Three's company

Since this magazine’s inception, we have dedicated a significant portion of our effort towards covering game-changing, edgy startups backed by enthusiastic, ambitious and passionate founders, who have targeted both domestic and global markets. It would be fair to say that, but for a lack of space, we may have covered many more.

India, the land of entrepreneurship, as often noted, has no dearth of entrepreneurial opportunity, given that many markets and segments are still unorganized. However, in our engagement with the ecosystem over the last three years, a few sectors in particular have taken prominence with respect to entrepreneur and investor interest-healthcare, education, clean energy, consumer internet and mobile. The latter two in particular have been key focus areas, with e-commerce leading the pack.

With respect to internet businesses, two clear-cut categories have emerged-those which use the internet to deliver a service or a product to make internet usage more effective. “There has been an increase of technology consumption by small and medium enterprises and consequently many new business models targeting this segment have emerged,” says Bharati Jacob, Founder Partner, Seedfund. The bulk of India’s startup activity has been fuelled by a maturing ecosystem which has gained strength particularly in Bengaluru, Pune, Chennai, Mumbai, Delhi and Hyderabad. Industry associations like TiE (The Indus Entrepreneurs) and Nasscom have provided mentoring forums to early stage entrepreneurs, while an emergence of some quality incubators (physical and virtual), e-cells, angel funds, B-Plan competitions, and accelerators have been catalysts to this evolution too.

“The amount of investment available has also increased despite the downturn in 2008-’09 and in the current slowdown too, with angels, seed funds and even larger venture funds investing in very early stage companies,” highlights Sandeep Singhal, Managing Director and Co-Founder, Nexus Venture Partners.

While technology companies and mobile-based businesses are still leading the deal flow, brick and mortar companies are also getting funded. “The year 2011 saw close to 200 deals in early stage startups, this was the highest in the past 10 years,” points out Varun Talwar, CEO, The HR Fund.

However, the picture isn’t fully rosy and many logistical and administrative gaps continue as challenges. Hiring senior talent remains hard for startups, particularly those that haven’t raised external funding. Sameer Guglani, Co-Founder, The Morpheus, an incubating and investing firm, feels the major challenge for entrepreneurs lies in the fact that the ecosystem is still heavily biased towards companies which are part of a dominant trend.

In the past year it’s been around e-commerce, group deals and, of late, in the taxi booking segment.

“A disproportionate amount of money and attention is going here and proves to be a challenge to those who aren’t operating in this sector. So those solving a problem, because they are passionate about it, have difficulties in scaling a venture,” he opines.

Thankfully, none of the above challenges have been a dampener to entrepreneurship or the number of people opting for it as a viable career option. It’s been driven by awareness, and media, too, has played a part here.

As far as exits go, it’s been a mixed bag. IPO exits have been few since many startups are still nascent nor are current market conditions conducive for such exits. A lot of entrepreneurs are ensuring that they have an exit strategy in place. Many investors are of the view that mergers and acquisitions (M&A) will take precedence as entrepreneurs consolidate their market position.

Overall, investors and entrepreneurs are bullish on the outlook for the ecosystem, expecting more exits and further improvements in number and quality of entrepreneurs.

Money talks

When we featured Prizm Payment Services in Entrepreneur’sNovember 2009 issue, Managing

Director Loney Antony (50) had just acquired Reliance Money’s Point of Sale (PoS) business, pushing its total count to 5,500 PoS terminals.

Since then, the startup, that’s in the space of ATM and PoS deployment, maintenance and handling back-end transaction processes, has achieved several significant milestones in terms of client acquisitions, investor funding and business growth.

The most crucial development facilitating the same has been a tweak in its business model-outsourcing to transaction-based, that has also increased revenues from Rs. 27 crore in FY’09-’10 to Rs. 340 crore in FY’11-’12.

The turning point occurred in April 2010 when Prizm signed on Axis Bank as a client, taking them into a new direction. Axis Bank then had 4,000 ATMs, and as of March 2012, its network has grown to 10,000 ATMs. Apart from fixed fees charged for deployment and maintenance in its earlier, traditional model, Prizm now earns revenue on every transaction.

