Ganesh Chaturthi, one of India’s most popular festivals, celebrates the arrival of Lord Ganesh, the Hindu God of new beginnings and remover of obstacles. Markedly, one of India’s hottest startups embarked on a beginning of sorts on this auspicious day.
On September 10, Udaan, an online platform for businesses and shop-owners, said cofounder Vaibhav Gupta would take charge as CEO, while cofounders Sujeet Kumar and Amod Malviya would work with him as board members to ensure that Udaan transitions to a CEO-led structure, aiming to be a publicly listed company in 18-24 months.
The decision was intriguing because until now, Udaan’s founders had steadfastly refused to appoint a CEO, citing their close links back at online retailer Flipkart, the camaraderie they shared and the power of decentralised control.
However, appointing Gupta – also known as VG – as the CEO suggested that all didn’t work out as planned for Udaan. It was as much a way to placate investors and distributors as it was a chance to seize the initiative after the Covid-19 pandemic battered Udaan’s business and questioned its very DNA – of growing fast without making money, according to people familiar with the matter.
Moneycontrol spoke to former employees, investors, and people close to Udaan to understand what’s happening behind the scenes at one of the hottest startups of the past five years – it was the fastest to become a unicorn (a startup with a billion dollar valuation) – and how things have panned out.
So far at Udaan, Gupta looked after finance, categories and investor relations; Malviya handled technology and Kumar managed operations, roles similar to what they did at Flipkart, the e-commerce pioneer they scaled to a multibillion giant, earning them stripes as India’s canniest startup operators.
Despite being equals, Kumar has been the face of the company – he is known to the employees and has the most prominent public profile. Along with his senior Flipkart credentials (he was second only to founders Sachin Bansal and Binny Bansal), Kumar is also an active angel investor with many lucrative bets, most notably Unacademy, where he became a board member last year. He also invests in startups via Tanglin Venture Partners, a venture firm where he is an investor along with Flipkart CEO Kalyan Krishnamurthy and Binny Bansal.
According to three people familiar with the matter, Kumar’s broadening aspirations triggered murmurs of his exit from Udaan for months. Kumar, who is from a small town in Bihar and initially wanted to join the civil services, is also known to have good relations with the ruling establishment.
Udaan, in response to detailed queries from Moneycontrol, said talk of an exit by Kumar and Malviya are “absolutely baseless and wild” speculation. It also stressed that the duo would support the effective functioning of a CEO-led organisation and continue to shape the strategic roadmap and investment decisions as active board members.
A suitable CEO
Not only was a CEO deemed necessary, Gupta was also considered ideal for the post, according to the people aware of the developments.
“The buck has to stop somewhere, especially when the competition has gone up significantly. Udaan is the only big B2B player burning serious money and fundraising is becoming harder… VG is the most aggressive and dominating of the three and also found favour among investors,” one person said. “There was also a lack of coherence at the top that impacted overall vision.”
“VG is very numbers-driven. He works 20 hours a day. His only focus is work. He is very articulate,” another person said, adding that Gupta’s McKinsey background also made him amenable to investors from whom Udaan has raised over a billion dollars so far.
Udaan, in response to a query on whether there was a lack of coherence at the top, said, “Cofounders always envisioned Udaan as an institution that is professionally run and will last beyond them.”
It said a CEO-led, board-driven structure would help the organisation evolve, scale-up and achieve its growth ambitions.
Business realities also had a lot to do with the leadership change, according to some of the people. Unlike other business-to-business e-commerce companies like Infra.Market, Zetwerk and OfBusiness, Udaan still burns about $12 million a month on transactions, one person said.
Udaan’s revenue grew to Rs 978 crore in FY20 from Rs 46.3 crore in FY19, according to Entrackr. Its expenditure shot up fourfold to about Rs 3,488 crore in FY20 from Rs 850 crore in FY19.
While Udaan operators in sub-sectors different from these companies, B2B businesses have some inherent rules of engagement.
“Unlike B2C e-commerce, you can’t burn money in B2B because in addition to selling products at a discount, you also have to manage working capital – you are working on a three-month credit cycle. So you have to fund your losses and working capital, which needs an enormous amount of money. That’s why B2B businesses have to crack profits faster,” a person aware of Udaan’s operations said.
While the three co-founders may have different priorities and styles of functioning, there is no rift between them, the people said.
“VG and Sujeet have known each other for two decades and are very good friends. If anything, they decided to put a structure in place to pre-empt any rifts going ahead. They know what it was like when Sachin and Binny fell out at Flipkart and would have wanted to avoid a similar scenario,” said one person.
The appointment of the CEO was aimed at managing Udaan’s image and actual business challenges, the people said. Although Gupta is now the CEO, the three co-founders will continue with the same functions as earlier.
The CEO role only fixes accountability and gives clarity to investors and employees – a traditional structure for a company that has over 3 million users, 30,000 sellers and a valuation of $3 billion (over Rs 21,000 crore).
