Paytm: A venture that stands out

(and so does VSS — its creator)

People who personally know me, are fully aware that very few things (and even fewer people) command my respect. Praising comes hard to me.

I am a fairly cynical person, i was told even when I presented in the Investment Committee of my previous fund. While most other people would start from the point of Zero(if we were to imagine a number line slider representing disposition) and hold a more balanced view when starting to evaluate an investment case, my default setting would be minus infinity to begin with (assuming any investment case to be bullshit and everything being told about that venture to be a lie and fraud). So unless what i saw, heard and validated, dragged my position slider gradually from negative infinity to zero and then to the positive side, I would not vote in favor of the investment proposal.

After moving back to India, I have similarily held strong views about different ventures in the ecosystem that just don’t make any sense to me. I am of the firm view that if you are up against maths that doesn’t adds up (even at some point in near foreseeable future), you are more likely to fail. I have mostly kept my views private and shared with limited audience (where i felt they were valued). But there is something about VSS (Vijay Shekhar Sharma) that makes me respect him as a founder and someone i personally look up to. Why? Consider this:

1. He is a sole founder. As such he observes, analyses and takes decisions by and large on his own. (Unlike most other ventures who have a team of co-founders to deliberate and take more informed decisions). I am sure VSS has a trusted core of advisors but in the end the onus is on him to separate the wheat from the chaff. And own the consequences of his decisions.
2. Paytm’s cost of customer acquisition is one of the lowest in India. I hear that it is around rs 30. Compare this with that of Flipkart, Uber, Ola? What is it? 200? 300? 500? It is relatively easier to have a positive overall Customer Lifetime Value when you have spent 30 rs to acquire a customer than 500 rs. VSS gets the importance of CLV.
3. Most ventures do not understand the importance of ‘timing’. I remember Bill Gross (of the legendary IdeaLab) analysing 700 + investments he has made over decades and trying to map out what reasons/factors contribute to the success or failure of a venture? Suprisingly apart from Idea, Capital and Team (the usual suspects), another factor that stood out and had the highest %ge contribution (c. 42%) to the success of ventures was TIMING! Very few entrepreneurs ask themselves this question: Why was a year ago too early to do this, and why would a year from now be too late (and a missed opportunity). If you launch something too far out (pre or post) when the market is ready for your product/service your likelihood to succeed drops drastically. VSS gets timing! (Explained in my next 3 points).
4. Timing of the Paytm Wallet: Paytm was the first prominent payment wallet in the Indian context. VSS smartly recognised that by offering a reliable utility service like mobile recharges was a good way to acquire a lot of online customers for cheap and start using paytm as a transaction platform. He followed on the footsteps of WeChat in China (More on WeChat and COC in next point).
5. WeChat has an ARPU (Average Revenue Per User) of $7–8 while Whatsapp has what? $1 per user per year? How does WeChat operating in a relatively tighter and closed market like Chat have a higher ARPU (and monetise its platform 8X better) than something as global as Whatsapp with a primary user base in the West? The secret lies in the fact that Wechat offered a public utility service (free messaging) to the people and thereby amassed a huge user base of recurring customer base who, a little later, happily adopted WeChat wallet and shared/saved their credit card information in the wallet. Basically WeChat wallet got pushed like a Trojan Horse on people’s phones. But once it was there, with people’s card payment information integrated, WeChat started facilitating all sorts of transactions through the WeChat wallet (including Direct Ecommerce, Utility Payments et all)- and transformed into an integrated platform for apps (mother of all apps!) powered by WeChat (+ wallet)! VSS gets this. By layering a public service for free (in this case mobile recharge instead of messaging) he replicated the same model in Indian Context.
6. Timing of the Ecommerce platform: While other early Ecom entrants like Flipkart has to literally build the backend delivery infrastructure from scratch (that’s where most of their money, time and effort went in the initial years), VSS waited smartly until companies like Delhivery, ECom Express etc had already figured out and built the delivery backbone to deliver ecommerce parcels across Indian in a fairly reliable, time bound and cost effective manner. When the backend infrastructure was ready he unleased the ecommerce platform to cross-monetise the Paytm wallet (similar to Wechat) to facilitating ecommerce transactions. What people often don’t get it is that Paytm is NOT an ECommerce Company. It is neither a Financial Services Company (Wallet). It is neither a Ticket Bookings App. VSS’s vision was much simpler and broader to create a more ubiquitous platform that will be present ‘wherever money changes hands’. This in my view is brilliant. Snapdeal is making an effort to transform into Paytm in this regard (by acquiring freecharge, bolting on an ecommerce platform and services booking platform).
7. Timing of the Payments Bank: Can there be any 2 views about this? He has again waited and timed it to a point when India is ready to adopt to completely online banking. I will write a separate post on this later someday, but the bottomline is VSS GETS TIMING like no other.
8. VSS gets Product/Service Market Fit. He is smarter than most entrepreneurs when it comes to determining where to spend money and where not ;) Some instances to highlight would be:

