 10-degree Celsius higher than China. NMCs aren’t stable at higher temperatures of 45-55 degrees. They are especially unsuited to 2- and 3-wheelers, which don’t have elaborate cooling mechanisms.

And despite repeated claims of being agnostic about the type of chemistry used, the Indian government has a soft spot for NMCs. “Output-linked subsidies” in the plan are connected to the energy density and life-cycle performance of a battery.

Battery manufacturers who’ve seen the draft plan are uncomfortable with this. “The government should not embed these technical requirements in the policy. India’s transport needs are unique. Simply copying what other countries chose isn’t going to work,” says the representative of an international energy company, now laying down roots in western India. Having worked in the Indian energy space for over two years, this official claims that the government wants to adopt the latest tech, without first ensuring that it’s a fit for the Indian EVs.

The Indian Institute of Technology in Madras (IIT-M) has also been batting for NMCs. But like the India Energy Storage Alliance (IESA) have recommended that the draft plan looks beyond them, to the other 15-16 types of chemistries available.



Banks enhancing the flexible nature


Consumer financing especially becomes vital at the time of a slowdown as it encourages people to spend more. Importantly, it also makes these people likely candidates for future credit. Having seen Non Performing Assets pile up on account of corporates defaulting on loans, banks can’t get enough of retail loans. Take Yes Bank, for instance, —8% of all loans issued by the lender are NPAs because of bad loans issued to corporates.

Utilizing it to the fullest

All of this does one crucial thing—it serves as a reminder of the value the bank brings beyond just a means of transacting. While the immediate importance of this may not seem apparent, it is a hedge against an uncertain future.

Banks realize that they are moving towards a future where the friction to switch banks is gradually disappearing. Initiatives like a central Know Your Customer (KYC) registry, which enables the sharing of KYC information between institutions, will ensure customers can transfer bank accounts with ease.

Once this happens, the very thing that gave banks their edge—the current account and savings account balances—could be chipped away. Banks, therefore, have to provide a value proposition, unlike anything they’ve offered before.

Banks already know what irrelevance is like. When the government’s real-time payments system, UPI (Unified Payments Interface) was introduced, banks were slow on the uptake. Instead, UPI exploded on the backs of nimble fintechs that created slick apps that made payments through UPI intuitive. Today, UPI-based payment apps like PhonePe and Google Pay have about 100 million users between them.

Crucially, UPI made payments so simple that users had nothing to remind them that payments are moving from an underlying bank account. By the time banks got their UPI apps to the market, the race had already been run—banks’ apps figure nowhere in the payments story today.

Importance of financing

“Banks lost any control they had on the customer by losing the plot on UPI. They are now just a settlement engine. And that is a scary place to be,” said a former e-commerce executive who worked closely with banks. A scary prospect because the bank account where the money is held suddenly ceases to matter.

Festive Treats is HDFC Bank’s way of avoiding an encore of the UPI debacle. As users’ purchases now are increasingly driven by consumer finance, HDFC Bank couldn’t have picked a better time to re-assert its influence on users. “It is the moment that endears the customer to a brand. Today financing is more important than other propositions like convenience,” said the senior banker quoted above. “That puts the control of the user in the bank’s hands,” he said.

For all of this, Santhanam refused to rule out the possibility that they would partner with e-commerce companies again. Already, HDFC has reactivated its SmartBuy marketplace. SmartBuy directs buyers to retailers like Amazon or Flipkart, while HDFC card users get close to 33% discount if they buy via this channel, according to reward point experts. Festive Treats is HDFC Bank’s way of avoiding an encore of the UPI debacle. As users’ purchases now are increasingly driven by consumer finance, HDFC Bank couldn’t have picked a better time to re-assert its influence on users.

In addition, Amazon, Flipkart, and Myntra have also joined the Festive Treats bandwagon. HDFC Bank seems intent on setting the terms of engagement. And if Festive Treats is a success—which will be seen in two months when data on card spend emerges from the RBI—expect any future partnership to be considerably more equitable.