“The traditional model we offered was based on two fundamentals-cost and operational efficiency-managing it cheaper and better for banks. However, other banks were reluctant to use this model as they thought the cost and operational efficiency may not be very high. So we devised an innovative model based on pay per transaction and went to larger banks. Now, we determine where to place an ATM, how to deploy and manage it,” Antony explains to us.

The firm charges a flat fee around Rs. 14 (varies from bank to bank) per transaction as opposed to fixed fee of Rs. 50,000-60,000 per month, per ATM, excluding rental of premises in the outsourced model. “This gave a new comfort to banks as they didn’t have to put down any capital, monthly fixed fee, or find suitable locations,” he highlights.

As of March 2012, Prizm Payments has 11,000 ATMs deployed or managed for banks, 35,000 PoSs and the firm’s run on the back of 900 employees across 16 offices, with a presence in over 100 locations. In its current model, Prizm Payments undertakes risk for banks, holding all the power to shut inactive ATMs and move them to new locations. The founders targeted banks with a good brand recall value or large customer base to sell the new model. ICICI Bank and HDFC Bank soon became clients and today it has six customers, both private
and multinationals.

“Most banks now prefer a transaction based model; it was a transformational move,” Antony mentions. For those with lesser brand presence or lower card penetration, it offers a hybrid model—a combination of fixed fee and transaction model. At present, the startup is in the process of completing a deal with 25 public sector banks.

“It’s a no-brainer. Only three percent of payments in India happen electronically. In a country moving toward electronic payments it’s a good idea to have a portion of revenues linked to transactions. Nor do we want to be a software or hardware company getting fixed fee,” says Antony.

Prizm Payments offers clients a hybrid model for its PoS business and hasn’t migrated to a completely transaction fee model here as yet. It charges for maintenance, back end functionality and transaction, the latter’s pricing varying from Rs. 300-Rs. 400, per transaction. So far it’s rolled in six clients for the PoS business, with State Bank of India and Corporation Bank as main customers apart from some small private banks.

“They are a year ahead of revenue and bottomline projections, and have succeeded in establishing themselves from a no name startup to a company many banks are choosing as a partner,” says Mohit Bhatnagar, Managing Director at Sequoia Capital India.

Emerging payments, its newest vertical, is piloting its first offering, mSwipe. This is a card reader which can be fitted on any mobile making it a PoS device, useful also for low value and cash transactions. Prizm is selling this through banks, which in turn sell to merchants. “We are seeing a convergence of payments in the mobile space, and we want to use it as a payment device, for processing transactions, especially in the home delivery segment,” says Antony. Axis Bank is its first customer here, and it is in pilot with a few merchants. “We will roll out a certain number of devices and see acceptance before we aggressively roll out more,” he adds.

The firm’s challenges have largely been centered around people and infrastructure. Constant innovation has been one of its conscious decisions. In addition, it’s ramped up senior management and raised more funding in the last 15-18 months, from Axis Bank, Sequoia (Rs.  55-56 crore), Silicon Valley Bank and some small investors. “This makes the consolidated amount from all sources Rs. 85 crore over the last four years,” says Antony. With 300 million debit cards and 18 million credit cards currently in use in a country with a population of over a billion, Prizm’s growth story has just begun.

It’s not all garbage
In 2009, when we first covered Manik Thapar, Founder of EcoWise Waste Management Pvt. Ltd., the phrase ‘early stage’ could be easily associated with him. Much of his work was concentrated in and around Noida. Thapar had then covered about 1,800-2,000 houses and was slowly building up.

Today, Thapar has expanded across the NCR-Noida, Gurgaon, Ghaziabad, and Faridabad-and has also started operations in Lucknow this year. The company, today, collects garbage from 25,000 houses, 850 factories, numerous malls, hotels, and also many companies on a daily basis.

During his studies in the US, Thapar realized the need for waste management back in India and closely studied the sector in that country. On his return to India, in 2006, he decided to venture out in the waste management sector with EcoWise Waste Management.

“Throughout my stay abroad, I found that NRIs and visiting Indians agreed on two things fundamentally about our country, bureaucracy, pollution and filth on the streets. After giving it some thought, I decided that there isn’t much that I as an individual can do to reduce bureaucracy, but there was a lot that could be done to clean India physically,” says Thapar.

