Forbes India 15th Anniversary Special

Flipkart: Born to race

How will Flipkart, the internet company from India backed by $7 billion of venture capital, be remembered? As a tech startup that solved problems at high velocity

Published: May 22, 2018 12:30:41 PM IST
Updated: May 22, 2018 01:01:23 PM IST

Flipkart: Born to raceSachin Bansal (left) and Binny Bansal studied at IIT-Delhi and founded ecommerce giant Flipkart in 2007
Image: Hemant Mishra / Mint via Getty Images
“I know you’ve taken it in the teeth out there, but the first guy through the wall. It always gets bloody, always. It’s the threat of not just the way of doing business, but in their minds it’s threatening the game.”

These are lines uttered by baseball team Boston Red Sox owner John William Henry II in the film adaptation of Michael Lewis’s book Moneyball. Henry says them to Oakland Athletics general manager Billy Beane, who became the face of selecting baseball players and framing strategy based on data, and was immortalised in the book. Data helped Beane build a playoff team for $41 million. In Henry’s words, “You won the exact same number of games that the (New York) Yankees won, but the Yankees spent $1.4 million per win and you paid $260,000.”

In the literal sense, India’s most valued internet company Flipkart has hardly followed Beane’s sense of economy. It raised more than $7 billion capital in eight years to build an ecommerce company, which clocked net sales of $4.6 billion in fiscal year 2018. This is considered sacrilege in India, where the purpose of business is to generate profits—make money.

Last week, when Walmart paid $16 billion to buy out Flipkart in a deal valued at more than $20 billion, it made founders Sachin Bansal and Binny Bansal billionaires. However, since late 2009, when private equity investor Tiger Global infused $10 million in Flipkart, they have had to take it in the teeth for one reason: They chose to build Flipkart at high velocity. They were the first guys through that wall.
Flipkart: Born to raceFlipkart is India’s most valued internet company
Image: Abhishek Chinnappa/ Reuters
In the process, they would break more than one rule in retail, as India Inc has known, because Flipkart started out as an antithesis.

Venky Harinarayan knows a thing or two about the changing face of retail. He and Anand Rajaraman were co-founders in, a website to simplify online search, which Amazon bought out in 1998. Thirteen years later, Walmart bought out Kosmix, a social media platform that the same duo had built since 2005. Understandably, Harinarayan is a treasure trove of stories. At the turn of the century, he was working with Amazon after the Junglee acquisition, and saw the predicament of ecommerce first hand, especially for a publicly-listed company.

 “We relied a lot on capital markets. When the sentiment turns (after the dotcom bubble burst), it gets really hard because you can’t change how you are operating very quickly,” he says. “Capital markets move very quickly, but you cannot change the operations of your business model as quickly.”
At the time, Amazon saw a huge drop in sales in the US. “The fixed costs start to swamp you. It was brutal. There was no capital available for almost three years. Amazon had to make the transition. Sales were collapsing,” says Harinarayan. Flipkart’s journey in the past two years under the watch of Kalyan Krishnamurthy, who worked at Tiger Global previously, and Binny Bansal was about making such a brutal transition when capital became unavailable.

When Flipkart Group clocked revenues of ₹19,854 crore in the 2017 fiscal, as reported in The Economic Times, it had grown at just under 30 percent despite demonetisation, with losses well over ₹8,000 crore. In the same period, Future Group—India’s largest publicly-listed retail chain—clocked ₹20,954 crore and almost ₹650 crore of operating profits between its retail and fashion businesses.

In just over a decade, Flipkart’s revenue had come within touching distance of Future Group, established in 1987. But for Flipkart, it was never about beating brick-and-mortar retail. It started as a company that would execute at speed, with a quiet goal of staying at least four quarters ahead of Amazon in India, which meant playing by the rules of the ecommerce juggernaut.

And it is threatening the way of doing business. “Ecommerce is here to stay, whether it is in the form of Walmart or Amazon,” says a Flipkart investor, on the condition of anonymity. “If the offline guys don’t change, they will get wiped out.”

In their minds it’s threatening the game.

Flip back
When Flipkart started in late 2007, Uber wasn’t even born. India was discovering Facebook, which was weaning users off Orkut. Google was taking the market away from Yahoo!.

For entrepreneurs biased to the internet as a playground in any country, Google had seized the ‘intent’ opportunity. ‘Search’ is so powerful because it is the cleanest reflection of intent, says Prantik Mazumdar, managing partner of HappyMarketer, a digital marketing firm in Singapore.

