KhataBook vs. Goliath

Last week when I saw the following Tweet from the KhataBook co-founder:

It got me thinking about another David vs. Goliath battle….Dropbox vs. Google Drive. Dropbox is a cross platform file-syncing app that was launched in 2007. Since it first launched everyone kept on saying “this is a a feature not a product” that any large technology company can launch. I used Dropbox when it first came out and it was magical because it just worked – files would get synced.

In 2011, Dropbox had a meeting with Steve Jobs of Apple who wanted to buy Dropbox and use their technology as the core for their upcoming iCloud platform. Dropbox passed and said it wanted to be independent. Then in 2012, Google finally launched their long awaited Google Drive syncing product. Which people had been saying for years was going to kill Dropbox. Well, Dropbox didn’t die and in fact in 2018, it went public and as of early 2020 it has a market cap that is just under USD $7.4 billion.

DBX price chart

I know in Silicon Valley that market cap means it’s a feature or lifestyle business when compared to Apple at $1.3 trillion or Google near $1 trillion. Part of that is because there are many file-syncing products that offer similar capabilities and most consumers can’t tell the difference. And when Google Drive is free, most users will opt for that and that makes it tough to compete against free. But, when you compare the market cap of Dropbox against some of the public companies in India it would rank among Grasim and Tata Steel. Dropbox has built a business that most people would be happy to call their own.

So what is KhataBook? It’s an Indian based startup that has taken the simple idea of keeping track of a small businesses credits and debits on a simple Android app. The startup has raised over $29 million from investors like Sequoia, DST Global and others. I’m guessing part of their monetization strategy will be based on their ability to give short term loans to those businesses. Recently the 800 pound gorilla, Paytm, entered with their own version called Business Khata.

For KhataBook the reality is that they do have an uphill battle and companies like Paytm, Instamojo and many others have taken the wind out of their sail by offering a simple to use debit/credit app. For Paytm this is another product offering and they will capture the lion’s share of the market because of their brand name, reach and distribution. On the other hand, the founders and employees of KhataBook will do well and end up building a respectable business just like Dropbox has. From a VC perspective, KhataBook will not be some crazy 50x return with hyper growth going forward. Of course, I really hope I’m wrong.

Startups and Microfinance

I know, I know what do startups and microfinance have in common? And the last time this was tried it failed miserably…remember SKS Finance? I do and I wrote about it 8 years ago.

So what’s changed for me? A couple of things…first, I had the chance to meet Prof. Yunus at an event in Alibaug with about 100 other people. In 2006, he won the Nobel Peace Prize for founding the Grameen Bank and pioneering the concepts of microcredit and microfinance. Yes, that Prof. Yunus.

Prof. Yunus in Alibaug

The event was hosted by Nishith Desai Associates at Imaginarium AliGunjan their Blue Sky Thinking and Research facility in Alibaug. To say this facility is world class is an understatement! Prof. Yunus talked for about an hour about microfinance and what the future holds by talking about snippets from his new book – A World of Three Zeros.

Before I went to the event I Googled “Three Zeros” to understand the overall construct of the book. The one thing that stuck in my mind was, “how can he say have zero unemployment”. That seems so far fetched and out of touch with reality. Lucky for me, Prof. Yunus covered it very well and he is so clear in his thoughts it’s scary.

Essentially he says, we grow up in a system that makes us want to get a job and then when we don’t have a job we are unemployed. Why even go down that path of working for someone and instead be an entrepreneur then you are never unemployed. At this point he should have done a mic drop.

That was the first point, the second point was a question that was asked by Eric Maimon (yes, a New Yorker based in Bombay). His question was what can we do NOW and not wait for the future when Prof. Yunus and others were planning to gather in June 2020 in Munich.

That got me thinking, what if startups and other mature businesses got into microlending from a corporate social responsibility (CSR) initiative? The idea is that microlending would not be the main function of the company but as a way to help others.

