"When we started in 2010, it was probably one of the worst times to start broking as a business. So, raising capital was like a no-go of sorts. In the first two years, we had already turned profitable."
Zerodha Founder and CEO Nithin Kamath. Illustration: Shyam Kumar Prasad/FE
Zerodha is one of the few unicorns in India without any external funding. At IAMAI’s India Digital Summit 2021, Sunil Jain caught up with the discount brokerage’s founder Nithin Kamath and spoke to him about the pros and cons of PE funding, about ‘flipping’, of cut-paste copies of Western businesses, etc. Excerpts:
What made you decide not to have an investor? When we started in 2010, it was probably one of the worst times to start broking as a business. So, raising capital was like a no-go of sorts. In the first two years, we had already turned profitable. Around 2013-14 is when we could raise money, but we knew that if we raised money, we would have to start chasing revenue and growth.
Are you recommending being bootstrapped versus getting investors? Not really. I actively invest in other start-ups, but investors’ money brings certain obligations. Not everyone enjoys those obligations, and not every business can be built bootstrapping. If you asked me whether I can build Zerodha with no outside money, I cannot today.
You don’t have that luxury of time… Yeah. When we started, the first competitor came in only after three-four years. We could kind of take it easy then, without having to raise capital.
Does bringing in investors also mean you get forced into a certain business model? It is possible. A lot of investors help businesses grow. Being bootstrapped sounds heroic but the odds of it working are poor; only those who were there at the right place, at the right time, have survived. It’s about what feels right for you as a founder and what feels right for you as a business. If it requires capital, you should raise it.
How are you different from some of the other people who invest? We have a large public market exposure. The private one we do is under Rainmatter, which is like an incubator. Around 2015-16, we realised the market in India was very shallow, so we tried to grow it. Zerodha offered a trading platform, so we started inviting start-ups who can build on top of us. When start-ups came to us, we realised that they needed capital as well. So, we started cutting cheques; but our only ROI consideration for us was: Can it help a retail trader in the market and can it expand the Indian capital market ecosystem? That was, essentially, the basis on which we invested. And some of these guys have built some of the coolest trading and investing platform.
Give me some examples … The most popular one is Smallcase, a thematic investing platform. When GST was being introduced, it was obvious some companies will benefit from it, so Smallcase had a basket of stocks that will benefit out of GST. Instead of buying the stock, you can buy the idea itself. So, you have this bunch of ideas which are listed as a basket of stocks. The good thing with Smallcase is that because it is a basket of stocks, there is diversification.
Then, there is Sensible that has built a very nice options trading platform. There is Streak, which has built a very nice back-testing trading platform for non-programmers. There is LearnApp that has built an education platform…
Are Indian apps, by and large, copies of western ones? You might say Ola is a copy of Uber, but actually, the way they have gone about building Ola is very different; the user-experience might seem similar, but the back-end is actually quite different. One reason for cut-paste references is that it makes it easier for the investor to relate to. We started in 2010, while Robin Hood started in 2014-15 but if I were to meet a US investor, it is quicker to say that we are the Robin Hood of India!
It is also true, the US has probably tried most ideas but to build the business here, it has to be very India-specific because the Indian audience is completely different from the US audience. A question that arises in the context of foreign investors is that they encourage you to flip, to register overseas; Sanjeev Bikchandani of Naukri raised this issue quite publicly recently. Ideally, we should try and keep our wealth here.
But if the money is coming from abroad, it’s only fair you listen to the investor. How can the government ensure Indian investors put in more money? Encourage people to think about moving money away from gold, bank deposits and real estate. Incentives have to be given to get people to actually look at investing. I can see people in my generation willing to invest a lot in Indian entrepreneurs, so I think that change is happening.
When you look at Silicon Valley, it has the university system, the financial system, everything is sort of working together … is that happening in India? I don’t think it’s there yet. But the enablers are getting put in place. If people make money investing in start-ups, there will be more people wanting to invest; over the last 3-4 years, you see a lot of angels. We need to make it easier for founders to raise money from angels, etc, but things are falling into place.
Is there a role for the government in all this? Keep in mind that without the GPS—that came out of US defence—you couldn’t have an Uber … The Indian equivalent of this could be Aadhaar and UPI … We always look at the government for freebies whereas it’s role is to put the enablers in place. The only reason my business is at the size it is today is because of Aadhaar. Until 2016, the know-your-customer was a 40-page document; it used to take us 2-3 weeks to comply. There was no way we could add 100,000 customers in a month. So, in 2016, when Aadhaar started, we started on onboarding customers using Aadhaar. We were at 100,000 customers then, we are at 4-million-plus today. We add 200,000 customers a month now versus 100,000 customers in six years without Aadhaar. Aadhaar was that enabler that helped a business like ours to grow large.
UPI for IPO got launched last year, and within one year, we contribute 10% of all IPO applications in this country. Jan Dhan is another enabler.
You spoke of how Aadhaar and UPI helped start-ups. Nandan Nilekani is working on Beckn which allows an order placed on an Uber or Ola to be fulfilled by even someone on WhatsApp or a Meru. iSpirt is working on flow-based lending models … Do you see these kind of technology ideas being the next big thing from India? Those aggregator apps haven’t really scaled anywhere in the world. The incentives are not really aligned right now with the underlying businesses. Super apps, like Alibaba and others, have done a great job in China, but this hasn’t really worked the same way in India.
Getting a super app right for the mobile is extremely complex because you have a 6-7 inch screen. And as soon as you add one or two extra menus, it just leads to clutter and then your drop-offs increase, etc. So, we need to see how that plays out.
Do you have a view on data protection? Like the current controversy over WhatsApp sharing data. Normally, it should be up to the user. For example, if I don’t like WhatsApp’s data protection policy, I have the option to go use Signal. As long as the user has an option, it is okay.
You can move from WhatsApp to Signal if there is interoperability and you can take your WhatsApp chats to Signal in the same way you can with your browser data. Should government mandate interoperability? The more the government interferes, the more it will stifle innovation. The issue here is actually how these businesses have become so large that they essentially control our life in all forms. Maybe that’s a bigger problem to solve.
Do you think that Big Tech firms should be broken up like many are suggesting? It’s a tricky place. I don’t really have a solid view on it. But I think it’s a problem if three companies in the world control most of the world.