Become a Creator today!Start creating today - Share your story with the world!
Start for free
00:00:00
00:00:01
Helping retailers scale customer loyalty Part 2 | Aneesh Reddy @ Capillary Technologies
202 Plays1 year ago
Aneesh Reddy is a rare founder who dedicated 15 years to building his startup, Capillary. With determination and some naivety, they bootstrapped Capillary and even secured funding a few years later. But the roller coaster ride was just beginning, filled with lessons from overfunding mistakes and the challenges posed by the pandemic.
For more such interesting founder journeys, subscribe to our newsletter www.founderthesis.com
Read more about Capillary Tech:-
1.What Aneesh Reddy is getting right about Capillary Technologies' push in the US
2.How customer engagement company capillary rejigged business to prepare for IPO
Recommended
Transcript
Introduction to Anish's Journey
00:00:00
Speaker
This is the second part of Akshay's conversation with Anish Reddy, founder of Capillary. That was also personally a time when, you know, I had to just run 35. It was 13 years as a founder, sorry, 11, 12 years as a founder. You know, kind of a midlife crisis as well. It's like just in this thing of, you know, hey, is it been too long? What's happening with life, etc. Another founder, you do gain a lot of baggage, right? I mean, not
00:00:29
Speaker
not more than 20 percent of what you try will work and thankfully that 20 that worked you know covered up for all the other things that I had over the over the 11-12 years but wait still a lot of baggage right and you you can get to a place where you know your mind is just this very negative place of saying hey you messed up at so many places at so many levels especially when you take the hard calls on turning the company profitable
00:00:59
Speaker
They feel like a lot of the money you invested in places in the company, right? Should you have even done that? What a stupid move. And you have this constant voice in your mind just saying, oh man, what a mess up, right?
Personal Growth and Vipassana Experience
00:01:19
Speaker
So luckily for me, what happened was a bunch of friends, we all went out to Goa for our 35th birthday. I mean, school friends, we've been together since our kindergarten. So we know each other very well. Grandparents know each other. Parents know each other. A group of nine actually, a pretty large group in that sense.
00:01:40
Speaker
So we all went to Goa, and people had flown from the US. This was December of 2019. And folks had flown in from the US, from Germany, from various places for that week that we were taking off.
00:02:01
Speaker
You know, usual stuff all of us got wrong when we were talking about what's happened with life and where has life taken us, et cetera. And here I was, I think I made some kind of statement that I think life is all downhill from here. And then the guys were very surprised he was like, this is a guy who's done so well in life. And why is he saying this? Life is all downhill from here. And I was just mentally in that space.
00:02:32
Speaker
So one of them was a banker with IFC, he's a venture capitalist, he's a banker with IFC, Karthik. He then said he was overthinking this, I think, you should just go to Vipassana. I had done it three, four years ago and then it really helped.
00:02:54
Speaker
And this is a group which knows me really well. We've been the thickest of friends forever. And a group where I don't have to think the rest of the place in all the world is a stage. So took that seriously.
00:03:11
Speaker
a course in Jain and you know, usually these things get booked out fairly quickly. Went to some really small center, Pocharam in Nizambad, which is some five hours away from Hyderabad. You know, nice center, small place. Had an amazing breakthrough in some senses. So it was just, I thought in those 10 days I cleared up some 12-15 years of baggage.
00:03:39
Speaker
in my head. So it just felt like I felt as clean in my head as when I got out of IIT. It was that clean, no baggage. The world again seemed like a land of opportunity. So a little bit of that. Of course, then I think the reason I'm saying this is it really helped with what happened when COVID hit.
00:04:05
Speaker
Otherwise, when COVID hit, it was like, we spent the last full year fixing a lot of stuff in the company, moving to larger enterprises, getting the P&L in shape, going from minus 65, minus 70 percent avatar to a plus three, plus four in four, five quarters, lot of hard work.
Capillary's COVID Challenges and Solutions
00:04:29
Speaker
Real grind across the business.
00:04:34
Speaker
And then, you know, our cash flows fell like 80%.
00:04:41
Speaker
You know, and we've had very good customers, you know, folks who always paid us on time, uh, people like, uh, but it was also times when their own business shined to zero, you know, so obviously people pride in his employee costs before and the cost and our cash flows really went to zero, right? Other than some international e-commerce customers, everything else just went to, uh,
00:05:07
Speaker
And so this was March 20th, right, when the lockdowns got announced. And we just cleared diligence. Amsterdam was doing diligence for this UK fund, this UK-red fund. It was all done. And the guy, obviously, even for them, it's like a retail tech company. God knows when this is going to come back. And this is debt, right? It's not equity.
00:05:32
Speaker
The guy obviously started really dallying a bit. And so I think we really had two options at that point in time. One was to see the reading and say, boss, this is not going to happen.
00:05:46
Speaker
The second was to say, no, no, he's just dilly-dallying, he might come and like, you know, and people never say no immediately, right? They'll delight by one week and delight by two weeks, then. So finally, it was made of April that the guy came back saying, sorry, like, this just won't happen, just given the macro, you know, all that stuff, right?
00:06:08
Speaker
And luckily, you know, given I had just nothing to pass, nothing, I think I had a clean mind, no baggage. And so it seemed very apparent. If you have to save the company now with 20% cash flows, 20% cash in the bank, sorry, 20% cash flows and probably, you know, one to months of real burn left in the bank, right? I mean, it is 80%.
