CNBC-TV18’s Young Turks is India’s longest show on startups and since 2002, week over week we have been putting the spotlight on young entrepreneurs who have been pushing the boundaries to build innovative & sustainable businesses. Most of you who have taken the plunge know that an entrepreneur needs more than just a good idea, timing or even money. Sometimes to turn an innovative business idea into reality one needs guidance. So, over the years we have put together multiple tutorials with the who’s who of the startup world and corporate India via our Young Turks Mentor platform. And now through our brand new TV series – the Young Turks Masterclass – we are taking this a step further and expanding the range of mentorship.
In our inaugural season of YT Master Class we have joined hands with Matrix Partners India. Part of the Boston based venture capital firm that manages $4 billion in assets across US, China and India – Matrix Partners India was founded in 2006 by founder of Bazee.com, Avnish Bajaj. With a focus on startups in the consumer tech, B2B, enterprise and the fin-tech space Matrix Partners India has $700 million under management. Over the years the #FOUNDERSFIRST philosophy has come to define their approach to investment and managing their portfolio of startups which include Ola Cabs, Practo, Quikr, Cloud Nine, Daily Hunt, Limeroad and MSwipe.
On the show today we bring you the story of Manish Patel’s MSwipe, a maker of point of sale or POS machines for merchants. MSwipe has deployed a network of 280,000 PoS terminals in India across 650 towns and cities since its inception in 2011. Apart from mobile PoS devices, the company also has a payment gateway for processing payments online and an automated payment settlement system for merchants. The venture has raised $65 million to date but its first cheque came from MSwipe back in 2013.
Listen to the podcast here:
Today CNBC-TV18’s Megha Vishwanath is in conversation with Manish Patel and Matrix Partner India’s Managing Director Vikram Vaidyanathan.
You must have several stories on how a startup has chased an investor in order to raise funds but today we are going to tell you a story of how an investor hounded an entrepreneur to cut the cheque and bring him on board as a portfolio company.
Q: Did I tell the story of how the two of you met correctly?
Vaidyanathan: I think you left out the amount of perseverance it needed and the amount of time it needed to get into his office. I was looking at the mobile POS space and it was an early interesting space and I had met everyone in the ecosystem and we didn’t connect with the founders that we were meeting. But everyone, even the banks told me about this company called MSwipe. So, then I went on the website, I mailed the guy but nobody responded. I went to his warehouse, he was a successful entrepreneur who had another business and I couldn’t get a meeting with him. Then I finally figured out that a friend of mine had his number and I texted him at night and he said, “You are just everywhere, I want to give you this meeting,” and he had a very low opinion of investors, he still does and he asked me to come on Sunday because he expected me not to work on Sunday and I went to the meeting on Sunday. That is how it started and he gave me that meeting.
Q: Two questions - We were talking about a time when fintech was still restricted to wallets and everyone thought that, that is going to be the next big thing, which is true to some extent but you said you were meeting a lot of POS-based companies that were looking at making real devices. So what made you go after Mswipe? Or go after Manish who is not even from this space or not engineer by education?
Vaidyanathan: Honestly that is exactly what made us want to go after Manish, which is that he is not from the space. He is doctor by education ended up as an alcohol beverage distributor and he was looking at merchants and technology in such a first principles way that is what we connected with. Looking at how this technology is useful and then how merchants are using this technology and focused on that and nothing else.
Patel: I started getting interested in Vikram’s story because he had gone down an entrepreneur’s journey to an extent and he is an engineer and I thought we will at least get an engineer to understand what we are really trying to do.
Q: That’s an odd kind of recruitment – do you not look at investors who are not engineers?
Vaidyanathan: The first 30 minutes of that meeting, he was quizzing me on what I done on embedded systems.
Q: Talk to us about that amazing Sunday that you actually had to spend with your wife but you ended up meeting Manish in a mall and sat with him for couple of hours?
Patel: So in fact it was bizzare because I really thought that he wouldn’t take the meeting but he did and the last thing I expected was with him to land up with his wife. I was feeling quite bad because he had send his wife on a little shopping spree and there would be these pauses where Vikram would message and I could figure out that his wife was getting anxious because she was circling the mall.
Vaidyanathan: Running joke in the family that I have kept her waiting many times and this is the only time that she says it was worth it.
Q: We briefly spoke about the fact that you had this “never will I ever raise funds attitude”, why is that?
