B2B Unicorns: A Myth or Reality?

July 31, 2018: Freshworks turns Unicorn with a $100 Mn funding at $1.5 Bn Valuation.

Dec 17, 2018: Accel US & IFC lead $23 Mn Series C funding into Moglix.

March 6, 2019: SME Corner raises around $13 Mn in Equity, Debt.

Trade pundits are speculating that more than half of Indian Unicorns coming out in 2019 will come from B2B space only. Ranging from on-demand trucking company Rivigo to on-demand task management firm Dunzo, experts say India could easily generate eight another Unicorns. This conjecture was fortified when Udaan received a valuation of more than a billion dollars in a mere twenty-six months of existence.

As an industry expert put it: “India has more than 50 million SMEs doing business worth 600-800 Billion USD annually within their ecosystem. We have a rare trillion dollar opportunity to ride the SaaS (Software as a Service, read B2B interfaces) wave".

Is this a myth or a reality? Will someday the present set of Unicorns will have the requisite top-line to substantiate excel based projections? Have these companies got their recipes right?

This brings to mind a compelling B2B narrative which this journalist has experienced and reported first hand. This is the story of original Indian Unicorn in B2B space which used technology as a glue. This Unicorn still displays its stripes in true form with close to 1.2 billion USD as sales figure.

It was the last decade of the 20th Century.

ITC ltd (established in 1910) realised that its revenue from tobacco-related products was fast shrinking.

It’s then Chairman YC Deveshwar thought of addressing this conundrum with a radical overture. He called in one of his bright management trainee S.Sivakumar and gave a one-line brief. “Let’s enter agri-business. Do the business modelling,” was the diktat.

On one sultry afternoon, an ITC group led by Siva found itself surrounded by a bunch of farmers sitting on a Choupal (a concrete circular sitting space paved around a tree trunk, prominent sight in Indian villages) discussing possible business avenues. This was in Rewa, Madhya Pradesh which is known for its soya production.

This village, as was normal, was lacking basic infrastructure of ‘pakka makaan’, roads, electricity, water, sanitation etc. Literacy was a rarity. And in these trying surroundings, this tie-suit gang was haranguing the natives for avenues to do business!

Finally frustrated, one of the village elders blurted, “Sahib, my son goes 80 kilometres one way to learn ‘con-tu-tar’ in order to be job ready. Why don’t you open up a computer training facility in our village and let government pay you under one of their schemes?”

In the sweltering atmosphere, this was passed as another lame joke by all, barring Siva.

Going back to the drawing board, he asked the most significant ‘what ifs’: “What if we help these farmers increase yield by using Information Technology highway introduced through `con-tu-tar’? Once we have access to quality raw material, what if we move into food processing? What if we do commerce with these folks when their pockets are laden with new monies?

The group agreed that the idea was fantastic but so were the challenges.

How do you solve electricity, internet, and basic literacy for these folks? How do you overcome a trust deficit against any power figure or organised body when caste-based politics is norm?

We are talking about times when rural electrification was a myth and Reliance was still one group!

Even if you solve all of these, you still can’t inspire the farmer to sell to you. Government regulations stipulated that you cannot set up your procurement booth offering prices higher than Minimum Support Price (MSP). This meant that cash dole outs, a darling strategy for present-day firms, was ruled out. (The cabinet has finally passed the bill in 2018 under Prime Minister Annadatta Aay Sanrakshan Abhiyaan allowing gradual entry of private entities which will help better price discovery by farmers)  

This ITC group found a truly inspiring solution for these set of challenges. However, to set the ball rolling Sivakumar needed complete backing of his chairman. He sought it with fervour and got the proverbial blanket to go ahead. ITC’s Agri Business Division (ABD) was born!

Six years of working experience with farmer co-operatives before joining ITC in 1989, came in handy for Siva. This had given Siva deep insight into the pulls and pushes the governing rural ecosystem.

First credibility was solved. To cut through divisional politics and have a trustworthy face value, ABD identified a local whose only claim to fame was un-tarnished reputation and non-alliance to any political group. This guy was ABD’s representative for the unit geography. They called him/her Sanchalak.

Now came electricity, internet, and literacy. From its own pocket, ABD got one of the rooms in residential hutment of Sanchalak, ‘pukka’. They put a computer inside this room and a VSAT (Very Small Aperture Terminal, used for internet connectivity) on the roof. They put solar panels for power generation.