00:06:38
Speaker
How much ever money if I earlier had money for like 6 months with some very little burn, now I have nothing left because 80% of my classes are vanishing overnight.
00:06:55
Speaker
Yeah, I know there were many things playing in the head. We've been very lucky to have very good employees stay with us for many, many years. Of the 150 people who joined us, first 150, about 50 have spent more than 10 years here.
00:07:11
Speaker
And then you had this choice of saying, look, we have to let these guys go now. And then, of course, there was this thing of saying, look, will you fire people who have worked with you for 10 years in a lockdown, cold shoulder, when they're just locked up in their own houses and have nowhere to go? There are no jobs. There's nothing placed anywhere. Now, I think it was a very, very
00:07:41
Speaker
testing time right in some senses and I think we took the very hard call we took the hard call of saying look I mean if you don't save the company then you will have to fire everyone eventually and so we actually let go like we cut 70% of cost in like in like a week
00:08:06
Speaker
And the way we did it was with some very, very hard calls, we decided to let like 33% of the company go.
00:08:20
Speaker
Of course we made sure that the average payout even though we didn't have money was like four months of severance you know and for everyone who had spent an year with us we had one more month each right so people had like all the way up to nine ten months of severance
00:08:37
Speaker
We put the rest of the teams on a 25% salary cut, I went on a zero. Of course, when the cost came down, all that stuff, we didn't exactly what our customers' net was in some senses. But, you know, kind of got to a place where we got cost down to like 33%.
00:08:59
Speaker
And took some very hard calls of saying we will do this in the lockdown. So March 27, I still remember the day was when we had this massive all hands, you know, asked these 33% of folks to leave. And the idea of doing it early, Akshay was
00:09:18
Speaker
that you can then go back and get these guys placed before the market really tanks. So we took a lot of care. We got a lot of help with your those. Your those was there on every call.
00:09:37
Speaker
where we were speaking to employees. They would call the employees up who were being let go like three times a week for the next four, five weeks to make sure. The scripts of what we would say was actually drafted by a psychologist. Don't use the word redundant. Don't use this word. Don't use that word. On the very next day, we had a resume building session for everyone.
00:10:07
Speaker
We then got, it was like IIT campus placement, we got 102 companies, 250 folks impacted to offer 750 roles.
00:10:20
Speaker
So everyone I had ever, anyone who had ever called me and said, look, hey, what do I do about this situation? You know, founders call you, right? Hey, you know, I'm struggling with this, tell me. So everyone who had called me, you know, I had made a list, I called up and said, buddy, like, time to, like, you know, return favors now.
00:10:43
Speaker
So luckily that worked out in order that 250 people over 220 got a job within like two months.
00:10:50
Speaker
You know, so it really just saved the day. I thought it was a... I don't think I would have been able to do that if I had not gone to the past nothing. I would have just been stuck with this baggage of saying, hey, these guys have been with you for so long. Like, how can you let them go now? How will the lockdown? We would have probably waited for the lockdown to end. But I mean, it should have been
Strategic Shifts and Open Communication
00:11:11
Speaker
too late, right? By when number of, you know, I don't think I would have been able to get those guys placed out. Right? So...
00:11:19
Speaker
Yeah, so it was hard, but I thought we kind of took some. And luckily for us at that point in time, I think the investors also stepped up. So I think in a two-week period, between the three of them, they wired in $5 million. So then I at least had a one-year runway. With the lower cost, I had a one-year runway. So we went deep enough.
00:11:47
Speaker
that you didn't go to the bone. In fact, the employees who stayed back, they had taken deep cuts, we had delayed variables, we had delayed hikes. And for the people who were leaving, they were paid energy, including more than what was legally required severance. So a bunch of folks came back and said, look, we feel we should have been let go. You treated them better than you treated us.
00:12:17
Speaker
It was just the right thing to do, right? It was just the right thing to, I mean, and luckily, you know, I think the business returned in about six, eight months. We still de-grew that year. That was the first year in the business when we really de-grew. We de-grew by some 20, 25%. We also had to do the right thing for the customers, right? So we actually, without any questions being asked, we gave almost a four months off for everyone.
00:12:45
Speaker
For a lot of customers, we move them to saying, we know your cash flow issues. So if our usual payment terms are 60 days, we'll not follow up until you get to 120.
00:13:01
Speaker
Right. So, and luckily there were a few customers, like, you know, the Tata's, South Bhurla group, etc. One thing, I mean, they could raise debt very quickly. So they also started paying, right? So it was a, even with vendors, we, what we did was we paid off all the small vendors very quickly because I mean, we were all so small, so we can, you know, that the stock would be highest there. The large vendors, we spoke to them and said, Hey guys, like, look, you'll have to like give us a deal on this. So,
00:13:31
Speaker
Yeah, it was very, it was a, and I think we did some things well which was, we went very deep, very quickly. You know, what I saw some of the other founders do was try and take this 5% cut every month. Things will improve, things will improve. They don't improve and then you take somehow, then it takes somehow.
00:13:54
Speaker
As a result, what happens with the company then is you're in this constant state of shock. So in our case, what happened was we went so deep in the first cut itself, we went 65% down rather than going 25% down. Right? So we went because we went that deep, you know, any news was better than the news I could get.
