Unlike the US where Amazon dominates, India is multi-platform market: Ananth Narayanan

One of the things that's been a constant for me over the years is just learning and putting yourself in different contexts. That's how one grows professionally and learns. So, I am very excited about this opportunity.

I don't think of this as a risk, otherwise, you wouldn't start a business.

But so far you have been associated with companies in operational capacities. It is for the first time you are building something from scratch. How is it different?

It is different in some ways and not different in others. I think having an owner mindset is quite critical for any start-up to be successful. So, if I take the example of Myntra, it was founded by Mukesh (Bansal). Sachin and Binny of course were the founders of Flipkart. But when I joined, the advice I got was that you must treat yourself and think of yourself as a founder independent of equity ownership. And that's how I sort of thought about Myntra itself.

In Medlife, as you know, I invested money. So, I was more founder-like.

In this case, of course, it's my baby, I'll tell you a bit about the differences.

One, is I think, you can set the right strategic direction from the very beginning, in terms of what you choose to do and where you play. And I think that's a very important choice that you make as a founder, because that defines business for the next five to 10 years.

The second is culture, which is very important to me; to get the right set of people. And building the right culture is really what makes great organizations. And here you have an opportunity to set the right culture, get the right values. For example, being fair and founder friendly for us is a value, right. Being a meritocracy is a value.

And the third thing, of course, which goes without saying is you have a lot more responsibility. You're a custodian of the capital that comes in through investors and you have to make sure the investors get a terrific return. You're also a custodian of the brands that you buy from these entrepreneurs. And you have to make sure that they are genuinely household names.

Why did you really choose to start up in this segment? This is something still alien in the India market. 

I have always been a believer in brands. I think there are three things that are happening in India. The first is e-commerce and sales through online channels, which will continue to grow for the next 10 years at 30 to 35 percent year-on-year. Second, as India becomes more prosperous and content becomes more available, Indians are moving from unbranded to branded in almost every segment.

Third, I fundamentally believe that the skills it takes to scale a digital brand are something that's relatively new, right. So, with all of these, we felt it was the absolute right time to get into the brand space and see if we can partner with the right founders and scale and grow the brands.

Second, a lot of brand founders felt that they needed the help, the capital to scale.

Any predictions on how big the market is? What sort of growth can be expected?

The market is quite large. If you look at the brands, we're looking across multiple segments. We're looking at home, personal care, beauty, apparel. If we just take these three, there are more than 4,000 brands, in the Rs10 crore to 70 crore range in India today. And I think that's a large opportunity. And this 4,000 will become closer to 12,000 in four years. We are trying to acquire 50 brands. So, it's a very large opportunity pool.

How is India different from markets like the US? When we talk about the Thrasio model, are you going to do a proper copy paste in terms of how the e-commerce environment is in India, or do you think there will be a need for local adoption? Anecdotally, I don't think that there are too many fashion brands in Thrasio in the US.

Let me answer it in two parts. The first is, by the way, India will always be a multi-platform market. The US is primarily an Amazon market, right, Amazon plus DTC (direct to customer). Here we’ll always be multi-platform across Flipkart, Amazon, Myntra, Nykaa, Ajio, and many others, right, as well as their own DTC site.

Therefore, as you build your product, and you build your technology tools, it's important to be platform neutral. And it's important to be able to go across all these platforms. So, I think that's one very big difference between models in the U.S. and what we must build here from a company standpoint.

The second big difference is the entrepreneurs in India. They are attached to brands. It's not like, you're just selling the brand and leaving it.

Therefore, operating in the financial model has to be a lot more about partnership with terrific founders than to say, `Look, I'll buy you and goodbye’. I don't think that works. So, the way we are structuring all our deals is founders typically stay with us between two and four years. And they also get to participate in the upside of the growth of the branch, which I think is very different.

On the choice of categories, I'll give you a couple of different answers.

In India, there's a unique opportunity, because we're a sourcing hub to create brands that go global, which is very different from any of the models anywhere in the West. So, as you build out a brand, I don't think of us as a Thrasio model, I think of ourselves as a technology lead house for brands.

The second is, I think you touched upon categories. I think, given what I told you about the founders continuing to stay on, it's not just a buy and transact and close. We have the ability here to go after real brands, not just categories.

There are some categories where it's primarily a search category. So, if you're going to buy garden tools, you will basically search for garden tools, you're likely not going to look for a brand. And then what will come up, what you're buying essentially are reviews rating and a sourcing ability.

If you're buying, for example, a personal care or a beauty brand, then the name of the brand matters because people come and search for a particular brand. I think in India, both these models will work. And we're going after both.

And third, you also need to have the right data and analytics to be able to pick the right categories in the right sourcing. So, I think there are lots of differences. So, I don't think of ourselves as a Thrasio of India. I think of ourselves as Mensa of India, which is a technology-led House of brands where we want to sort of build this into a large global play over the long term.

Give me a little context on your time at Medlife. You came at a time when their growth was beginning to explode. From what I understand, the ultimate objective obviously wouldn't have been to sell a company. You would have wanted to build it into a large company. What was the experience like for you, running what eventually was not a very long period? And what did you take away from that?

I think there's a negative connotation in that question which is not necessary, and I believe in always being positive. In every industry where you have multiple players, there is always an opportunity for consolidation, right? And consolidation creates value. It creates value because of many things. It creates value, because capital then flows to the market leader, because you become the primary choice for customers and therefore, you're able to reduce subsidies, you're able to reduce the cost of customer acquisition.