Never one to rely on venture capitalists, Thapar’s father supported him initially but business has been self-sustaining even when we met him initially. What has changed is the contribution he is making towards the environment. Thapar, in 2009, was treating around 40 tons of waste a day through composting and recycling methods. He had then managed to divert 5,000 tons of waste from ending up in landfill sites. Today, EcoWise diverts 18,000 tons of garbage annually from ending up in landfill sites.

In Lucknow too, business works on door–to-door collection, and Thapar’s tied up with other garbage collectors for the same. To achieve further geographic scale, he decided to change his business model and EcoWise now works with franchisees, starting this year. “I’m looking to try out a franchise model to get growth and access to different cities. It’s time we step out of NCR and go to different cities across India,” he says.

EcoWise exists across the entire spectrum of garbage disposal, which includes transportation, segregation, treatment and disposal. This model of work continues for EcoWise, but Thapar has now increased his reach in terms of opening up to the government sector. “We have also got into government contracts, small as they maybe, but it helps us build experience in working with this sector,” Thapar says.

These are small tenders from civil authorities like collection of garbage from municipal bins, removing silt from drains and Thapar hopes in the next two-three years this should expand in a big way. “It is difficult to get a break in a government contract as there are strict and stringent requirements in terms of experience of working with the government, we have been lucky to be able to do such work,” he says. Within Noida and Greater Noida, the startup’s covered quite a bit but resistance from Resident Welfare Associations (RWAs) who want money from EcoWise for garbage collection continues to be a hurdle. Adding to his woes, are other social and societal stigmas associated with the nature of his business.

Most, if not a majority of people that Thapar meets as potential hires, see this field of work as degrading and something that is better left to the underprivileged. “These issues are hampering growth when it comes to the household space,” says Thapar.

To counter it, he’s focusing energies on the industrial sector, and expects it to be a major growth driver for EcoWise. “We started with the Patparganj industrial area in Delhi where we have started with door-to-door collection on a daily basis, as well as numerous factories in Noida and Faridabad. Operational growth has now shifted from household to industries as they are easier to approach. People are more aware and they have a real problem in disposing waste,” says Thapar.

In terms of revenues, EcoWise has experienced growth of about 150 percent over the last three years. The market size for the company continues to be enormous despite thousands of big and small players in the sector. Recycling of waste alone within Noida is about a Rs. 50-crore industry per month or about Rs. 600 crore per annum, according to Thapar. In terms of households, Noida has a population of about five lakh and generates 500 tonnes of waste per day. Even if 20 percent is recyclable, Thapar is looking at 100 tonnes of waste a day. A tonne is one lakh kilograms and if Thapar recovers Rs. 5 per kilogram from recycled waste, he is looking at daily revenues of Rs. 5 lakh from recycling from household waste alone. Such is the revenue potential of Thapar’s business. “It’s a business which is evolving and will take some more time to completely takeoff.”

Thapar has persisted and expanded his business since 2009 when he was still testing the waters with his model back then. “The learning specific to this business is that it’s very labour intensive, without which little can be done. I’ve also realized that one cannot be involved in one process and has to operate from collection to treatment. This was the operating model I wanted to follow since the beginning and now I am certain it is the right way to go. It has not been all that profitable but it has been a very satisfying journey. “We are taking it to the next level now and I am sure the financial results will start coming in,” says Thapar.

Patience first. Patience last

When we finished meeting the founders at veriCAR three years ago, it would not be too wrong to say that for the first time, we were dropping our mace of objectivity and rooting for these guys. We had to. Jayesh Jagasia and Kartik Singhee were once of our kind-journalists.

They were auto journalists to be precise, and so they (and their courage to break away to start up) had our vote. To top that, they had started up within their area of expertise-cars, and that too during one of the worst economic dips this country has ever seen.

Started in December 2009, veriCAR had a business model unseen in the country till then. The company offered a used-car advisory service targeted at people looking to buy used cars. In effect, the duo wanted to help buyers find the right second-hand car at the right price. For a fixed fee, Jagasia told us then, the car was run through a pre-set list of physical and mechanical checks, covering everything from the car’s interiors to the engine to its driving performance.

Initially, the duo put their bets on the buyers, working exclusively with them and not used-car dealers, lest it be perceived as a conflict of interest. Over time, the duo tweaked their company’s model to make it an independent certification agency-not one that caters only to car buyers.