00:14:16
Speaker
But I had assumed. And that also meant that the day after the cuts, for the next three weeks, all I did was run a placement, sir. I was not bothered about what news is coming from the market. None of that stuff. We were just heads on saying, look, every day morning evening, we'd converted our recruitment team into our placement team. I don't think I'd been involved in hiring as much as I was involved in our placement.
00:14:46
Speaker
you know, it was that level of, I mean, I don't think we could have done that if there was this constant, hey, but what makes what makes what makes types, right?
00:14:56
Speaker
Yeah, so I think that really helped. I thought that was a good learning for the company as well. So what happened was, as things were improving, as we started seeing the lockdowns got lifted in June, we paid variables out in July instead of paying them out in April. That was one big boost to the team. They looked okay, okay, right? Things are coming back.
00:15:19
Speaker
In October, we reversed back the normal salaries. In March of the next year, we actually paid out all the areas also. Whatever we had cut the salary cuts, we paid it off. So it was a good, I mean, as a team, I think it just built that whole thing of saying, okay, we fought this one, we could have died. And we saw a bunch of our other partners in retail, like in the startup space, not survive. So we
00:15:46
Speaker
So it was just for the team, it was great muscle memory of saying, hey, I mean, together we got out of this mess, right? We were doing all hands, every 15 days, there would be an all hands where I would actually show that look here's how much we collected in the last few days. So this month, here is how much we've actually burned, here is how much cash is left.
00:16:05
Speaker
that level of transparency. So no one needed to ever guess that look. So you just, I think that really helped. That really helped as well. But yeah, those were, I thought, really good learnings. But also what happened with that, Akshay was, again, thanks to the Bipassana, my baggage on the US was gone.
00:16:27
Speaker
I mean, I had this very, you know, obviously KK moved on after we opened the U.S. It was this whole, you know, it really tore the company apart, right? And so that baggage moved off. We then sat down in May, you know, because I'd done this cleanup properly and we were trying to, we spent the whole of May, June when business was low. We got in Psyche from Extrotenics. I don't know if you've heard of Extrotenics, but
00:17:00
Speaker
Yeah, they are this McKinsey for startup style thing. They do what's called a business design.
00:17:07
Speaker
And so we had two, three months, no customers. I was like, chilled out. So we got him in saying, look, hey, help us figure out what we should do. Obviously now, this 11, 12, 13 years, I feel we've kind of hit a plateau. So we were at retail in Asia was what we were focused on.
00:17:33
Speaker
We kind of hit a plateau there, right? So we were growing, but you know, we were profitable, but it was not like, and you know, the one question I would anyway get asked by everyone is $300 million market, like you're already at 30-32 million, like how much more can this grow? And you would obviously give them very, very strong answers, you know, we're doing, we're carrying, we're carrying all that stuff, right?
00:17:59
Speaker
So again, given I didn't have this headache to deal with what's happening with COVID, we went the other way round of actually saying, hey, let's redesign the business. And that's when we took some very hard calls saying, no mid-market, no SMB going forward, only large enterprise. Let's get out of retail. I mean, continue with retail, but add other verticals.
00:18:25
Speaker
Let's go from Asia to the US, given you have some reasonably strong pivots. And those have really played out very well. When we entered COVID, 90% of revenue was retail. Today, it is 55%. And we work with
00:18:45
Speaker
The best oil and gas companies like Shell, we work with the best consumer goods companies like Unilever, Nestle, Abbot. We work with some of the best travel and hospitality players, you know, Sabre is a large partner for us. So a lot of, you know, and because we had all this time now, customers weren't like serious about us for that period. We use those that time to really build out for these verticals.
00:19:13
Speaker
So the core 70% of the product was same. You had to change 25, 30%. Every year, you pick two and redo the whole thing. So that kind of work. On the US, one of our employees, he got married. He was going to Canada. So I said, look, continue on the roads. Just sell into the US. So we then went and signed up
00:19:39
Speaker
One of the ex CEOs of one of the largest loyalty companies of a Forrester wave leader. The guy who had really grown them like 10X and then sold it off and then was kind of like, you know, a quarter man as an advisor first one day a week. And that really cut our time into the US very quickly. This was October, November, December 20. We then won a couple of customers in January, March 20. We realized the product will work.
00:20:09
Speaker
And we said, look, I didn't want to spend this two, three years getting to zero to one in the US. So I said, let's do a small acquisition where the team is very good. It's the same product or like a much smaller set of the product. So let that team, a team who knows how to sell coupled with our globally best loyalty platform, and let's see where this goes.
00:20:36
Speaker
That worked out brilliantly. You know, we bought a company which was 25 crores, three and a half million. In a year, I mean, given they were now selling our platform, we grew from that 25 crores to like 65 crores, you know, in like 12 months. So, and very blue chip customer side. So we, like four Fortune 100 customers is what we ended up winning. So it was just like a,
00:21:05
Speaker
So the last 24-25 months have been totally the other way of saying life is downhill, right?
00:21:14
Speaker
So we had a great US story now. We had two engines growing. Asia was coming back to growth. US was growing.
