“The higher you were the mightier you fell. Gravity had always been there. It was the jetpack which created the illusion of anti-gravity.”
I recently finished Kashyap Deorah’s book, ‘Golden Tap- The Inside Story of India’s Hyper Funded Startups’ this past week. It is written in such an amazingly inspiring and frank no-holds-barred manner with delectable ‘insider’ view on starting up, startups, venture capital and the ups and downs of the funding cycles. I would definitely urge the readers to grab a copy and devour it.
This article is written for all the entrepreneurs, budding entrepreneurs, VC’s, aspiring VC’s and anybody associated with/ mildly curious about the startup world. And also to allow folks to gain key insights from the book but who might not get the time to read it, for those who have read the book and would like to refresh some of those memories and ultimately for those who harbor the desire to start up and the bittersweet reality associated with it.
While the book ends somewhere around 2015–16, it still remains as relevant as ever in 2019 as I keenly observe the startup and VC space. Let me provide a brief summary of the book and the writer before we dive in!
Kashyap Deorah is an entrepreneur and investor. Over 15 years, he has split his time between Silicon Valley and India building global technology companies. Kashyap has started and sold three companies, worked with public companies in the US and India, invested in a score of startups and mentored many more. He started his first company RightHalf.com (a creative idea generation platform) during his final years in IIT Bombay in 2000. After its acquisition by a Silicon Valley company, he spent seven years in the US. He returned to India in 2007 to start Chaupaati Bazaar (phone commerce marketplace), merged it with Future Group (India’s largest retailer). In 2012, he co-founded a company called Chalo (mobile payments) and sold it to Open Table (San Fran based restaurant reservation space). He currently is on to his fourth venture HyperTrack (software tracking services for B2B and C2C).
What I really loved about the Book
- It provides the early history and experiences of some of the most storied VC’s in the startup ecosystem in India (and globally) today. These include Shailendra Singh (MD, Sequoia Capital), Ashish Gupta (Co-Founder, Helion Venture Partners and angel investor in Flipkart), Subrata Mitra (Partner, Accel), Avnish Bajaj (Founder & MD, Matrix Partners, also founded Baazee) and Suvir Sujan (Co-Founder, Nexus Venture Partners). Reading about their stories and their starting of some of the best and most reputed VC’s gave a thrill like no other!
- Captures the story of a few globally renowned VC’s too and their investing experiences in India. Particularly the no-holds-barred (brutal!) selection criteria adopted by Lee Fixel to screen startups (covered later).
- The scintillating poker table style coverage of the big players on the table- Tiger’s Fixel on Flipkart, Bezos on Amazon’s India entry and Son through Snapdeal and how they unfolded their cards at that time is a terrific section!
Powerful Insights from the Book with Reflections
The venture investing playbook deployed by Tiger Global to scour and pick the market winners. ‘This of that investing’. This is established market spaces and that is emerging market countries.
Tiger was inactive in India since late 2015 but in recent times has been back with a roar to invest in India with a big time focus on B2B SaaS startups (enterprise tech with a tantalizing $1tn global opportunity) and Agri Tech ($100m in Ninjacart)
Friction and cost of collecting money is much higher in India than in the US, High enough to change the user’s behavior of the product and therefore the company’s business model. It is due to the ability of Indian consumers to out wait you and live with the pain. It is easy to get user growth when you give away a valuable service for free or at a discount. But it is very hard to get consumers in the habit to pay for the value consumed.
Could sharply relate this to the unsustainable heavily cash back dependent growth strategy used by Paytm Mall (among the fastest domestic internet firms to grow into a unicorn backed by heavyweight investors such as Alibaba and Softbank) which burnt $150–200m during the Diwali sales period last year to get fickle users. As the Golden Tap is drying, cashbacks have been cut down which led to 60–65% fall in GMV in Mar 19 from $400-$450m in Q4 2018.
Ashish Gupta’s insight on unit economics for consumer tech startups in India that unit revenue is a fourth or fifth of the US consistent with PPP but unit cost is only half or same of the US. Then how do you really make money as a copy-cat business.
Rings true as some of the most famous ones such as Flipkart, Ola, Oyo continue to be loss-making with no clear headway to achieving profitability
Bezos Regret Minimization framework which he invented as he deliberated to quit his job at DE Shaw and now uses it to clear out daily confusions in decision making
Timing and access to right network is the biggest factor for a startup to succeed not just to raise further rounds but also provide an exit pathway to founders and investors- Seen from the fact that Deorah’s third company ‘Chalo’, a post restaurant reservation platform was acquired even before the team launched a beta product. Ash the angel investor knew the CFO of Open Table the leading restaurant reservation platform on San Francisco who bought them out. The fact that the product had not been launched, it was still closely held and did not raise any VC money further tipped the scales in their favor.
Without funding startups are forced to build something of value for customers who are willing to pay for it. They do so because their life depends on it. On the other hand funding eliminates exit opportunities under the last rounds valuation. The higher the valuation the lesser the exit options. The lesser the exit options the higher the onus to make up for it in growth and earnings. The startup gets on the hook to deliver insane revenues growth followed by insane profit margins to deliver their valuation
The startups which sprung to mind while reading this were Zoho, Zerodha and Wingify. No surprises that companies which bootstrap their way to success are not the darling’s media and receive relatively lesser coverage against the valor they deserve
E-commerce companies that are scaling at a scorching pace at negative margins are not only eroding future profitability of e commerce, they are eroding profitability of retail. They are not just eroding profitability of organized retail they are eroding it of all the small stores and supplier, traders and merchants that are the life and blood of India. They are commoditizing India’s consumption economy while pandering to the whims of a small group of investors and corporations for whom India is a column in a spreadsheet that they wish to own. These companies are not creating the market but destroying it.
