Reverse auction platforms

Before my recent trip to Indonesia, I used this website called Cash Kumar to buy my foreign exchange. It was rather simple to use. I posted my location and my requirement for foreign exchange. I had to provide my phone number (and verify it by entering an SMS code; I think this was to make sure only genuine buyers asked for a quote) and then a message went out to all foreign exchange dealers in this part of town, and a few of them responded to my request with quotes.

One of them was significantly cheaper than the other, so I chose him, and CashKumar connected us up. This dealer sent the foreign exchange home. It was an incredibly smooth process.

This is one example of a platform that conducts “reverse auctions”, where a customer states his preferences and you have providers who bid (in a competitive fashion) to provide the said product or service. This results in significant ease-of-use by the customers (though not for service providers since they need to have someone monitoring the requests and bidding for them).

There are several other websites that follow this model. TaxiForSure used to operate like this (I haven’t used it in a while so not sure if it still does). Your request would be broadcast to all taxis around and if one of them accepted it, a match would be made. The difference there was there was no bidding, just matching.

Then there is this AirBnB clone called TravelMob where you can post your requirements (rather than selecting an existing posting), and providers will start responding to that.

One of the “hot” sectors currently in India is hyperlocal delivery, where you request for a product, which a provider procures and delivers for you. In this context, I was thinking of reverse auctions for grocery. You upload your shopping list which goes to nearby grocers (with infrastructure to deliver to you). Since it’s all commodities, the platform can solve some kind of a set covering problem to determine which grocer has to sell you what for you to get the goods at the cheapest rate (after accounting for transaction costs). And in the next couple of hours, more than one delivery can come in to deliver the goods, which you’ve paid for on the platform!

And this multiple delivery thing reminds me of the time when I was doing my MBA (a decade ago), when Dell’s supply chain was widely hailed in Operations Management classes. And the beauty of that supply chain was apparently that once you specified your requirements, the Dell supply chain would get to work and within the next few days different components of the computer would land up at your door!

On startups, headless chicken, trend following and execution

So I recently told someone, “I don’t like your business idea. It’s too brick and mortar for me”. By publicising that I said this, I’m probably ruling myself out of a large number of possible job openings, if I want to get interested in those things. For the buzzwords nowadays in the Indian startup world are implementation, delivery, execution and getting one’s hands dirty. By professing a dislike for “brick and mortar”, I’m basically declaring myself to be a sort of a misfit for the Indian startup world.

Traditionally, things like what I’ve mentioned above – implementation, execution, delivery, etc. have never been sexy. They’ve basically been the necessary work that has had to be done to get full mileage out of one’s sexy work. The sexy work has traditionally been getting ideas, solving problems, negotiating, cutting deals and all such. And in the traditional model the unsexy work has gotten outsourced to the underlings and the less capable and to “Bangalore”.

But then this model wasn’t very sustainable. A bank I used to work for insisted that quants code their own trading algorithms, arguing that the transaction cost of explaining the algorithm to a specialist coder was significantly higher than the cost of coding it themselves. Recently, an interview with Jay Parikh of Facebook revealed that they’ve stopped bifurcating employees as those that do “day to day work” and those that work on “breakthrough ideas”.

Basically, companies started figuring out that the necessary but unsexy work was actually much more critical than they had imagined, but it was hard to motivate people to do a good job of them. So the next natural step was to play up the roles that had traditionally been unsexy. So execution became part of the mantra. Corporate leaders and gurus would talk about how they were successful due to an extreme focus on “rolling up their sleeves and getting their hands dirty”. And it seems to have worked.

Rather, I think it has worked too well. Implementation and execution has been played up so much that nobody can talk much about the kind of work that used to be sexy. So people don’t talk about ideas any more – the consensus seems to be that ideas are cheap and anyone can generate them, and what matters is only execution. Venture capitalists talk about execution, too, and of investing in companies based on the execution capabilities of the founders. And having invested, they drive their investees to simply “execute away”, and get things done.

I don’t have too many closely observed data points to corroborate this, but my reading of the Indian startup scene is that it is full of headless chicken. The focus on execution is so extreme, and the push from founders and venture capitalists in that direction so strong, that it appears that people have stopped thinking any more. And (again, this might appear speculative, and it is, for I don’t have much data to back this up) it appears that such sectors are headed for a kind of equilibrium where extreme execution is the norm, and people who like to deliberate and think before acting are getting weeded out.

I’m not saying that we should not execute, or give execution its due. All I’m saying is that we’ve gone too far in that direction, to a state where thinking might actually be penalised. And it is this bit that needs to be kinda “rolled back”. But then who will execute this roll-back?