Myntra got bought by Flipkart. Jabong was bought by Myntra and I think there was a lot of value created. In a start-up ecosystem where it's a marketplace, and where there are multiple players doing very similar things, and there is a network effect, it is an important aspect. So, for example, if you're building brands, you can have multiple large players building brands, because you're not – it's not a winner takes all market, right.

However, in a network play, network effects start to play, which is when a lot of traffic needs to go towards one person. And therefore, the money you need to spend towards it becomes higher and higher. Therefore, we thought it was the right strategic thing to do. We're incredibly happy. And we're incredibly excited about the transaction with PharmEasy. I think PharmEasy has an outstanding set of founders, led by Siddharth, and an outstanding set of investors.

And so, for Prashant, Tushar and I, it was an opportunity to say how do we combine forces, so that we create a clear market leader. And the benefits for us, of course, is it was a good financial transaction and so on. But also, by the way, it's a great way to land your customers and your employees into a larger organization.

For the broader PharmEasy guys, it was an opportunity to establish a clear market leadership, and therefore the ability to get a lot of talent and capital in. So, it was a win-win for both. And I think a lot of times, the advice that I give to start-up guys is knowing when to sell, and when to consolidate is as important as knowing when to start. So, I actually feel very good about the entire experience in transaction.

Let's go back to the whole model Mensa is building. Why do you want to restrict yourself only to home apparel, personal care, and beauty? Do you want to play safe and remain in areas with high margin items instead of getting into categories such as groceries, electronics...?

And the short answer is, Never Say Never. But the reason we pick these categories first, is we believe they have high growth, high customer stickiness and high gross margins. Therefore, you can build large and profitable brands out of them.

This is the focus for the first couple of years, and then we'll see where it evolves.

When you're also talking about acquiring brands, these are also again, companies and small start-ups that come up with their own culture. When your business model is built around acquisitions, have you thought about the cultural challenges that you come across having to integrate all of them into your company culture. How would you tackle that?

Yeah, I don't think there is an easy answer to it. You have to be clear about what expertise each person brings. In a lot of cases, when we buy brands, what they bring to the table is sourcing design expertise around the actual physical product. What we bring is technology, digital marketing and some level of operational excellence. So, it's usually complimentary in terms of skills.

The second is, as we look for the right brands, one of the things we do assess is the quality of the founder, and whether the founder is somebody that we want to work with constantly, day in and day out. So, to that extent, the brands that we're selecting are people that we want to work with. So, I think those are the two ways to do it.

Then it is to have an aligned set of goals, and an aligned set of values that I think are important. And the aligned set of goals happens even before we buy, and the aligned set of values will hopefully happen within the first three to six months.

Currently, there's a lot of capital sitting to be invested in the Indian market. Investors’ appetite has grown phenomenally in the last one year, despite the pandemic. Now at a time when venture capitalists (VCs) are ready to take the risk and invest in smaller brands, why do you think these brands would want to get invested or acquired by Mensa instead of raising an investment round?

Usually venture capital and private equity invest in the top two or top three in each category. So, from number three to number 10 doesn't get invested in by private equity and venture capital firms. There is a little bit of a lack of capital in the market, independent of how buoyant it is.

Number two is if you speak to founders ... the answer may vary ... but the founders were excited about working with us and have the following things. The first is they get a financial exit. When you get an investor from outside, you don't get a real financial exit, you may get a valuation. That cash exit comes seven years or 10 years later. You get upfront money.

Third, most founders want to see their brands become household names. They realize some of the limitations and capabilities of what it takes to build a brand from Rs 10 crores to Rs 100 crores or Rs 20 crores to 200 crores and therefore, are looking for operational experience and expertise to help them.

Fourth, as I told you, for us, one thing that matters is to be very founder friendly. So, that's why I keep using the word partnership. And they think that we can genuinely be partners to them, and they will be treated with the right respect as a partner would be. We're both operators and entrepreneurs. We're not investors.

$50 million for a Series A round is massive. Do you think investors in India are more comfortable writing bigger checks in companies owned by people who are well known? Do you think people take precedence over business models in India?

I think investing in the person matters always. When you make an investment, you're not going to control the company or run the company, you're betting on the person to run the company. So, I would suspect that for investors, the entrepreneur always makes a difference. Of course, along with that you need a business model but remember, in most start-ups, the business model evolves over time, because you're trying to figure out how to solve the problem.

In terms of the fundraise, we're fortunate to have started and I think we have a good start. But I don't think this is about the capital. This is all about execution. It is about scaling the brands. We want to get to the right founders, right partners, and then be able to really turbocharge the growth without impacting profitability.

Could you also give a break-up of the debt and equity in this fundraise; from what I understand, it is about $20 million of equity. Could you confirm that?

No, I haven't commented on it before and I don't intend to comment on it now.

In the last few months, we are seeing that debt is becoming an important component in the way companies raise funding. What is going to be the use case for venture debts in a business like yours?

We're buying profitable EBITDA (earnings before interest, taxes, depreciation, and amortization), making businesses, therefore debt can be used for working capital and growth. For founders, the debt with the right business model allows you to dilute much less of your business today. So that's what debt is used for.