“Any other form of advertising—TV, radio, even Facebook, Twitter and Snapchat—is not intent driven. They are pushing ads, whether a user wants to see them or not. Google is more targeted,” says Mazumdar. For tech entrepreneurs, products like Google meant seamless user adoption across geographic markets, without the company needing to grow teams and invest locally at the same pace.

The same was not true of product ecommerce, which called for local knowledge. An Amazon would have to grow operations in India to become a formidable player in this market.
Flipkart: Born to raceFlipkart serves over 800 cities, making 500,000 deliveries daily
Image: Amit Verma
Before Flipkart, India already had online retail ventures like Infibeam—now a listed company—and Indiaplaza, which began in 1999 as Fabmart. But the arrival of the Bansals—both graduates of the Indian Institute of Technology (IIT)-Delhi—coincided with one significant factor. As the Indian economy was booming, venture capital (VC) funds were getting a new lease of life since 2006. A firm called Erasmic Venture Fund in Bengaluru was about to evolve into the Indian arm of Accel Partners.

Until 2009, most influential VC funds were based in Mumbai, which was home to ventures like Baazee (which eBay acquired in 2004), Justdial, BookMyShow and Cleartrip. When Tiger Global shut its only India office ever in Mumbai in 2009, it symbolised a swing in the nascent digital economy here. The private equity firm was doing what it had never done—it would operate from New York, but focus on the technology talent and startups emerging out of Bengaluru.

Until then, Tiger Global’s approach had been to “wait for the winner”, according to a person with direct knowledge of the fund’s functioning. “The mandate was to be in mature, profitable companies—both public and private—like Justdial or category leaders like MakeMyTrip, which was a leader in the market, or Naukri (after Info Edge listed). It did not have a mandate for startups at all. That changed in 2010.”

In Bengaluru, Accel India was impressed by Flipkart. Abhishek Goyal, who worked with Accel then and is now co-founder of a startups analytics firm Tracxn, introduced the founders to the partners. Sachin Bansal, the Flipkart CEO, was keen that Subrata Mitra, a partner at Accel India, be the investor on its board.

The focus was on speed of execution. Mitra, an alumnus of IIT-Kanpur, had worked with companies in the US. He was one of the founding partners of Erasmic.
Flipkart: Born to raceInitially Flipkart sold books and managed 40 shipments per day
Image: Amit Verma
During one of their early conversations, Mitra warned the Flipkart founders of their approach. Flipkart, which sold books, was doing 40 shipments per day. “You’ll need $20-30 million of cash to grow it to a $100 million company. You’ll probably be left with 25 percent of the company when you touch $100 million—are you OK with it?” he told them.

Flipkart’s best case scenario internal projection at the time was a $200 million exit. Mitra and the founders agreed they would not relent on speed. That relationship began in 2009, and also marks the point in time when venture capital began to harness the IIT alumni and graduates network to build the internet economy from India.

Critics call this the caste system of the startup industry. However, it is also true that until 2010, technology talent in India leaned heavily towards the exports-led software and services industry. So, VCs began to go to the roots—engineering colleges—to tap the local markets.  

Problem solving
Where Amazon had chosen the primary markets route in 1997, Flipkart had to draw from the VC and private investors’ pool. Tiger Global would prove crucial. Mitra and Tiger Global’s Lee Fixel met in person at The Oberoi, Bengaluru, in 2009. Both agreed on Flipkart’s founder quotient.

Says another startup entrepreneur who has known Flipkart’s founders and Accel. “Think about it: How many people in India read books? How many people in India buy clothes? Myntra should have become the Flipkart of India, but Flipkart became Flipkart despite the addressable market for books being less than that for clothes. Everybody buys clothes. That tells you something about founder quotient.”

Myntra had been funded almost eight months before Flipkart. If the category was not vital to begin with, it was because of its emphasis on technology, says the Flipkart investor. “In ecommerce, you have to invest a lot of money in tech because at the end of the day, Flipkart’s proposition is: Users just have to order on their phone, even before the physical delivery has to happen,” he says.

Flipkart: Born to raceThe company began to build its warehouse and logistics functions in 2011
Image: Amit Verma

If Flipkart sought to be that high-velocity venture, it also meant dealing with infrastructure problems at scale. “Payments wouldn’t go through. Deliveries wouldn’t reach,” the investor says. “So the ecommerce companies had to invest a lot of money to build that infrastructure. These (Flipkart, Myntra) are the original guys who built it.”

eKart stands out in this respect. As Walmart told its shareholders while announcing the acquisition, “Flipkart’s supply chain arm, eKart, serves more than 800 cities, making 500,000 deliveries daily.” When the company had begun to build its warehouse and logistics functions in 2011, it was derided as evolving into a courier company.

