Sramana Mitra: Let’s do a couple of case studies of the kinds of companies that you have invested in and had successes with. If you could, for the benefit of our entrepreneurs, walk us through the logic and thought process of the investment thesis when you invested.
John Dougery: I’ll start with companies that are based in Bangalore. It’s a very typical example of how we work. This is an entrepreneur that we started tracking and mentoring because we liked him back in 2006. This was when we were just forming the firm. We didn’t have the capital yet, but we were engaged in the community and we helped him find his seed financing.
He was 26 years old, and he was starting a company called RedBus. RedBus came out of his own experience trying to get home for the holidays. He couldn’t get there. You go to the bus station and hope to find a ticket. That’s what he did. He expected to get a ticket. By the time he got to the window, the bus route was sold out.
He was very frustrated by that. That was back in 2004. He started RedBus to put all the bus operators online, put all the inventory in an online firm similar to Make My Trip for air travel and hotels. You could discover and book online rather than having to go physically to the bus depot.
It’s really ambitious because like so many things in India, it’s a highly fragmented supply. It’s 1,200 bus operators; none of whom have huge market share. You’ve got to get hundreds of these bus operators online before you have meaningful inventory. Without meaningful inventory, consumers don’t care. He had to break that cycle and get meaningful inventory and get the consumers to care.
The innovative thing he did was that he built the software that would automate the operations for the bus operators and gave it for free. All the other competitors were trying to charge on a SaaS basis. He realized that if he can help them from paper and pencil automated billing, exposing the inventory to all travel agents, then consumers will care. That’s exactly how it worked out. We had tracked him for 18 months.
Then in late 2008, he was looking for his Series A. He had about $2 million in ticket sales. He has been selling a good number of tickets. We led the Series A. We syndicated it and brought in another investor, and he was off to the races. He grew 10x in four years to over a hundred million in ticket sales.
Four years later, he raised a total of $9 million. He had only used four of it so when he was acquired, it was a tough decision but we decided to sell the company. It was a great outcome for him and everybody. It was a capital-efficient business where he owned a lot in the end. That’s what made the acquisition so attractive for him and for the rest of us.
Sramana Mitra: I met Phani back in 2010. We did a huge story on him first in 2011. He’s a great guy; a really wonderful person. I think redBus was one of the first companies in the e-commerce model that scaled to a large extent.
I guess the question that I have out of all of this is that we’re seeing an e-commerce bubble. Too much money has gone into the sector. The sector adoption is not as fast. Obviously, you made the redBus investment in 2008. Now we are in 2016. What is your analysis of the B2C commerce sector in India?
John Dougery: That’s a good question. Like any sector, there are attractive companies and there are challenging companies. We look at some of these other players taking inventory. We didn’t like that. They’re subsidizing and we’re not in favor of that. It doesn’t mean it can’t work.
For our fund size and strategy, it didn’t meet the filter that we had. We want to see companies like redBus that are enabling people to do something they, otherwise, couldn’t and who are willing to pay for it. If you look at the redBus story for example, they were charging about 8% commission to the bus operator for the seats they were selling when we first invested. By the time we sold the company, they were charging almost 11%.
They had increased pricing and everybody was very happy including the bus operator because the bus operator was getting more and more seats filled that otherwise would have gone vacant. Every incremental seat that they fill for that bus company was pure profit.