It’s unclear whether the CEO structure will pave the way for Kumar and Malviya’s eventual exit even as they continue on Udaan’s board of directors. For now at least, the founders will need to stick together as they navigate an intensely competitive landscape that has several players with deep pockets.
Founded in 2016, Udaan’s promise of organising India’s trillion dollar wholesale commerce space using technology was unique. Udaan would bring retailers, traders, wholesalers, distributors, manufacturers and brands on one platform when over 90 percent of retail in India took place through an estimated 20-25 million kirana stores.
With Udaan, retailers across categories would be able to order, get credit and delivery.
For the first six months, they analysed the market by speaking to retailers and suppliers, before launching the beta in November 2016. In less than two years, they were already valued at a billion dollars – an unprecedented speed for any startup, let alone one in an offline-heavy nuts-and-bolts industry like Udaan.
It was valued at $3 billion in 2020, having raised a billion dollars from investors such as Lightspeed Venture Partners, DST Global, GGV Capital and Tencent. Notably though, Udaan’s valuation crawled from $2.8 billion in 2019 to $3 billion in January 2021 – unlike its previous euphoric rise – largely due to the pandemic, insiders said.
Lightspeed, traditionally an early-stage investor, bet big on Udaan, investing over $300 million from its India and global funds (its investments in other companies are a fraction of that amount).
Lightspeed India head Bejul Somaia and his US colleagues were said to have spent a significant amount of time sorting out Udaan’s issues, wanting to steady the fortunes of an outsized bet.
In response to detailed queries from Moneycontrol, Somaia said, "Your insinuations, on all counts, are absolutely incorrect. We would urge you to refrain from speculating baselessly."
Udaan appointed investment bank Goldman Sachs six months ago to raise a large round of funds, which has not happened so far, the people said. It may now raise debt instead.
If Udaan plans to list soon, it remains to be seen how stock market investors will value a B2B company that’s a lesser-known brand than its consumer peers, how Udaan will plan a pre-IPO round, and what upside it will sell to prospective investors.
Goldman Sachs declined to comment in response to queries from Moneycontrol.
Over 50 percent of Udaan’s revenue comes from selling fruits and vegetables and the rest is split between apparels, pharma, mobiles and general retail items. Reducing food and increasing the share of fast-moving consumer goods was a key part of Udaan’s effort to become profitable, but this has seen challenges, a report from The Ken said.
Udaan is the largest eB2B company in India with an 80 percent market share and over half a million products across 2,500 brands on its platform, Bernstein said in a report in February.
Udaan makes money via logistics services and lending. Its logistics company, Udaan Express, manages the deliveries and its financial services arm, Udaan Capital, provides credit support to retailers.
But competition is nipping at its heels. Flipkart Wholesale, the B2B arm of Walmart-owned e-commerce giant Flipkart, said it plans to expand to almost 2,700 cities in India. Amazon has been ramping up its fulfilment network in India. Reliance’s JioMart said it has seen a huge surge in kirana orders and plans to onboard 10 million merchants in three years.
Apart from B2B, Udaan has been stepping up its consumer-facing business through Pickily, its online supermarket app that promises delivery of fruits, vegetables and daily essentials in 30-45 minutes. The hyperlocal grocery delivery space is equally competitive, with Flipkart, Amazon, Dunzo, Swiggy, and Grofers.
Udaan said it has invested more than Rs 4,000 crore in the past 12-18 months across different technology, supply chain, category, credit, people and compliance to accelerate and strengthen capabilities to serve its customers better. While it laid off over 1,000 contractual employees at the height of the pandemic, the management said it has recovered fully to pre-pandemic levels, and expects its annual revenue rate to be about $4 billion by the end of the year.
Udaan vs FMCG
The management rejig also comes when Udaan faces allegations of monopolising the distribution of goods to retailers by some of India’s largest FMCG companies.
Gujarat Cooperative Milk Marketing Federation (GCMMF), which sells Amul-branded dairy products, and Parle Products have stopped supplying goods directly to Udaan, according to a report in The Economic Times.
“We are not supplying to Udaan,” GCMMF managing director RS Sodhi told Moneycontrol. “We have 10,000 distributors who create employment for 1 lakh people. We have worked with them for 6-7 decades. We don’t want to sacrifice distribution. We have an Amul cart app that can do the same.”
Udaan has filed a complaint with the Competition Commission of India against Parle Products, alleging that the company was abusing its dominant position by refusing to supply its products directly to the startup.
CEO Gupta has his task cut out – attempting to straddle growth, profit, fundraising, going public and keeping his co-founders and employees in good cheer.
In an otherwise epic, unprecedented funding boom for internet startups, Udaan’s future could serve as an industry bellwether and determine the future of many of India’s most powerful startup executives and investors.Disclaimer: JioMart, one of Udaan's competitors is owned by Reliance Industries Limited, which owns and operates Network18, which runs Moneycontrol