The current trend in the Indian startup scene is funding startups that facilitate peer-to-peer (P2P) loans and SME lending which is just another name for microfinance. YourStory wrote an article about SME lending a couple of months ago and I’m sure since then, another 50 new startups have entered this space. But, I feel many of them will end up in the same situation as SKS. When you have margin expansion, hyper growth revenue targets and KPIs to achieve, you will just screw it up.

So for example, suppose you have a B2B SaaS platform that is used by kirana stores. Over time you can run some algorithms on the data and gauge their credit worthiness. And the interest rate you charge can be based on a benchmark like the State Bank of India FD rate for 1 year + 50bps to cover administrative costs. Yes, I know there is a tendency to say “let’s just charge as much as possible and make a ton of money.” However this activity should be thought of as a CSR activity and businesses will flock to these lower rates…imagine the stickiness of your platform. In the end, everyone benefits and that’s the whole point of what Prof. Yunus has been preaching since the 1970’s.

Introduction to IoT Devices

Initially, this was going to be a simple blog post about building an internet connected device more commonly referred to as Internet of Things (IoT) device. But, as I was gathering information I soon realized there is a lot that goes into building a device. So I decided to break this up into 4 blog posts over the next few months:

What is an IoT Device?

An IoT device is a piece of hardware with a single sensor or multiple sensors that transmits the data from the sensor to the cloud via the internet. Some examples of IoT devices are a fitness tracker, smart door locks, proximity badge readers, etc…

In an industrial setting they are called IIoTs (Industrial Internet of Things) and used to monitor the efficiency of machinery, room temperature and humidity, predictive maintenance, etc… In an industrial setting they have had sensors and systems for decades but that is all old school technology using RS-485 connections which means the data is usually stored locally.

There is a big trend called Industry 4.0 which is the “fourth industrial revolution” and part of that is to have these sensors connect via TCP/IP (the protocol of the internet) and send the data to the cloud where it can be aggregated and analyzed.

It’s easy to find reports on how large the IoT market is and all the big consulting companies will roll out their 2020 and 2025 future trends reports. But, I like to look at what the programmers have to say and what do they think of the technology and space. Below is a graph from the latest HackerRank 2019 Developer Skills Report and you can see IoT is at the top of what technology people feel is the most real emerging technology.

2019 Developer Skills Report – HackerRank

Even in a consumer setting the growth of IoT devices is explosive. Using a Nest Thermostat you can control the temperature of your home from anywhere. Using an August door lock you can literally open the door to your home from anywhere in the world. The Canary camera is a security camera that also monitors the air quality, temperature, and humidity in your home. All these devices have sensors that send data back to the cloud and then using an app you can control the various settings when you are not physically in your home.

The Market Potential of IoT Devices

Why is the market getting bigger and do we really need all these devices? I will not bore you with potential market size numbers but instead give you some examples of how the space is growing and why.

Take the above example I gave of the 3 IoT devices for a home, imagine you have listed your house on Airbnb those 3 devices make it so much easier to manage and understand the usage of your property. Without them putting your house on Airbnb would seem risky.

As I mentioned the industrial complex has always had sensors to monitor equipment but the data was always stored locally. With an IoT device the company can now aggregate all their data and make better predictions and spot trends much easier from a centralized team of machine learning experts.

Lastly, IoT is replacing repetitive tasks that previously were handled by humans such as energy meters. In India, the electricity bill you get every month has energy usage that has been collected by a person that visits every meter and takes the reading. Today, it’s a manual process in the future it will be replaced by an IoT sensor – that can detect the energy consumption, send that data to the cloud and then your bill will get generated.

The next post in this IoT series is about Aggregation, building an IoT device to capture the data and sending it to the cloud.

Open-Sourcing the Telecom Rack

I started my career many years ago in the data center configuring Cisco routers and switches and thinking….damn these “boxes” are expensive as shit. I wasn’t thinking much about the future of the data center as I was more concerned about getting XOT working…yes kids, that’s X.25 over TCP/IP.

I was on the Iridium project for Accenture and we worked besides equipment like the Siemens D900 GSM Switch in a telecom data center.