To us, given that it was historically evident that used car sales skyrocketed during slowdowns, veriCAR had looked to have it worked out pretty neatly for itself in those conditions.

But as it turned out, it was not enough. Not too long later after we met them, veriCAR shuttered its doors one last time. While it is never the best news to hear about a promising startup shuttering down, the learnings of such an event are priceless-for the founders and other entrepreneurs as well.

Jagasia tells us that the two called it a day on veriCAR exactly a year after it started-in December 2010. The reasons were not complicated. “It was more of a philosophical error, a mistake in belief.” He revealed that the duo had worked on a yearly review plan, where they were to look at their goals for each year, and work off them towards the next year.

“But at the end of the first year, we saw that we had not achieved any of the first year targets. While we were still a profitable business taken in isolation, we had not scaled to the extent we had predicted,” he says.

He agrees now that just one year is too short a term for any startup to be assessing itself on goals and scale. “We always knew we had aggressive targets, but we were also confident of achieving them. You could say we were just two young boys, who did not have the patience.”

The targets were not met for a couple of reasons, which Jagasia says are proof that perhaps their basic concept was ahead of its time. “We say that the market was not evolved enough on both the buyer and the seller side.”

According to Jagasia, their learning was that the typical Indian buyer was just not appreciative of the service they offered. He was typically looking to thrash around a used car for a year at most before he bought a new one. As such, he was not willing to pay Rs. 1200 to Rs. 1500 for a certification service. “We had people negotiate on that fee with us, which went against our grain.”

The seller was always going to be a tough nut to crack. “Most used car dealers are hole-in-the-wall operators who are in a rush to clear their inventory. They are not evolved enough to understand the value we bought to them.”

At the time we first met them, Singhee had told us that they were in the final stages of forging collaborations with banks and leasing agencies, for whom they would certify the repossessed and used cars respectively.

Jagasia tells us that they made some headway with this business-to-business approach. “We did do a pilot for Kotak Mahindra Bank for their repossessed cars, and did collaborate with leasing agencies too. But either their processes took too long or we would get stonewalled at some level in their organization.”

Back in 2010, the duo had sold a minority stake to The Morpheus in a non-cash deal in return for mentoring and guidance for a period of six months. Morpheus’ Sameer Guglani says that the crucial bit in the undoing of veriCAR was that they did not give time to the business and also overestimated the reach of their abilities.

“They were a team of two plus two. And their work was way more exhaustive than, say, starting a dotcom. It was eight of hours of hard work. I think the concept was phenomenal but ahead of its time. The market was surely not evolved enough and given that both of them had personal commitments, I think it was a fair call by them to shut down. Though I wish they do start it up again when the time is right,” he says.

In the end though, says Jagasia, it was a matter of patience perhaps. “Since then, I have met many startups who stayed in the game till their third year and managed to scale up afterwards. We were in a bit of a hurry and patience did not come easily to us at that time.”

Today, Jagasia heads the India operations of Sewell’s Group, an automotive solutions and consulting firm with its headquarters in Melbourne, as Managing Partner while Singhee has gone back to be the Associate Editor and Anchor of ‘The Autocar Show’ on Bloomberg TV. But veriCAR has stayed with them in a sense. Jagasia says that while he cannot connect the dots backwards on the decisions he takes at Sewell’s back to veriCAR, there is no doubt in his mind that the experience of starting and running it has made him a more evolved professional.

“That one year of experience was so rich. The evolution was so dramatic, even on the personal front, that I cannot disassociate what veriCAR taught me from my current and future roles,” he says. In fact, Jagasia asks for such an experience to be made mandatory for all B-School students, such is its value. “I think every student should be asked to start a company from campus, where all the infra is anyway available, in the second year of studies. The experience there is something that no academic education can replace. It will be an invaluable experience for them, no matter their direction.”

Signing off, Jagasia lets us know one more thing-he does not want to call veriCAR shut down. “Let’s call it suspended animation. The market will evolve one day. And we can restart veriCAR again then. Perhaps not as founders, given our current roles, but there are means and ways.”

(With Pranbihanga Borpuzari and Ankush Chibber)

© Entrepreneur India September 2012