Why VCs continue to fund me-too startups

In a previous post, I had written about how a large number of startups in India are “me-too” companies, and that a sector, once it becomes hot, gets overcrowded. I had also expressed incredulity at the fact that Venture Capitalists continue to fund such “me-too” startups despite knowing that they are copies of companies that exist.

Thinking about it, however, there is one reason that makes the decisions by VCs to fund me-too startups worthwhile – mergers and acquisitions. And this hypothesis is based on M&A activity in the “hyperlocal delivery” (one of those “hot” buzzphrases) space.

Nowadays, due to activity in the sector, the hyperlocal delivery sector has become the equivalent of Pets.com from the turn of the millennium. At a conversation a month ago, for example, a bunch of us weren’t able to fathom how something like Swiggy is valued at what it is, given its decidedly low-tech business of taking packed food from restaurants and delivering it to customers. A couple of months before that, TinyOwl, which is in a very similar business, had raised similar money.

But then two events in the recent (and maybe not-so-recent) past have indicated why VCs continue to invest (and heavily ) in such sectors. Firstly, in February, Foodpanda acquired the Indian operations of Justeat. Both companies are in the business of delivering packed foods from restaurants to people’s homes. And last week, grocery retailer BigBasket acquired Delyver, yet another company in the business of transporting packed food from restaurants to homes.

There is this Panchatantra story about a Jackal and a dead elephant. Basically a jackal comes across a dead elephant, and wants to eat it. But for this, he has to fight off other competitors, and also get the elephant’s skin torn in the process. The story involves how he uses different strategies to outwit different animals. Here is a youtube video, not very well made, of this story:

This is the cover of the  Amar Chitra Katha edition where I first came across this story.

And this link has a good summary of the story, all you need to know. Exactly like how it’s in the Amar Chitra Katha story.

The moral I derive from this story in this context is that there are different ways to deal with opponents/competitors. Some opponents you just fight off and finish. Others you learn to coexist with. Yet other you simply “swallow” or acquire. Each of them has its own set of payoffs.

Based on the deals described above, what we notice in the “transport-of-packed-food-from-restaurant-to-homes” business is that companies are preferring to swallow each other (and coexisting with some others) rather than fighting. And when one company acquires another, investors in the target company get a “soft landing”, and don’t lose all of their investment (though it is well possible that the acquisition happens at a valuation lower than that when the investors invested, but ratchets might take care of that).

Apart from investors not losing too much, the advantage of acquisitions is that existing infrastructure of an erstwhile competitor can be leveraged. And when companies are in growth mode and profit and cash are not as important as growth, an acquisition works really well in generating significant inorganic growth. It is a win-win for multiple reasons.

The fact that mergers are the preferred way of getting rid of competition in the startup world puts a cap on the losses an investor might have to bear on an investment (and there are ratchets in any case). And since the downside is now limited, the risk of investing in a me-too startup is significantly lower. In other words, investors invest in a me-too startup since they believe that in the near-worst case it will get acquired rather than shut down. And as a further consequence, there is more incentive for entrepreneurs to set up me-too startups (assuming they can get funded) rather than venturing into virgin territory.

Uninspiring startups

The other day I suddenly wanted to check out what the “startup scene” is like in India, and so went on to VC Circle, looking at companies that have raised (Series A or B) funding in the last few months. I looked at the last 20 such companies, and quickly got bored. Most of them were in businesses that seemed absolutely uninspiring and banal.

A week ago I was mentioning this to a friend, who chided me for wasting time on VCCircle doing such “research” when Tracxn has it all in one place. And so yesterday, when I was once again in the frame of mind where I wanted to see what’s going on in the startup world. I logged on to Tracxn.

So I couldn’t log on immediately. The site asked me for my “work email” before I could see anything, and when I supplied an email ID that can pass off as a work ID, I got a mail saying it will take some time before I can actually log on. That time turned out to be five minutes, after which I got a message asking me to log on, and I started browsing the section on Indian e-commerce companies.

The experience wasn’t very different from what I had on VCCircle the other day, though evidently this was much quicker and more organised, meaning I could browse more companies with fewer clicks. So I probably got past a hundred startups, not all of them funded (VCCircle reports funding events, so it is biased that way). The tracxn database contains name of company, sector, what their business is, who the founders are (including background), any funding and so forth.

I’m unaware if any biases have crept in to the Tracxn database in terms of listing, but after some cursory viewing, there was a dominant pattern that emerged. And I must admit this is not a pattern that I might have fully appreciated.