Patel: I was working with a company that had taken a lot of venture financing – any business goes through certain ups and downs and when the going was good, investors were backing them up and when the tide turned a little, which was during the financial meltdown between 2008-2010 things changed. Since I was in the alco-bev space this company was actually producing alcoholic beverages and when things started going south for a while, which was industry wide not particularly for this company, it was bizzare to hear investors wanting to change course of the company and asking them to get into FMCG products, etc just to use their distribution network and defocus out of their core business and start doing something else. What I really learnt from that experience was that you need investors but finding the right one is extremely important
Q: If you were to draw some parallels from that experience to now, what are the major differences between then and now?
Patel: We started Mswipe sometime in early 2011 and it took us about 18 months to get our first product to the market which was a swipe machine you could plug into the audio jack of a phone and it could together work as a POS terminal and ofcourse we had raised our series A round of funding and we had pretty much burnt most of that cash. Early 2013, the RBI just out of the blue came out with a regulation that mandated all acquirers in the country to move their acquiring infrastructure to chip and pin and what that meant was that that swiper was no longer relevant. In fact we had acquired 40,000 merchants in our first quarter and we were really happy and all of a sudden we had to literally go back to the drawing board and spend a bunch of cash on new technologies, let go of all our existing customers and at that point of time I went calling to my investors. I met Vikram – one of the first times I had to actually prep for a meeting – I am going to go to our investor to tell him we need to raise more money, we need to build a new product. I was prepared to hound him and I was surprised when Vikram said, “Fantastic not a problem as long as you work out a plan”.
Q: Did you know what you were cutting the check for?
Vaidyanathan: The honest answer is that the first cheque we cut was for Manish and the second cheque was also for Manish. It was actually his way of looking at merchants and how focused he was on getting the right service and we truly believe that is the only way you can build large base of merchants in this country.
Q: I would like to deep-dive into what you just said and it is pretty much is what the ‘founder’s first’ philosophy teaches and preaches. Talk to us about that, when you say that you were betting on Manish over Mswipe – what does that exactly mean?
Vaidyanathan: Manish is a serial entrepreneur, he had made a bunch of money in life, it was not that he was going to do this for money. He was doing this for legacy and impact and that motivation was really important to us.
And he is very focused. He knows that in India you are building for the kirana shop merchants, and it needs to be of the lowest cost. Even the first product which we had to rollback, he was so focused on getting that cost down, he refused to launch the first 4-5 versions of the product although we were pushing him to launch; but he said, “No I am not going to launch until I get the right cost”. Once you have experienced that with a founder, you have taken that early bet, it is a much easier to repeat that bet. Honestly, the second bet was easier because we already knew what he is going to do with that money.
Q: Apart from the disagreement that you had on the prototypes, tell us one of the biggest disagreements you have had?
Vaidyanathan: I have always been the conservative one it come to the product.
Patel: Vikram feels we obsess too much over irrelevant things like how the product actually looks – for us the design needs to be perfect
Q: You find that irrelevant, Vikram?
Vaidyanathan: I don’t find it irrelevant, he has looked at the ‘M of the Mswipe’ many times but that is what makes him unique, the fact that he wants to be perfect. I think the products we have put out are 10x better than the rest.
Patel: Vikram comes from the point of view that we should expand the market fast and what that really means is we should probably reduce prices, experiment with giving away terminals free and I come from a slightly older school of thought, I think merchants will only value and use our products and services if they have skin in the game and that works for everyone, it’s universal.
Vaidyanathan: Our partnership with each founder is unique. I know with Manish, he is never going to lose his money, he is going to be profitable and therefore my role as his partner is actually to push him on growth and expand his way of thinking on other things. With others who are giving away money, then I am reigning them back saying guys let us focus on profitability.
For us it is a very easy answer, Manish knows that we disagree strongly in private, with data and I will keep going at him. And at some point of time when I think that he has heard about it enough, it’s his decision. It is his company, his time, his life is on the line, he deserves to make that decision and that is how we think.
Q: As an investor what is it that you need to look for when you are investing in a start-up?
Vaidyanathan: A founder who is deeply passionate about a problem and that needs to be a large massive problem. Looking at that problem in a very different way than the others. Finally, some greater perseverance, if you do not have that I don’t think you will last through bad times.
Q: So it’s all about the founder. So, Manish as an entrepreneur what should you look for in an investor?
Patel: Number one is always get a partner on board. So you need to work with this person or group of people at least for half a decade. It is pretty much like getting into marriage, you need to really value it very carefully.
Q: In 2011-2012 fintech was limited to wallets and most believed that those would be the next big thing. That statement did turn out to be true to a large extent but back then chip and pin cards were still not a reality, India was not demonetized and smart phones had not seen the kind of penetration in the country that we have today. While many NBFCs started mushrooming in the fintech space, Mswipe was one of the first in the country to look beyond the obvious and ventured into POS services. As an entrepreneur, you were trying to experiment and get into building out a new business but at the same time you were building out a new market for yourself? Share with us what according to you have been your top five commandments?
