Food is in the Air
Cloud Kitchen - the next Big Bet
Confession: The entire editorial board of this newsletter loves food!
Bigger confession: Due to our unapologetic craze for startups, what we love even more is the tireless efforts by entrepreneurs to find new ways of getting us more food, tastier food and easier access to food.
That’s why we got super excited when we heard that the Future Group, famous for its hypermarket chain Big Bazaar, announced that it’s diversifying into the Cloud Kitchen business. Cloud Kitchens, also known as Ghost Kitchens or Dark Kitchens are pure delivery units with no facility of dine-out, often dependent on the logistics network created by food delivery companies like Swiggy and Zomato. The founder and CEO of Future Group, Kishore Biyani disclosed some mouth-watering insights to Economic Times: The group plans to sell rice-based meals at a finger-licking-cheap rate of ₹40 only. The CEO expressed that the food industry is shadowed by thin margins but let's admit it, if there is anyone who knows how to master survival in the face of thin margins, it is the Future Group that also runs affordable garment brands like fbb and Brand Factory. The only way to achieve such rates, as Biyani explained was by leveraging the existing value chains of the group. The group owns rice and flour mills, factories and logistics companies. If all the value chains are used well, Biyani might as well be able to create a sizable dent in the food industry.
While we’re at it: In November’19, co-founder and ex-CEO of Uber, Travis Kalanick’s, ‘CloudKitchens’ raised USD 400 million dollars from Saudi Arabia’s sovereign-wealth fund, leading to a post-money valuation of USD 5 billion dollars. As reported by Economic Times, the 4 years old company is also making an entry in India, currently working in ‘stealth mode’. Earlier this year, it was also reported by YourStory.com that Kalanick has invested in Pune based Rebel Foods, the largest cloud kitchen in India, operating 222 cloud kitchens including Faasos and Behrouz Biryani.
Word: Kalanick also loves food. We know this for sure because Uber’s ‘gold-mine’ UberEats, one of the world’s largest food delivery businesses, is also his brainchild.
The big picture: The Foodtech startups in India have raised as much as USD 2.93 billion till date. The sector has witnessed exponential growth in the last 3 years and is projected to grow from USD 44 Billion in 2016 to USD 86 Billion by 2023. With the big players finally making inroads, the development of the sector in the coming months will be exciting to observe. And of-course among all this, it is our pursuit for more food, tastier food and easier access to food, that just becomes easier.
Are Startups Overvalued?
Yes. But why and when?
To quote Paul Buchheit, the founder of Gmail,
“If the company has 1% chance of being a $100 billion company, then it’s worth about a billion dollars”
One of the primary differences between investing in a public stock vs betting on private ventures is the lack of documented history of the latter. You have no trend or price trajectory that can define expectations but just the idea and execution strategy of the team. The DCF valuation falls soft and perhaps it is the user base growth that defines the expectations for future cash flows. As this landscape of private equity valuations is relatively new and unconventional, the numbers quoted sometimes go haywire and paint an extravagant picture. But the question still persists, why and when are these unicorns overvalued?
More often than not, startups are seen to magnify their value as they inch closer to being listed. Well, there are 2 schools of thought: while one side believes that as the company becomes a better proxy of existing public companies the valuations get better, the other side bases their valuation on the security of returns guaranteed at exit. Ratios of Valuations before and after the public listing, can be a good measure to check the transparency in VC valuations. As the company faces reality check and undergoes regulators’ litmus test to be listed, it offers investors better access to qualified information, just like in case of WeWork. As the caveats to exit and failure of the venture are too high, it makes the investments virtually riskless, and VCs see it as an opportunity to ride the next unicorn story. One such provision frequently afforded to investors is called a liquidation preference: It guarantees a minimum pay out in the event of an acquisition or other exit.
AppNexus, a digital advertising startup sold shares with a liquidation preference that guaranteed new backers at least double the amount they put in if AppNexus is acquired. The study found that it can exaggerate a company’s valuation by as much as 94 percent.
Another common tool used by the industry is known as a ratchet: It is a tool by which the VC investors are guaranteed a minimum return on the IPO of the company. Here is some maths around the concept: From Square’s S-1, we know that its Series E investors paid $15.46 per share for Series E Preferred Stock. The ratchet in Square’s Series E provides that if the IPO price is less than $18.56 per share, the IPO conversion formula is adjusted such that the Series E investors would receive a number of common shares equivalent to a number if the IPO price had been $18.56. What does this mean? Square’s Series E investors were guaranteed a 20 percent return through an IPO. Other incentives that are widely used include the acquisition protections, which typically means last money in, first money out.
These elaborate provisions give investors in unicorn investments significantly more downside protection than public-company common-stock investors. We suggest that more attention should be paid to the contractual terms between investors and companies. Applying a discount factor for each class of securities in the capital structure, one can sum up the costs for all classes of securities and arrive at a more nuanced valuation. So next time you see a headline flash some million dollars of fresh funding, look for what the startup is offering than what it was offered.
Recent Investments in Indian Startups
Microfinance & MSME
The hype is real!
Entrepreneurs are like leopards, patiently observing at first (a.k.a. ‘stalking’): the rising ailments of traditional businesses and then making their disruptive entry (a.k.a. ‘pouncing’) at just the right moment. The only difference: they don’t pounce to take lives but only to ‘put them out of their misery’. In this fast moving world, ‘Entrepards’, as we like to call them, are everywhere! Some searching for their prey, some stalking, and some who finally made the pounce.