Software-defined networking (SDN) and the Open Compute Project were established to break the proprietary nature of the hardware used in data centers. Instead of buying a Cisco switch with its software you would buy generic hardware from Taiwan or China and use the open source OpenFlow protocol.

Software-Defined Networking (SDN)

This commodization explains the growth of cloud providers like Amazon Web Services (AWS), Microsoft Azure and Google Cloud Platform (GCP). Companies want to ditch their existing data centers and move to cloud providers that have a perceived lower cost since they are using open source hardware and software to bring down the build-out costs.

While all this was happening in the corporate data centers, I figured the telecom data centers were business as usual with expensive proprietary hardware. Well, I was wrong.

I was recently chatting with a friend who is in the telecom field and he told me the same commoditization is happening in the telecom data center. The initiative is called Network Functions Virtualization (NFV). Reading the NFV white paper is a great way to get over your insomnia and also packs a lot of information in it.

The idea was that the core components of the data center – routers and switches were getting commoditized but the applications and servers were still proprietary in nature. NFV is changing that and it has enabled them to bring down the cost for telco providers but more importantly allow them to use the latest cloud technologies such as containers…that’s for another blog post.

Not surprising is that the NFV initiative was driven by the telcos like AT&T, British Telecom, China Mobile, Telecom Italia, Verizon and several more providers. I guess when you have these heavyweights behind a project it gains traction. With the upcoming 5G deployments around the world the telco providers figured they needed to cut costs somewhere and NFV was a good start. The one place I don’t think we will see open source equipment is the radios in the cell towers…that’s where all the money is going to be made by the 5G vendors like Samsung, Huawei, Ericsson and Nokia.

WeWork Collateral Damage in India

The last couple of weeks have been a real shit show for WeWork. It all began when WeWork started it’s roadshow for its upcoming IPO which was being led by JP Morgan and Goldman Sachs. The IPO was targeting a USD $3.5 billion offering. WeWorks’ last valuation was at USD $47 billion based on their Series H raise from SoftBank back in January 2019.

The roadshow highlighted many of the issues that people have been complaining about, mainly their business model. They take on 10-15 year leases on buildings and then turn around and sell seats on a monthly basis. What really kicked up the negativity was a blog post by NYC Professor Scott Galloway titled WeWTF (click for blog post), and WTF was not We Truly Fine! The blog post highlighted many of the red-flags about the upcoming WeWork IPO. It’s fair to say the professor is probably not welcome at any WeWork facility around the world.

So how does the WeWork IPO train wreck lead to collateral damage in India? Well, there are 2 entities that will get affected – Embassy Group and OYO.

Let’s talk about Embassy Group first, they are a property developer based in Bangalore (Bengaluru) and the local JV partner in India for WeWork.

The JV entity is called WeWork India Management Pvt. Ltd., 30% is held by WeWork and the balance 70% is owned by the Embassy Group. In June 2019, they were hammering out valuations and it was reported the JV was worth USD $2.75 billion. Which meant if WeWork wanted to buy out the Embassy Group it had to fork over USD $1.9 billion. At the time of the negotiations WeWork was valued at $47 billion, but after all the drama some are now estimating the company to be worth under USD $10 billion. Which means there is NO WAY the India JV is worth USD $2.75 billion. If WeWork really has taken an 80% haircut then the JV is probably worth in the neighborhood of USD $600 million as the new enterprise valuation.

The other startup that is going to face valuation drama is Oyo. Oyo is backed by SoftBank which also happens to have funded WeWork and Uber. SoftBank seems to have a track record of going big on these bets and pushing for public market valuations even though these startups don’t make a dime in profit. Uber had the same drama with the founder before it’s IPO and was ultimately fired. Uber is currently trading at it’s all-time lows and has yet to figure out it’s path to profitability.

I’m pretty sure in the coming months we are going to hear about OYO along the same lines of these other SoftBank portfolio companies. In fact the NY Times recently had an article about SoftBank founder Masayoshi Son and how these bets may not turn out as expected. But don’t feel bad for Masa, some of his other bets have done fantastic. In 2000, SoftBank made its most successful investment ever – USD $20 million to a then fledgling Chinese Internet venture Alibaba. This investment turned into $60 billion when Alibaba went public in September 2014.