IPO Plans and Market Positioning
00:21:21
Speaker
Our margins were much better because this was large enterprises. Growth was a lot more predictable because large enterprises have more money to spend. What we're doing for them, they'll spend more with you, unlike mid-market SMB, where there are always budget constraints. There's always question of, hey, but you need to give me more.
00:21:40
Speaker
So, yeah, so the last two three have been very interesting in that sense where we filed for an IPO, right? So, given those numbers, we probably have these very rare tech companies which are growing 30-35% plus without actually burning any money, you know, like, and our economics is very different unlike the most SaaS companies which spend 70% on sales and marketing.
00:22:08
Speaker
We spend like mid 20s and grow mid 30s. People spend 60, 70% on sales and marketing and grow mid 30s. We just do the, so I'm just saving like a big chunk there because half my growth comes from these larger enterprises saying, look, we are growing so you will grow with us. And so, I mean, some of that worked out. I think.
00:22:31
Speaker
So we went and implemented this with PASNA thing for everyone. So as an employee, you know, if you like 10 days a year beyond the usual 22 days of leave and study leave and all that stuff you have, you can take 10 days off to go to a PASNA or go to a retreat. And that's beyond your use.
00:22:54
Speaker
What made you think that this will be a sustained, prolonged lockdown? Because, you know, there were examples like, say, there was like the SARS thing which happened a couple of years back and Swine Flu and all of these, like, you know, did not affect India at all. And at that stage, most people would have thought that COVID is like that. It'll come and go. So what made you feel that this will be like a sustained thing and you really need to cut deep?
00:23:22
Speaker
Yet we had a business in China before, China is about 5-7% of our revenue. And Covid if you remember China started in December, early January. So it had already played out for 3 months in China. And 80% fall in revenues, we already saw in China.
00:23:41
Speaker
So I knew what was coming a little bit like a 160 day early view of what was going to happen. And it at least same key was 90 days through your chalaya. If something as well run as China, you know, can't contain this damn thing. Oh, no chance like India and Indonesia and all these, you know, all the rest of Asia will be able to grow.
00:24:06
Speaker
So, you kind of had that view that it is at least not a 15 day problem. At least it was not like you were seeing any visible change in China right they went into lockdowns I think mid of Jan and it was mid of March and they were incessant right and in spite of that it did not seem like they were still locking cities down and channel lockdowns were
00:24:36
Speaker
Unbelievable, right? I mean, at least India, you could go buy a grocery, you could do something. It was crazy, right? So I thought we had that advantage. The second advantage we really had, Akshay was, you know, sometimes in life when you don't have options, right? And you have, I knew that, look, I had money for, in the new world, I had money for 15 days.
00:25:05
Speaker
It was not like if I had money for let's say six months, I might have still waited, I might have still done some other stuff, right? But, but you know, I feel the right thing to do whenever you have hard choices to make is make the hard choice and look at it like one silver bullet you have. So if you only had that one silver bullet, you have to get your timing not too late.
00:25:27
Speaker
And you have to find it deep enough. Amazing. OK. So you spoke of diversifying beyond detail. We spoke last time of the use case for a Unilever kind of FMCG, where it could be for the Kirana loyalty. What about for oil and gas? This would be for the petrol pump point of sale. They would start collecting. Shell is a large customer. Let me give you the use case for Shell.
00:25:56
Speaker
So, that industry is transforming like crazy right. So, what is happening is everyone knows in 10 years no one will go to fuel up right. And so, obviously these are large billion dollar corporations right I mean 5 of the top 10 fortune 10 are oil and gas companies right it is energy is that large right.
00:26:18
Speaker
So, for a lot of these folks the thing is look ok. So, people will probably come for a recharge because you know you can recharge your car in 15 minutes in a in a shell store right. It will take you 8 hours at home. The fast rechargers which recharge you in 80 percent in 15 minutes.
00:26:39
Speaker
I have seen them work it is incredible right. So, it is still and because these guys can buy power at a very different price, it will also be cheaper than recharging at home.
00:26:51
Speaker
you know like energy is different like you know, so there we was look, so this consumer now instead of refueling has to come for a recharge. I still need that, I need to know that customer, I need to offer him premium slots, I need to get them to go to the coffee shop, buy convenience from me, while it's getting a recharge, do a car wash, do a you know, change the boil, you know all that stuff right.
00:27:19
Speaker
So, you have these like shell in Asia has 4000 petrol stations, India has 400 it will probably give me 4000 over the next 5-10 years just in India. So, they are trying to say look I need a new customer value prop for my customer, but that starts with first name ok let me build a database of customers, let me get them engaged first, let me get all them into one app right.
00:27:45
Speaker
So Shell now, just in India, has a million plus users. A million plus was within three months of launch. Many more people have downloaded that Shell Go Plus, or it's called Shell Asia now, the Shell Asia app. And this happens for EV charging?
00:28:01
Speaker
No, no, it's for fuel. So the idea is you start with fuel and then over 5-10 years as you switch over to EV. Like in Singapore now, we also have EV in the same thing. But, you know, you start with fuel, there's basically, we try to get you to go into the convenience store, buy coffee from us, do your caroshers, do your
00:28:21
Speaker
Look at Shell as not just your, like you said, petro mob. Like trying to get you out of that mindset. So the idea is in that same 15 minutes, can I make the same margin from this place? Fuel is a very low margin business, right? 1%, 2% margin business. Can I make the same margin if not the same revenue? No.