By then, it had built a resilient website. But to grow at scale, it had introduced ‘cash on delivery’ as a customer-facing measure to attract more users. At the backend, the logistics arm was much needed to fulfil user expectation from the website.

The Flipkart investor says if any ecommerce company had relied on BlueDart, which was the domestic leader, it would have cost more than ₹200 per package. Further, as a cash-on-delivery market, the courier companies kept the money for up to 21 days. “They had an absolute monopoly. An ecommerce company would have been burning money pretty much on every delivery,” says the investor, adding that having logistics gave Flipkart more control over the end-user experience, and generated local market data it could own.

According to an associate in China who has worked closely with Alibaba, this was one of the main reasons founder Jack Ma never considered India as a pure ecommerce market until 2015. “Poor logistics balloons the cost structure, and is not worth the effort, given the size of the paying internet-user population,” the associate says. Ma, of course, used fintech as a pathway to the Indian market—digital wallet Paytm, which has since been expanding its mobile commerce play.

For long, even Snapdeal—Flipkart’s largest VC-backed rival—abstained from building a logistics arm to keep the unit economics under control. “They kept saying they didn’t want to do that, but eventually went for GoJavas,” the Flipkart investor says, referring to the acquisition Snapdeal belatedly made in it in 2015.
When ecommerce companies depended on third-party courier companies, they also found siphoning and pilferage to be rampant. “To maintain quality of service, it was important to have control of logistics,” says the Flipkart investor, adding that delivery costs can now range between ₹100 and ₹150 per package. Companies like Rivigo and BlackBuck have also grown around the ecommerce industry.

It is a model even Amazon has replicated in India to control customer fulfilment. “Both companies (Flipkart and Amazon) are able to maintain that quality because 70-80 percent of their deliveries happen through their own logistics network,” the investor says.

Flipkart saw the end of an era, as Sachin Bansal moved on. According to a source in knowledge of the management upheaval in the past two years, the company erred with its mobile-only strategy, after which the board—at Fixel’s prodding—elevated Krishnamurthy as CEO, with Binny Bansal bringing the institutional memory to Flipkart.

Mukesh Bansal, who was heading Flipkart’s commerce platform, after it acquired Myntra, left the company in early 2016, while Sachin Bansal took a backseat. “Kalyan ran with a lean team, to execute, get the numbers, raise money to be financially secure. Right now, the company is centred on Kalyan,” says the source, adding that Krishnamurthy has at least direct 40 reportees across tech, category, product, and supply chain functions. “This won’t cut it with Walmart. They have to bring in more senior leaders.”

But Flipkart has a bigger problem: Growth of online buyers. Prudent investors separate the internet user numbers of travel aggregators and railway portal IRCTC as a test of whether buyers trust product ecommerce companies for their convenience and reliability.

According to an investor, the good news is that the number of product buyers online is in the 50 million to 55 million range, up from 8 to 10 million in 2013. “This will go up to 40 million or 45 million households by 2020, which works out to between 60 million and 80 million ecommerce users,” says the Flipkart investor.

Flipkart, a homegrown company, essentially got first rights to granular data of the first 100 million online users in India. As Binny Bansal put it in February 2014, “We think a little differently. Let’s go into the city, and make 100 orders a day happen. How do I make that happen? We’ve done that over and over again.” From 20 cities in 2011, Flipkart expanded to 150 cities in 2014. It is now in 800 cities.

Explains a former Flipkart engineer: “(When) you’re at Flipkart, the amount of data you are exposed to makes you cry on some days. You can predict the behaviour of customers based on this data: Real data on real customers. If you’re the first mover, you’re the first mover on everything, right? Even the move to mobile was a bold move because they could capture much more data.”

That sort of discernible data would make Billy Beane of Moneyball proud. If Google has data on intent, ecommerce companies have the data on purchase history and decisions. “In ecommerce, there is a high chance that advertisers will go directly to Flipkart or an Amazon because people search there,” says Mazumdar of HappyMarketer.

But even if Flipkart attained its local stronghold over Amazon, it has divided the house here like no startup before it. It was a true risk-taking venture, which cultivated a healthy group of supporters and critics, often warring over its very premise. For a high-velocity venture in India, Flipkart may well have carried the warning: Do not try this at home.

The writer is a freelance journalist