Patel: The first thing that is important is you need to be solving a problem because that is where it all starts.
Q: So, identifying the problem is the first commandment - how did you identify the problem?
Patel: I was in the alco-bev business and I had set up a chain of wine and beer retail stores called Milestone Merchandise and I requested my banker for 15 years to give me a POS terminal, I was shocked when Union Bank of India said that they did not provide that as a service. I spoke to bankers that actually did provide this service and the pitch from all of them was that we are not selling the service to merchants, they were really selling a banking account to me and that was not what my interest was, I already had a banker.
At that point in time, the number of cards in circulation were about 400 million and we had just about 1.4-1.5 million terminals in the country and Brazil and Turkey had more terminals than India. So, from every metric that I looked at whether it was cards to terminals, population, etc this was the problem, acceptance of cards was a problem.
Vaidyanathan: So for us founders who experience a pain point themselves usually end up solving that problem in a unique way because it is their own problem and experiencing that problem we call it experiential entrepreneurs.
Patel: I just kind of decided to take the plunge and see what we could do to solve the problem and it all started with putting together a solution, and that is the second commandment. That you need a solution that is at the right price, the right quality and is simple.
Q: So cost would that be..
Patel: Cost is always a driving factor in a market like India, which is a value conscious country. So for us trying to get the best and the lowest price for everything is who we are.
Vaidyanathan: It was not just the cost of hardware but we really focused on the cost to serve. The fact that we were the lowest cost by far in terms of installing the terminal helped us install more terminals. So for Rs 100 somebody installed ‘x’ terminals, we would install 4-5x terminals.
Q: So we have talked about how you managed to keep your cost down but maintain quality and yet remain profitable and since this is a masterclass, give us an insight into how you managed to do that and what was it that the other guys could not figure out? Or why is that they were not able to bring costs down?
Patel: It is because I don’t think any of our competitors were focused on the core problem which is providing a viable and useful service for merchants. Merchants are willing to pay for it. So, at the end of the day the product that we have is a means to deliver our service and hence that cost has to be low. Cost of our service has to be competitive and that is essentially what we really focused on.
Q: So how did you do that?
Vaidyanathan: Having observed Manish versus other founders both in our portfolio and outside, I think it is actually the power of saying ‘no’. I have seen Manish say no so many times: no to somebody who makes a lazy sales man, no to a hardware guy who says that this is the price, no to someone who says that this is the one that needs to be discontinued. He just keeps saying no and it is a mindset. Over a period of time I have seen rest of his team imbibe that mindset.
Patel: That brings us to number three, which us that you need the right partner. You need capital for business and in my mind your investor is your partner.
The fourth commandment is you need a ‘A-class’ team, the best guys on your side and that is hard. It is hard to win some of the best guys over, it’s hard to retain them.
Q: What is unique about your team, especially considering that you were trying to build something in a market that practically did not exist?
Patel: What we have done consciously is also invest in young people. I have failed many times when we have hired from industry or hired slightly more experienced people. Unfortunately that experience comes with a fixed ways of doing things and thinking. So get young folks and then you have couple of experienced hands to kind of guide them. Some of my biggest mistakes have been wrong hires. It puts you back a few quarters.
Q: What is the fifth commandment?
Patel: You need to have a medium to long term horizon, especially in the industry that we are in. Have a medium-term outlook more than a goal and there is always going to be a lot of noise in this industry but you have to stay focused on executing the core plan that you have built.
Vaidyanathan: If Manish sets a plan, he will hit that plan and for us founders who hit the plan are founders who succeed. I always know that he has hidden away some money in the business plan, which is for long term – it will be for the R&D, for the labs, he will have these buffers built-in. Now I know they are there and that is fantastic. Some of our best conversations are over dinner where we do not talk about business at all and we are talking blue sky on if we had started this company all over again what could it look like and some of that blue sky is the long-term. And he has got the money hidden away to keep experimenting.
Q: Do you tend to micro manage or do you tend to completely let go and trust? What kind of investor are you.
Vaidyanathan: On certain things I can get more detail than people would like me to.
Patel: Vikram is far from micro, from an interference perspective. As an entrepreneur sometimes you are so deep in what you are doing, you don’t really take your head off and look at what is happening around. He very clearly understands what the ground level plan is but has a 30,000 feet view of what is happening and many times the early warning alarms that Vikram raises, help us hell of a lot.
Catch all the episodes of Young Turks Master Class here.