The Ruthless World of Investing and Winner Takes All
- How Letsbuy was ‘killed’ by Lee Fixel who promised a follow on round to them but then backed out and put his money in Flipkart. Other investors who were backing Letsbuy also declined as they did not want to mess with the big cat which was Tiger.
- Fixel preferred North Indian Marwari banias with single or double-digit JEE ranks who were young first-time entrepreneurs. An analysis had revealed that such entrepreneurs were best performers in the types of companies Tiger liked funding
- Amazon and JD enjoyed a revenue multiple of 1.6 and 1.8 respectively while breaking even per transaction and Flipkart was pitched for the last funding round pre IPO and given a multiple of 28 while bleeding profusely
- The section on the heavily funded startup Housing, its rash and volatile founder Rahul Yadav also returned a valuable lesson. Early stage investors need to bet on the jockey and not the horse, a fact which was lost amidst the funding craze of that time. Housing got $2.5m from Nexus Venture Partners and spent $0.5m on buying a domain name reflected both the audacity and craziness of the use of investor funds at that time.
- More companies die due to indigestion fueled by over funding, than due to starvation. Excess funding kills accountability, customer focus, the necessity to innovate, organizational discipline and everything else needed to make a profitable company. Too much too soon creates bad habits. When bad habits get rewarded they encourage worse habits and perpetuate them like cancer. Eventually, the company dies before bad habits do.
- Uber’s strategy was to bleed out Ola’s funding and Travis did not hesitate in sharing this strategy with investors looking to invest in the competitor. It was again a war of who blinks first
- Every market space had a corresponding race. Runners who got half a million to million dollars in angel funding qualified for the heats. Those who won the heats got a few million to tens of millions of dollar in VC funding and qualified for the final race. The top 3 medalists in the final race received funding in the denomination of hundreds of millions of dollars from global ‘this of that’ funds. With that, they had earned the right to run a victory lap, be on covers of magazines, judge other runners, get them qualified for heats in a new market space and get the runners to be more like them.
Delightful Quotes from the Book
- From Kishore Biyani during the merger talks for Chaupaati Bazaar (Deborah's second company), “Everyone needs LSD. Lakshmi is the goddess of Wealth, Saraswati is the goddess of knowledge and Durga is the goddess of power. In this deal we will both get Saraswati, you will learn retail from us and we will get passion from you. You probably want Lakshmi and we will give you Durga instead.”
- Said by Anand, angel investor in Chaupaati Bazaar, “In every acquisition deal I have been in, it all falls apart before it all comes together.”
- From the author himself, “Once they had Tigers backing their default mode was to grow at a scorching pace, race past the targets necessary to multiply their valuations and go back to raise money. Entrepreneurs got hooked to funding like users get hooked to drugs.”
Predictions and Suggestions by the Author
- India will neither be the next USA nor the next China. India will evolve uniquely and transform into the next India.
- By 2020 we should expect IPOs of about ten Indian Internet companies in the US markets that exceed a billion dollars in market cap. The current Indian unicorns who make it that far would be valued at lesser levels than their current valuations.
- Hyperlocal marketplaces cater to a society with a tiered socio-economic structure and low trust. Sellers’ motivation is to earn a better livelihood at their core job or business and multiply their incomes that have previously been at the mercy of local crony networks.
- Market places that empower suppliers by amplifying their value to their customers will be able to create strong network effects and phenomenal profits. Marketplaces that commoditize suppliers will marginalize the value of their own company and the entire industry
- One of my favorite business ideas is an e-commerce marketplace that provides Kirana stores with a digital catalog of products to sell to their end customer in addition to their existing business- Reliance Retail is in fact working to create the world’s largest online-to-offline e-commerce platform in the country which will digitize 5 million kirana stores by 2023!
- Creating business marketplaces. If all participants get onto an online platform that manages the workflow which should mirror the project lifecycle it would be to the larger benefit of all of them. Can be applied in healthcare, energy, education, construction, garments, chemical, automobiles etc.
- In India, there is an opportunity to fill the employability gap through the Internet and mobile-based education across all skills and domains. Companies that provide education leading to employability would directly impact the income of their consumers and therefore the future GDP of India.
- Build a global enterprise software- Zoho was the first Indian company to get to over a hundred million dollars in revenue by selling enterprise software. They demonstrated how to build a profitable global software company at a fraction of a cost of their US competitors
And as the writer ends, After OpenTable was acquired by the Priceline Group, I got to experience the largest online travel business of the world (Booking.com) from the inside. The business had been built with much love, affection, sweat, and tears out of Netherlands. It strengthened my belief that there would be global consumer businesses out of India in my lifetime. I will either build one of them or die trying.
With inputs from Economic Times
Please note that the views and opinions expressed in the piece are largely derived from the author of the book and do not necessarily reflect the views of the writer of the article in all instances