00:28:44
Speaker
This Shell app, why would people download it? They would get some discounts or some cashbacks or something like that? Yeah. Basically, it's offers on non-fuell mostly. It's still doesn't allow you to do much. You accrue points, which you can then spend. There's fleet loyalty. All of this is publicly available. In this app, the loyalty part is powered by you basically.
00:29:11
Speaker
Actually, the whole app is Power Mess. Ah, OK. In fact, in a bunch of use cases, like consumer goods, like this and all, we realized that these are not the typical store use cases when you're at the cash still. So these are slightly different. So we actually, the whole app is on us as well. So if we do a bunch around a lot more stuff on that.
00:29:41
Speaker
So you built the app as well like this was like a turnkey project
00:29:47
Speaker
Yeah, so we actually build the app on this case because it's only a loyalty thing. But we also needed to do that because we were trying to accelerate this piece for ourselves. So I thought rather than have five other vendors do this yourself and go deep. It gives you more control on how quickly you can release new features or do more stuff with the data.
00:30:14
Speaker
Okay. Amazing. Okay. So you are essentially a loyalty company. How does this differ from, say, like there's this payback, loyalty rewards? Is there a different business model for those companies versus capillary?
00:30:35
Speaker
Very different, very different. Look, we are a B2B player. Our customers own their data. We are a platform for them. Payback is where you're the customer and you're the product. Payback basically makes money by getting you to spend more at other places and all that. So what happens, I think the beauty of loyalty or customer data works when you're working with 70% of the customers of a brand.
00:31:05
Speaker
80% of customers over brand. What happens in all these coalitions right like payback, I mean etc etc is it contributes to 3% of your revenue as a retailer or as a brand. So, it is useless. What are you doing like and then it just becomes this over we had so many customers move from payback towards over the last 15 years.
00:31:28
Speaker
Like, you know, it's because beyond a point it looks to the customer, yeah, I'm just paying these guys this point cost. You know, it's not like, you know, while in our case it's their own data, their own teams work on our data, they are running their own campaigns, it's joint ownership in some sense, if not them owning the whole thing.
00:31:50
Speaker
So, as a net result, I think, yeah, and also what's happened is over the last, especially five, six years, right, as Amazon has, I think Amazon has done that great job of telling the world, okay, look, I mean, business is not trading, it is actually dealing with customers, right? So, you always need to have your own customer data, right?
00:32:11
Speaker
So what really has happened is, people would outsource all this stuff, payback, some agency, some business. What is payback? It's like a platform where you can plug in. It's like a coalition loyalty program. It's a coalition program. But the consumer has to see, I'm a payback member and I will like, you know, but actual truth is in most markets, less than 5% of customers actually will
00:32:36
Speaker
at the point of sale tell this guy am I am part of payback. So as a result the other way around where the brand asks you to look we have a program please be a part of it we want to take good care of you is a lot more you know the brand is taking control right. So you have much higher participation rates as compared to and then the analytics works the campaigns work the engagement works the growth in their sales works.
00:33:09
Speaker
I want to understand about M&A.
Mergers, Acquisitions, and Cultural Fit
00:33:16
Speaker
I guess that's the sign of a mature organization when it starts doing M&A. What is the way in which you think about M&A?
00:33:24
Speaker
pitfalls to avoid what is the way to make a merger successful because you acquired a company in the US also and probably you've done more post that also so you know tell me about that yeah no we've done four acquisitions for the last I'd say ten years I think two have worked
00:33:47
Speaker
one has is working now but took us a lot of effort to make work which is the Anywhere Commerce product. One was a total failure. So what was the total failure like the first one you did or which one?
00:34:05
Speaker
Yeah, the first one we did, right? It was a very small firm called Ruah. This was in 2015. We had gone and bought a machine learning modeling firm, a small company, two PhDs. That was like an aquihire. We wanted the IP and the tech, but very cool tech, but we very soon realized that
00:34:29
Speaker
especially with a lot of this PhD data scientist type stuff. It's great tech, but it doesn't work outside the lab. After that happened, we actually built our own AI machine learning teams and then engineered it properly and all that stuff. But yeah, sometimes. My view on some of this shown M&A is,
00:34:58
Speaker
I think the mistake we did with Flexi and Marjack was being bought for revenues. We shouldn't have, you know, there were a couple of other companies that we were considering which were much smaller. Three, four customers would probably had a similar product, a more newer age product. Probably that was what, you know, so I think M&A is great to solve the zero to one story.
00:35:27
Speaker
there was zero to one or any new product or any new market is a three, four, five year journey. So the first $1 million of revenue, the first five referenceable customers, the first 15 employees or 10 employees, I think is at least is what I feel is the right as a product company, I think that's the right
00:35:54
Speaker
M&A model, having tried a few things like doing something pre-revenue like we did with this AI machine learning thing. Very different because when the company starts working with customers is when the real rubber hits the road.
00:36:21
Speaker
moment arrives, right? Then it's not in this lab and it's a great work in the lab. You know, then customers throw you out if you don't deliver for three months on other patients, right? So yes, I mean, for me, I think it's more that side, right? So I would look at it as zero to one breakthroughs. But again, I also think the most important thing in M&A is culture.