The Rally that Left Manpasand Behind

Friday, Sept 20th, 2019 will hopefully go down in Indian financial markets as the day the economic boom for the country got re-started. The markets zoomed over 1,900 points or 5.3% for their biggest gain in a decade. The fuse was lit by the Finance Minister Nirmala Sitharaman when she announced several economic measures that should help companies. The theory is that by helping companies they will invest and create more jobs which the economy sorely needs.

One company that completely missed this rally was Manpasand. In fact, it fell below Rs. 10 for the first time ever which is also it’s par value or face value.

I’ve been tracking this stock for a couple of years now. And I got to watch it go up and down and so glad I never invested a single Rupee in it.

The company has been around for 30 years and is a Gujarat-based juice manufacturing company. In 2011, it got private equity money from SAIF Partners a well-respected PE fund. (SAIF is a acronym for Softbank Asia Infrastructure Fund). Then in early 2015 it started a roadshow to build up enthusiasm for its upcoming Initial Public Offering (IPO). You can read the Red Herring prospectus here (PDF) to see how they pitched their offering. What is a Red Herring prospectus? click here.

In mid 2015, Manpasand finally got listed on the National Stock Exchange (NSE) at Rs. 150 a share. All was good and it looked like another example where PE money helped a company grow and everyone benefitted.

Then in May 2018, the wheels fell off when the auditor on record – Deloitte Haskin & Sells resigned. It’s pretty clear from the above chart where the stock ended after this revelation. The brokerage firm Motilal Oswal quickly issued a statement (PDF) saying it’s recommendation for the stock was “under review”. Let me be clear, when the auditor bails on a company that’s a very clear indicator you need to bail on the stock.

Had you sold when the auditor resigned, then at the worst you would have broken even from it’s IPO price. But, if you held on thinking the auditor resigned because they didn’t like the Gujurati food while auditing the client, then that’s on you.

Jio is Unstoppable

Reliance Industries (RIL) this past week held its 42nd Annual General Meeting (AGM) in Nariman Point. Mukesh Ambani broke the meeting into 3 parts:
1. Oil & Chemicals
2. Jio
3. Reliance Retail

The Oil & Chemicals division is the money maker that allows Reliance to expand into new unrelated markets like Jio.

Jio was the star of this AGM and rightfully so, they have 350 million paid connections and on a growth path to 500 million connections. Their GigaFiber service is what everyone is waiting for. I’m on their free GigaFiber trial service and it’s been an absolute delight – 100Mbps download AND uploads. Because of GigaFiber we have cancelled our traditional coaxial cable connection and now watch everything via OTT apps like Amazon Prime, Netflix and YouTube.

When I used to work at Cisco Systems 20 years ago we talked about the Triple Play – Voice, Video and Data over the same connection. Here we are in 2019 and Jio is finally delivering the holy grail of connections. The connection speed will be upto 1Gbps to allow for the large amount of data that is required for broadcast quality high definition TV. The amount of traffic that is taken up by a single voice call is next to nothing and hence Jio is willing to say voice calls are free for life.

The Indian telecom industry has been completely decimated because of Jio. Idea had to merge with Vodafone and many of the smaller players had to merge as well. Airtel is still the largest wireless company but I’m sure will soon be eclipsed by Jio. It’s clear Jio has become what it is because of Mukesh Ambani and Reliance, their on-the-ground execution is unmatched. If they want something done, they figure out a way to clear the decks to make the policy match their goals – not a bad way to work!

What’s unclear is how much money they have spent on building out the infrastructure and the overall cost of getting Jio up and running. But that has always been the style of Reliance, don’t ask too many questions and just watch the stock price continue to go north. Jai Jio!

During the AGM they did several demos of new technology and they were quite cool. The only funny part it is when they did a video conference to someone in New Jersey where it was 2am in the morning yet it was a bright as hell – maybe some new virtual reality stuff!!