The latest stalk-chase-pounce by Entrepards that we’ve caught our hands on is unfolding in the Financial Sector. Microfinance, a financing tool that provides short-term credit breath to micro, small and medium enterprises (MSMEs) as well as nascent entrepreneurial setups, has picked up pace in recent years and rightly so at a time, when the Indian credit market is not at the best of its mood. As the space witnesses traction and opportunity, Flipkart’s ex-CTO, Ravi Garikipati along with Raj Vattikuti has come up with a microfinance company, Davinta Financial Services, primarily focusing on three segments; rural, urban and micro entrepreneurs. Davinta, which caters to both rural and urban populations, has built a unique underwriting model based on an artificial intelligence engine that in ‘near’ real time creates specific customer profiles based on a proprietary list of variables. With an ambitious goal of keeping the venture at zero-percent NPAs, the founders seem to be confident about the prospects and claim that the rural segment will contribute to the extent of 75% of overall lending business.
Our favorite Entrepard, Sachin Bansal probably also saw what Garikapati and Vattikuti did and that’s how we know that the buzz is real. In an interview with Business Standard, Bansal expressed his bullish stance on the microfinance sector. This was further verified through his recent investment move of acquiring 94% stake in Chaitanya India Fin Credit (an NBFC catering to the financial service needs of the rural masses), at INR 739 crores, in September’19. Bansal’s, Navi Technologies is closely working with the NBFC to come up with a digitized product suite for microfinancing. If this is not enough to make you believe that these ex-Flipkart colleagues are probably headed for a bull fight, this surely will: On 28 January’20, Bansal also resigned as Independent director of Ujjivan Small Finance Bank “in the interest of propriety and to prevent conflict of interest”, as he puts it, arising out of the fact that his wholly owned firm Navi Technologies has applied for a banking license.
Zoom Out: Before you think that the fall of the financial sector is alone going to take credit for attracting the entrepreneurs into the sector, we beg to tell you that equal credit also goes to the rising importance of MSMEs and Startups in the Indian ecosystem.
Even N R Narayana Murthy, co-founder of Infosys who chairs a Sebi Panel on Alternate Investment Policy Advisory called out for policy changes in the financial sector by allowing Pension funds, Corporations and Banks to invest in startups.
Jeff Bezos, founder and CEO of Amazon, on his recent visit to India also promised to pump in a whopping USD 1 billion in the economy by extending aid to the small Indian businesses to come online. Amazon aims to digitize 10 million MSMEs with the investment.
Even the Budget '20 reverberated the importance of MSMEs and startups in the Indian economy as the finance minister allocated a record high INR 7,572 crore (8% y-o-y increase) to the MSME Ministry.
The Government’s move to enable NBFCs to extend an app based invoice financing to the MSMEs through TReDS (Trade Receivables Discounting System) was well received by the industry.
To further address the working capital credit issues of MSMEs, a scheme has also been proposed to provide subordinate debt for entrepreneurs of MSMEs. This subordinate debt to be provided by banks would count as quasi-equity and would be fully guaranteed through the 27 Credit Guarantee Trust for Medium and Small Entrepreneurs (CGTMSE).
As the hon’ble finance minister Mrs. Nirmala Sitharaman puts it, “MSMEs are vital to keep the wheels of economy moving.”
With inflation rising, real interest rates falling, clingy NPAs, lethargic credit flow, failing NBFCs & weakened consumer sentiments, the financial world is crying! And we believe, somewhere out there, the entrepreneurs have heard the calling. Hold tight, because they’re coming!
Learning from the Best
words by Late Clayton Christensen (1952-2020) (often known as the Most Influential Business Management thinker of our generation)
Don’t reserve your best self only for your career
Allocation choices can make your life turn out to be very different from what you intended. Sometimes that’s good: Opportunities that you never planned for emerge. But if you make poor choices about how to invest your resources, the outcome can be bad. When people who have a high need for achievement have an extra half hour of time or an extra ounce of energy, they often unconsciously allocate it to activities that yield the most tangible accomplishments. And our careers provide the most concrete evidence that we’re moving forward. You ship a product, finish a design, complete a presentation, close a sale, get paid or promoted. In contrast, investing time and energy in your relationship with your friends and family typically doesn’t offer that same immediate sense of achievement. Kids, for instance, misbehave every day, and it’s not until 20 odd years later that you can say, “I raised a good kid.” You can neglect your relationship with your spouse, and on a day-to-day basis, it doesn’t seem as if things are deteriorating. People who are driven to excel have this unconscious propensity to under-invest in their families and over-invest in their careers — even though intimate and loving relationships with their families are the most powerful and enduring source of happiness.
Management can be a noble profession
Management isn’t simply about P&L statements, meeting quarterly growth and profitability targets, and creating brand awareness. Those are byproducts of good management. Management is about waking up every day and helping people become better people so they can do better work and live better lives.
God does not hire accountants in heaven
…I realized that the way God would measure my life is different than how we measure each
other’s. Instead of aggregating all my accomplishments, comparing them with the accomplishments of my friends and colleagues, and then giving me a grade, he would simply want to know how I helped other people. It will not be about my degrees, books, or awards, but about the lives I was able to assist along the way.