00:36:48
Speaker
And we learned this the wrong way, like you know we were a very, companies are very, you know people look at me as an equal, almost like an equal, as we are not this hierarchical promoter run company, right. And I think some of the companies which we bought were just so hierarchical, right. The office boy will go get the bag of the gunner from the car, put it on the table,
00:37:19
Speaker
you know and I did not understand this at that point in time but there essentially there essentially means the whole org is like that. So, the org will not tell you like here and capillary if there is a bad news they will walk into the room and tell me right. So, like it is an open culture you come and tell. So, I do not have a double guess I do not have to second guess. So, while in some of these places I think the first learning for us in some of these places was
00:37:45
Speaker
People would not tell you like there is an issue and we were expecting people to tell you there is an issue right. So, I think cultural similarity and culture working is transparency right. So, radical transparency something we have always built capillary on. So, no one has to do second years anyway right, but those were stuff which were very different from you know some of these things we did.
00:38:07
Speaker
So yeah, I think culture do the zero to one shortcut, I think is easier. You know, you know, launch companies buy for the right reason is to do your zero to one for a new. Yeah. Zero to one for a new product or a new geography. And second is, uh,
00:38:31
Speaker
A product market fit proof should be there, like it should be proven that the product market fit is there. And third is... Five customers, about a million dollars of revenue and the same use case for those customers. Five customers, same use case for those customers and first 10, 15 employees who have stuck around and are culturally similar to you, I think is very, very important. Okay.
00:39:02
Speaker
And how do you integrate? Do you let them run their own shape or like how does that happen? The other thing I should say is you should have a very strong earnout model. What does that mean?
00:39:22
Speaker
Burnout is that you have significant amounts to be paid out post the acquisition. Okay. Don't pay everything. Don't pay everything upfront. Align, because more than anything else, it just aligns the hard conversation of saying, what do you want post the acquisition from that firm? And it aligns the founders also of the other firm, right? That this is what we are signing up for.
00:39:48
Speaker
You know, so it's not like a lot of times when someone wants to sell a firm, they are in this mode of, hey, I've run this for 10 years, now I'm tired. Right? So, or you're, you know, that you think, hey, I have paid lower salary so many years, now this
00:40:08
Speaker
private equity funded company is coming in, good salaries for everyone. And as you start, as you buy and you do that after two months, then as the buying point, you're like, oh God, I didn't think, I didn't think, I didn't think, I didn't think. So on the other hand, if you put it in saying, this is what I want from you, and this is how you deliver on that promise. So I think some of that is very, very key.
00:40:38
Speaker
especially for the management team if not the shareholders of that company. Shareholders of that company don't have any more influence right so you should probably take them and move but yeah.
00:40:51
Speaker
The operator founder should have skid in the game and be aligned with what goals you want to achieve through that acquisition. Why IPO? What is the reason to choose to do an IPO in this kind of a market?
00:41:18
Speaker
So we decided to start the process in April, May, June of
00:41:29
Speaker
So, almost 18 months ago it is a long process and then whatever. So, hence we are fairly are in terms of the process. So, I think two reasons Shai. So, one was look having well this I mean we got close and we again ended FI21, Janfer Malch 21 profitably right after all this.
00:41:54
Speaker
you know after even getting salaries back to normal all that stuff again ended it with you know with the 10% or 89% profitability I don't remember the exact number now but reasonably profitable right so and and so by then my view on the world was you know that I was starting to believe the right way to build companies is
00:42:15
Speaker
you know, like relatively mid thirties growth, uh, 10% of it, five, seven, 10% of it, keep increasing a bit scared to the, like that beauty, that inferior, right? Which was for 15 years, they compounded 30% with a 20% ever done the 25% ever done the 27% of it. Right? So I thought I fell into that camp of saying, this is the right way to build along the mark, right? It's not,
00:42:45
Speaker
you know it is not growth at all cost which we had tried earlier which we had you know. So, and this was April of 2020 and you know tech was. So, before and I think at that point in time in India you had a couple of companies Apple route which were in that 200 crore switch time revenue bucket which went public the stock had done well.
00:43:08
Speaker
they are not pure tech like one is an eye tech one is a CPAS provider types but there was some view of saying look like the threshold for at least people are doing semi-tech you know I would not call CPAS tech right so is not the
00:43:25
Speaker
you know 3000 crores as a commodity business or as an apparel business 1500 crores but is lower because people understand that margins are higher it's a different business right. So, so that was one thing the second was I realized that especially last year was very glaring right it was the market was just that oh like we I would go into these VC meetings or private equity meetings when people reached out facing lookly profitable
00:43:54
Speaker
And it was almost like people didn't want to look below the line. What are you growing at? And I think having gone through that whole thing, in my head I was sure if you look, the company I want to build and I think what we can build as a good company over the next many years is probably this infelike, right?
00:44:22
Speaker
30-35% grow and then get to 20% margins, like compound. You know, build a good company, build a nice company, right? Anyway, look, I've always had this philosophy in my works, that beyond the first 50 crores of money, money is not going to make a big change in anyone's life. And so we've kind of made all that, most of the employees have got reasonable exit. So I think there's not this pressure to say, hey, exit in 2 years, exit in 3 years, so we also had the wrong time here.