So what I found based on the Tracxn database is that most of the startup founders are very young, aged less than 25 (guessing based on their school graduation year). Not too many of them have much in terms of academic pedigree (a few recent IIT graduates here and there, but more the exception than the norm), and not much in terms of work experience (obvious, if you’re starting up before you are 25).

Again the Tracxn data might be biased, but I didn’t find too many technology companies. Most seemed to be of the on-the-ground-getting-things-done kind of businesses. And then there were copycats.

It is not hard to believe, but every time a particular sector gets established or becomes “hot”, it attracts all and sundry. And justifiably so, for the company that might ultimately make money from the sector need not be the pioneer. In fact, there might be a last mover advantage, since the later entrants can learn from the mistakes of the early entrants and set themselves up to succeed better. In that sense the copycats are justified.

But the thing to note is that a large number of such “copycat” companies are getting funded. Some of them might have raised from angels, or small investors, rather than from established Venture Capitalists, but they have obtained financial backing for sure.

Anyways, after my session of looking at startups and analysing them yesterday, the one big insight was that the market is currently rewarding risk taking ability at the cost of all other kinds of abilities. Hot money is chasing startups, so anyone willing to work with a remotely viable idea is able to raise money. How these companies will fan out going forward is anybody’s guess!

 

Bubbles and acquisition valuation

By all accounts, the Indian “startup scene” seems to be highly overvalued, and in a bubble. VCs, flush with cash, and chasing similar opportunities, are said to be overpaying significantly in terms of valuations. Check out this piece by iSpirt’s Sharad Sharma (HT: Saurabh Chandra), for example, where he hopes for a “soft landing” from the bubble:

In the soft-landing scenario, e-commerce companies are able to raise money but at near flat valuations. This allows the fundamentals to catch-up with the inflated valuation. Here the pain is localized. It’s only the early stage investors who are unable to participate in the new rounds that see rapid dilution. The rest of the ecosystem remains relatively unaffected.

An obvious  things for companies to do when they are overvalued is to use their balance sheets – use the overvalued stock price to make acquisitions. This can help explain some of the LBOs done by Indian companies in 2007 (Tata Steel buying Corus; Tata Motors buying Jaguar LandRover come to mind). And some of the startups seem to have internalised this principle, and are making use of their overvalued valuations to buy up other startups. It also helps that the acquiring startups are rich in cash, following fund raises, which helps them to even do part-stock part-cash deals.

The point is that if you are a company that has a takeover offer from a funded startup, you need to keep in mind that you are going to be mostly paid in “bubbled stock” and put an appropriate haircut on that account. I can’t advise on what this haircut percentage has to be, but if you are in the startup world, I guess you can take a guess!

Extending this argument further, if you are an employee who has just been offered a job in a startup, and are going to be part-compensated in equity, remember that the equity that you are being offered is “bubbled equity” and possibly overvalued, and once again you need to impose an appropriate haircut. I might go to the extent of asking to examine the books of a private company part-compensating in stock, but that’s likely to lead to breakdown of talks!

Writing on the Facebook-WhatsApp deal in 2014, valuation guru Aswath Damodaran wrote:

First, it is possible (and perhaps even probable) that the market is over estimating the value of users at social media companies across the board. However, Facebook has buffered the blowback from this problem by paying for the bulk of the deal with its own shares. Thus, if it turns out that a year or two from now that reality brings social media companies back down to earth, Facebook would have overpaid for Whatsapp but the shares it used on the overpayment were also over priced.

Keep the bubble in mind while accepting payment of any kind in stock!

Cross-posted on LinkedIn

Making Zero Rating work without disruption

The Net Neutrality debate in India has seen a large number of analogies being raised, in order to help people understand and frame the debate. Internet services have been variously compared to television, postal services, highways, markets and what not. Things got so bad that that at some point in time people had to collectively denounce all analogies, for they were simply taking away from the debate.

One of the analogies that were being drawn in an argument in favour of Zero Rating was to compare it to e-commerce companies that provide free shipping, for example, or the deep discounts provided by services such as Uber or Ola. If you ban zero rating, other legitimate activities such as free shipping will be next, critics of net neutrality argued, arguing that there would be no end to this. The counter-argument is that free shipping doesn’t disrupt the basic structure of the market while zero rating does. Here is a way in which zero rating can be made to work without disrupting the market.

And it is a rather simple one – cash transfers. Rather than an e-commerce company subsidising your browsing of their website directly (by paying the telecom provider to make your access free), they can instead refund your costs of browsing their sites in terms of a discount. Going back into the analogy space, this is similar to malls that charge you heavily for parking but then offset your parking fees against any purchase you make in the mall.