Each such unit had a capital expenditure of close to INR 30 lakh during those days.

Next came training the Sanchalak in basic computer and internet usage. Once this was achieved, finally came job description.

A centralised team of agri-scientists, meteorological and farm equipment experts was set up. Sanchalak was supposed to gather information and best practices through IT highway and disseminate it locally. This service was free to farmers.

First kiosk was launched in 1998 for proof of concept in Rewa. It was aptly named ‘Soya Choupal’.

Within a year farmers experienced a forty percent (estimated) rise in net yield.

Due to high transportation cost (accounting for multiple trips to Mandi), long capital cycles (due to postponement and non-payment of lump sums) and ‘not so best’ practices of Adhatiyas during measurement of farm yield, farmers were getting fleeced up to 15 percent of the true value of their produce.

In phase 2, ABD set up its own procurement platform with digital weighing machines. They also facilitated immediate lump sum payment to farmers. Even though they were offering MSP prices, farmers didn’t need any further motivation to sell to them.

Now came the third stage. In two years’ time, farmers were now sitting on high disposable income. To capture this strength, ABD launched Choupal Sagar. This rural ‘Mall’ got all national brands across product categories within the geographical reach of farmers. Choupal Sagar by itself was a smart move by the parent company. They tied up with all leading manufacturers who were number two or three nationally by sales number and cut a better deal. The incentive for these manufacturers was direct access to cash and avoidance of EMI cycles as farmers preferred to buy at one go. Hence creating a win-win opportunity for both the parties!

Cut to circa 2019, ITC is getting geared up for E-Choupal 4.0. It will now assume the role of an ‘Aggregator of Agricultural Services’ and offer a bouquet of farm-focused services in areas including crop management, farm mechanisation, health care, banking, and insurance. Here, mobile telephony and data explosion is coming in handy which has seen the cost of setting up an E-Choupal kiosk plummet to less than 1.5 lakh in recent times. The rollout is slated to happen in mid-2019.

The ABD sales figures is closing in on INR 10,000 Crore.

Latest data from ITC suggests, today E-Choupal (name changed from Soya Choupal) comprises of 6,100 installations covering over 35,000 villages in 21 states and touches more than 4 million farmers. Sunfeast and Aashirwad are household names today.

This story can serve as a benchmark for the present B2B lot.

In order to derive value from the ecosystem, ITC first created value. They put a lot of ground-level pedestrian work in understanding their stakeholders then engaged them meaningfully through various touchpoints.

Are present B2B companies (especially those operating in fin-tech space or have finance as one of the founding pillars) creating value? Do they understand their stakeholders the way they should be understood?

They are trying to eke out data from stakeholders by entering SME cosmos through touch points like logistics and transportation. By using applications like AI and analytics they are then ‘figuring out’ customer need and profile. Then they are offering them capital soliciting interest rates between 15 to 34 percent.

If charging higher interest rates is the only avenue to make money (since Udaan founders have stated that they are not making any money on logistics and transportation), then it’s a non-sustainable business model. More importantly, there is no visible value creation for SMEs here.

A Delhivery co-founder in an informal conversation with this journalist had said, “When we entered logistics and transportation space, we shortened the financial cycles of truckers from more than 60 days to less than 24 hours. This meant more free cash to them”.

This emphasises the far-reaching impact business can have if it has a value proposition for just one variable. Incidentally, amongst the current lot of would be Unicorns, it is likely that Delhivery would have similar sales numbers to match.  

Topline as an important matrix for valuation cannot be emphasised enough. Several large Indian start-ups are not profitable, pointing to the fact that valuations are not the end all and be all for a necessarily successful business.

“I have a very contrarian view, which is unpopular. It’s not difficult to create Unicorns, but it’s difficult to build a Unicorn that makes money. You can’t just say this is indicative of a great market opportunity. It’s also indicative of the fact that the founders have not figured out how to make money,” says Vaitheeswaran K, founder of India’s first e-commerce company Indiaplaza.com (Fabmall) and author of ‘Failing to Succeed’.

Looks like it would be a while before any B2B company in SME world gets the equation right.

(The inputs for this article are derived from the author's coverage of E-Choupal initiative in Uttar Pradesh during 2004-05)