00:44:50
Speaker
And that was one big thing I felt that our growth, our 5% additional margins every year type story probably resonated better with public market investors than with private guys. So that was I think the biggest reason for doing it and thankfully the investors were very supportive.
00:45:18
Speaker
They said whatever you want to do. But are you listing because you want to raise more funds or are you listing for the benefit of being a listed company having that equity as a currency and under such benefits?
Sustainable Growth and Employee Value
00:45:35
Speaker
See, I do think we'll do more happening going forward. So definitely, equity matters in that sense. So we're also, in some senses, I think it's also value creation for employees. I do think compounding at 30% is like over 10 years is incredible, right? I mean, in fact, we'd seen the infe story, right? Infe was,
00:46:01
Speaker
I think 7800 crores of revenues in 2000, 7800 crores like I am not talking so I think there were 100 crores of revenues or something like that in 1992.
00:46:15
Speaker
And it's all been this very same 30 percent, 30 percent, 25 percent margin, 30 percent growth, 35 percent growth type for many years, right? So, I do believe in that look, given people have worked so hard for like 10-12 years here, you know, why not just compound hydrate with your future in your hands, right?
00:46:40
Speaker
And look, the fact is, business we are in, even if I go and scream and say, hey, there's a discount, please take, no one will take. It's large enterprises. They have to go through their evolve. Risk is more important for them than discounts. You can't spend to grow. I mean, if you don't need the incremental cost of
00:47:08
Speaker
of I would say forced growth is 10X higher than like normal growth, what the market can support. Okay. And what do you want to use these funds for? What you'll raise in the IPO?
00:47:25
Speaker
Like when we bought this US company, it was in the middle of Covid, right? So we were profitable, they were profitable. So I actually went with a typical average buyout wave, which is we raised only $2 of equity, $8 of debt. So we have some debt to pay back there.
00:47:45
Speaker
Obviously, as a company, we continue to build more products in this space, some of that. But yeah, mostly I would say, for paying data for long-term K-PEX type stuff. So we are about four months away from end of current financial year. What do you estimate as the revenue for this financial year, like ballpark? Can't say that. Can't say that.
00:48:15
Speaker
But we decent growth, better growth than last year. Let's put it that way. And what was last year? That number was public. So we grew at 26% last year. Again, we lost one quarter to COVID and all that stuff, right? So we grew 26% last year with a break-in. This year, we'll go faster with better profitability.
00:48:39
Speaker
26% over 32 million. So something like 40 million. 32 we went down. Our numbers are actually all in the public domain. We went down from I think 220 something crores to 190s.
00:48:57
Speaker
And then we went back to like 245ish, 247ish. I told you that we had one year of degrowth and gold. So I want to go a bit deeper into your people management and culture part of capillary.
00:49:15
Speaker
One thing is that I have seen a lot of people from capillary go on to become founders and scale their business as well. So there must be something in the culture which teaches them entrepreneurship. And then the second thing is you told me that one third of your first 150 employees are still with you 10 years down the line. Help me understand how you build this kind of culture.
00:49:39
Speaker
I think I told you, I was in IDC for a couple of years and we had this, my boss there was, I mean, my super boss, actually not my direct boss, was this guy called Cindy Brangras. Great guy. And she had this, you know, very people first view of the world. He was like, you have the right people, stuff will happen.
00:50:00
Speaker
So, unlike the other way around which most people are like you know, so I think our culture is a little bit like that. So, we always had this trust by default culture. So, give people, get the right people, give them like large amounts of responsibility and do not be behind their back right, be very accepting of like it is ok to make a mistake you know as long as you learn from it type.
00:50:29
Speaker
And that really I think has helped us with the culture for many many years. People have stuck around for, it's a very transparent culture. We also brought in a bunch of stuff from, like in Kharagpur we used to have a brotherhood fund in the hall, it was a boy's house, it was a brotherhood fund.
00:50:52
Speaker
So, basically a small amount from your mess bill would be deducted and kept aside and at the end of if any students you know there was a loss in the family or they really needed money for something you would get that from another fund right. So, and we had that in capillary for.
00:51:13
Speaker
1 percent of salary is deducted and then as a community if someone needs something you like especially health issues you know and you do have that right, you do have that and I mean you obviously have insurance and stuff but insurance does not cover everything right. So, like COVID was a great time right to COVID wave too.
00:51:37
Speaker
When it hit us, you know, almost 50 employees formed a call center. We had employees in like, I don't know, 100 cities by then people had gone to their homes and all that stuff. And there was this call center we had set up to call, find beds for people. So for one of our employees, we actually had to fly that individual down from, like airlift him from Patna to Hyderabad.
00:52:05
Speaker
you know find, call up people, get him into an Apollo and the family at that point actually paid nothing, right. So, the whole group together we raised some two and a half, three crores for that employee so that he could get an untransplant if it was required, right. So, luckily for us you know through COVID we actually didn't lose any employee.
00:52:32
Speaker
I thought that people moved in ambulances from over 300 kilometers, airlifted people. It was one man operation. It was one man. It was just incredible. I thought the way people responded to it was
00:52:53
Speaker
I always say that this capillary will be more like a community than a company you know and I think that that that's really helped over the years. Then we also taken care of folks you know like startups are not easy right when startups are very hard you know slow. I think around the fifth year or sixth year operation we realized that people tend to burn out. So, we have this thing in the firm where every four years you get one month fully paid off.