So Flipkart, for example, can estimate the amount of bandwidth a particular user would have spent in browsing their app (not hard to track at all, especially if the user uses the app), and any purchase on their site can be appropriately discounted to that extent (and maybe a little more to cover for browsing that didn’t lead to a purchase).

This works in several ways. In the current proposed model of Zero Rating, the e-commerce company doesn’t know how many users will access it, using each ISP, so there is uncertainty in the amount that they have to pay the ISPs for such access. By moving to a user-wise subsidy model, they know exactly what users are using how much, and this enables them to target the subsidies much better. Another way in which it helps the retailer is that it doesn’t waste money spending on bandwidth for people who only browse the website without buying (of course, if they wish to, they can subsidise such usage also, but since it can be so obviously gamed, they won’t do it).

More importantly, what such a system ensures is that the internet is not broken. You might recall my earlier post on this topic that zero rating results in “walled gardens” that leads to a broken internet which reduces the overall value of the internet. With a cash transfer scheme (rather than direct subsidy), such distortions are avoided, and the internet remains “free” (of any barriers, not free of cost) and maximum value of the internetwork is realised.

So as described above it is well possible for e-commerce players to subsidise users’ browsing of their apps without distorting the internet, and without using zero rating. And as shown above, doing so is in their interest.

PS: This post also came out of the same discussions from which my earlier post on 2ab had come out.

How Long Tail affects pricing

My late mother never shopped for fruits and vegetables in the Gandhi Bazaar market. She found that the market was in general consistently overpriced, and if we look at the items that she would buy, it is still the case. For “normal” stuff, you are better off going to nearby “downmarkets” like the one at NR Colony, or even Jayanagar Fourth Block.

So why is the Gandhi Bazaar market overpriced? The answer lies in the long tail. In the book of the same name, Chris Anderson talks about products that are not the most popular, but which has a niche demand. In that he talks about companies such as Amazon or Netflix which are successful not because they do a better job of selling the “bestsellers” but because they are able to service well the “long tail” – items that are not found elsewhere thanks to the high cost of selling.

In other words, it is a liquidity story. If the neighbourhood kirana, for example, wants to sell olives, his costs are going to be high as the rate at which he sells olive bottles is going to be so low that his inventory costs are going to increase, and the risks of ageing and spoilage of inventory also goes up. And he has to spend that much more manpower and effort in managing this extra item, so he decides to not sell this item at all (he will have to charge such a high premium to sell such goods that it doesn’t make sense for the customer to buy it).

Yesterday I bought an “imam pasand” mango in Gandhi Bazaar. Now, this is not one of the “standard” mango varieties that are available in Bangalore. In fact, I had never in my life eaten this variety of mango until yesterday, for the simple reason that it is not generally available in Bangalore. The fruit stall in Gandhi Bazaar, however, stocked it. A neighbouring fruit stall was where I used to source the Dashehri mangoes (common in North India but rare in Bangalore) a couple of mango seasons back. Avocados, which are generally hard to find in “traditional” retailers in Bangalore were also available in every fruit stall in Gandhi Bazaar, as were other not-so-common fruits.

So why did my mother find Gandhi Bazaar expensive? The answer is that the fruit sellers at Gandhi Bazaar stock the “long tail” because of which their general costs of inventory are high compared to competitors who don’t. Thanks to the range, they will have a large number of customers who come to them to buy specifically these “long tail” items. And while they are at it (buying the long tail items), they also end up buying some “normal” items. Customers who come seeking the long tail are usually those that are willing to pay a premium, and thus the shops in Gandhi Bazaar are able to charge a premium for the non long tail items also.

 

Thus, if you purely look at rates of “common” items, Gandhi Bazaar, a market which offers the “long tail” will always be more expensive than other markets. Anecdotally, along with the Imam Pasand yesterday, I also bought a kilo of “vanilla” Raspuri mangoes, at the rate of Rs. 100 per kg. At the shop down the road, Raspuri was available for Rs. 90 per kg. The shop down the road, however, doesn’t stock Imam Pasand, which means that the price of Imam Pasand in that shop is infinity.

So if you are only looking to buy Raspuri, you are better off going to the shop down the road. If you either want only Imam Pasand, or both Imam Pasand and Raspuri, though, you should go to Gandhi Bazaar! In other words, the “range” that the fruit seller in Gandhi Bazaar offers implies that he can get away without discounting. Theoretically speaking, though, we can say that the fruit seller in Gandhi Bazaar actually discounts on the long tail items by the sheer act of stocking them (thus dropping their price from infinity to a finite number), and he is using this discount to sell his “normal” goods at “full price”. Ruminate on it, while I go off to devour a mango!