a) Paytm has probably the poorest customer service amongst the Top 5 Ecommerce players in India. I am not sure, but i won’t be surprised, if it was a deliberate move by Paytm to actually not invest in Customer Service at all and pass on those savings (on customer services expenditure) directly to Consumers in the form of additional discounts instead. Their thesis probably is: The Indian Consumer will happily put up with shitty customer service as long as you offer the cheapest prices ;) The same strategy is followed by the likes of RyanAir, Wizz et all in Europe where they figured that the incremental investment in Customer Service and facilities is not valued by customers vis a vis lower prices. So while Amazon, Flipkart can keep investing in flawless delivery infrastructure that delivers within the same day/hour, and offer unrestricted returns (that hemorrhage their profitability potential big time), Paytm is happy to offer a 10% cheaper price to a customer who can live with a 3–4 days delivery cycle and shitty customer service :P So by all means, the Indian Consumer will curse Paytm but still again order from it when it offers the cheapest price ;)

b) Paytm has spent a lot of its own money on creating a brand (something Snapdeal only learned a few months ago). Have you ever noticed the Paytm logo below the NDTV logo whenever you switch it on? It has invested in marquee and unique deals to highlight its brand. I still find it surprising that even Ola drivers (I am not sure if Paytm is even supported on Ola) say — Sir paise paytm kar diye kya? and I was like Yes (essentially making card payments of any nature synonymous with Paytm kar diya!). Can it get more brilliant that that?

People don’t buy products or services. They buy brands! In terms of mindspace, is there any other brand that occupies so much mindshare as Paytm?

I remember someone telling me how Paytm has a team of 50+ (that goes up to 200 people at peak times) camping literally inside the offices of their PR firm. VSS takes Paytm’s (and his own personal brand) seriously. And that’s a good thing!

9. Paytm gets the Indian Consumer Psychology: Bear with me, as i explain this. Paytm ran a crazy cashback sale in January last year (2016) right after its 950M US$ raise from Alibaba syndicate. I observed something peculiar as the cashback sale was executed week over week but with varying cash back levels for the same products. In my mind, i thought if what i am thinking is true, this is another masterstroke from the genius VSS. I explained my rationale in a talk i gave at BITS Pilani Hyderabad Campus around the same time as the sale was ongoing and what to expect next. What Paytm was essentially doing was to offer the same item (say Woodlands shoes) on a 40% CashBack level from Jan 1st-7th and then make it available next week at a 30% CashBack and at a 20–25% level the following week. This cashback was (apart from an investment in aggressively acquiring more customers and catapulting Paytm into the Top 4 Ecom players) actually a ‘Mass Consumer Psychology Experiment’ to test the depth of the Indian Ecommerce Market. Even with a funding of multiple orders higher than Paytm, no other ecom player had attempted such an exercise. I guessed that Paytm will probably spend c. 50M US$ to run this experiment to learn about the depth of the Indian Ecommerce Market at different price levels for hotselling items. For instance: Paytm could figure that they can sell 50 lakhs Woodland shoes in a week if they were offered at 40% discount vis a vis 5 lakhs in a week if offered at 20% discount. Why is this important? You may ask. See the next point.

10. Paytm gets Business Models that work: Armed with this type of consumer psychology and depth of market transaction data, Paytm could be exploring a different business model of offering ‘Inventory Clearing as a service’ instead of ‘Etailer platform as a product’ and thereby make margins beyond the role of a normal ‘Etailer’ which is capped at 15–20%. e.g. If you are Woodlands, and I am Paytm. I come to you and say, listen Woodlands you have 50 lakhs shoes stuck in your inventory. I will be happy to take it all and clear it out, within a week, provided you give it to me at a 40% discount and pay me a flat 20% cash commission for my ‘Inventory Clearing’ Service to you. As paytm, I know i can dump (and the Indian market has the depth to absorb 50 lakhs Woodland Shoes within a week if offered at the right price level ;)) these many Woodland shoes and make a handsome 20% commission on such volumes. I would offer this service periodically to companies like Canon, Nikon, Woodland, Bombay Dyeing…etc You get the drift. Funnily enough, around march 2016 i remember watching a snippet forwarded to me by a BITSian junior who messaged — You were right, Paytm did spend exactly 50M US$ (around 300 crores in cash back during that sale period) as you guessed. My firm belief was that VSS is making a courageous bet here to run this mass market consumer psychology experiment (like no other ecommerce venture in India before) and spending this 50M US$ on this will enable him to spend the next 900M US$ in a way to surpass every other ecom venture on profitability and traction.

Another masterstroke could be explore, opening up a gateway for Alibaba’s inventory to directly be made available in India. Just as Amazon is integrating Amazon Global (where you can get a product available in US shipped to you - albeit with duties et all) which other ecommerce venture in India has the ability to replicate this feature? Paytm.

You may criticise me that I am not as critical of VSS as the founders of other ventures who are stacking up huge losses — my response is something that I personally (and i believe VSS too) believe in: Traction is the leading indicator, while Revenue is a lagging indicator (I guess it was Jack Ma who said this). In terms of CLV, Unit Economics, Cross Monetisation , Brand, Innovative Business Models only Paytm checks most of the boxes. It has adapted and indigenised (if theres a word like that) proven global business models to the Indian context better than other most ventures.

And so for all the above reasons. VSS, take a bow. I root for you.