00:53:24
Speaker
It is like a sabbatical, so you go to, I mean you have some restrictions, you cannot go get married, you know, so it is really to go travel, learn something, stay at home, you know, stuff like that is ok, but yeah, so that is what, this world we pass, nothing is what we have a, one of the core beliefs in the company is to build a conscious workplace.
00:53:51
Speaker
your conscious workplace is essentially saying look, unfortunately the way most of us locate life is title and salary.
00:54:00
Speaker
But life is a lot beyond magic. The most beautiful things about life are beyond title and salary. So we do these two day retreats for employees. It's like two days of meditation and yoga and just a bunch of stuff like that. We had a running club for many years in the company. So a lot of us did our first half marathon.
00:54:25
Speaker
you know, all that stuff together. We all hit a couple on Saturday morning, 25 of us. So, I think that's helped the culture, that's kept the culture alive.
00:54:42
Speaker
It's amazing how you built that second-family kind of a culture, you know, and like the Brotherhood Fund of getting people, empowering people to care for each other. I mean, now it's not just an individual initiative, but you have access to a fund which you can use to help a co-worker who may need.
00:55:07
Speaker
Then the keep is always made good, right? So multiple startups. What also helped is, you know, I'm an angel in all of these. As I put money, people around me put money. So, in fact, I think almost most of the startups that come out of capillaries within the first three months raise a couple of million. Who are some of the startups in the capillary mafia? If I could use that term.
00:55:32
Speaker
you know this game very which is done very well is MPL you know MPL is I mean Shubh was our second employee it's very very early you had
00:55:48
Speaker
You've met a few of them, Nectar, which is Abhijit's thing, and then Angkor, Bamboo Box. We've faced this, which is actually Pravanjan, who's our CTO. He started up again, done fairly well.
00:56:06
Speaker
Yeah, I think that there's your dose which is again a capillary, you know, there's a bunch of them. I think there's a list of about 50-55 now. Wow, amazing, amazing, amazing. Okay, so we need to make this term viral now, capillary mafia. 50 is a fairly big size.
00:56:28
Speaker
I think there have been enough deaths as well. We've had people who started up, come back and joined us again. It's been a very open culture in that sense. You know that you want to start up a darling workout. I've told people actually this that you really want to start up, you're worried about something. Go come back after a few years for a darling workout. Yeah, yeah, yeah, yeah. Amazing, amazing.
00:56:55
Speaker
Quick update for listeners of this episode. We are now recording a year after we originally recorded with some additional updates and a couple of unanswered questions. Let me start by, you know, I had asked you about the product and you had told me way back in 2010 what the product looked like, how it captured data, generated an offer. What is the product today?
Product Focus and Market Expansion
00:57:19
Speaker
Right. So we power loyalty programs for customers. So basically, it's the whole membership management that's signing up customers across channels. Then a single view of that customer across whether you're online, offline, wherever. If you're subscribed to our program, then managing the subscriptions.
00:57:47
Speaker
In typical airline hotel type use cases, it's things like the points and miles and all of that. And then we also have a pretty strong engagement product, which is once you're part of a program re-engaging with you, getting you back, all kinds of reminders, if your points are expiring, if your membership is coming for a renewal, things like that. So that's the whole gamut of it.
00:58:14
Speaker
Think of it as end-to-end managing a customer's lifecycle with a brand. Is it on autopilot or like the reminders, the communication which goes out? Is it like set and format? Yeah, it's all automated. You can go change, of course. A bunch of stuff is automated. In fact, we have a bunch of stuff which is
00:58:40
Speaker
We use a bunch of AI in the tool as well. So the tool would prompt the marketing leader or the CRM manager or whoever that these customers haven't come back. So a lot of the, even the thinking is in a sense, reasonably automated into the tool now. So while we stay on the product, I think
00:59:07
Speaker
So in this space, in the loyalty management space, we are now globally the best regarded product. So there's an analyst called Forrester. Forrester is known on the CMO on the marketing side, and we're the highest rated product on Forrester globally now. And we feature on a bunch of other waves. Even on the engagement one, we feature that I think we're on the top five, the number one there. So I think the product has come a long way.
00:59:37
Speaker
You know, so, uh, why not go full stack and also offer point of sale software like billing and all, because they're so related. Uh, why, why work with other billing softwares? If you have a customer, then upsell billing software also. You know, I think that's, that's a massive Red Ocean, right? So what do you mean by Red Ocean? Yeah. So, um, like,
01:00:03
Speaker
It's an extremely fragmented space, too many competitors. If you get into that space, we don't compete in that space today. What we felt was that replacing a point of sale system is akin to an open heart surgery. What we felt was it's better to integrate with those folks rather than compete with them. Like you have asked,
01:00:33
Speaker
There's been this constant question we've got many, many times from, you know, from customers, from investors, from everyone saying you should build your own POS when you're doing 50% of the work. And our answer to it has always been that look, we don't want to compete in that space. You know, it's also a different buyer, like the like our products are bought by a CMO, while the POS is typically bought by the CIO. And
01:01:01
Speaker
It's a different space to be in. And it's also a very extremely customized, highly fragmented space. I don't think we'll ever get into the POS space. We'll stay in the loyalty and customer engagement and marketing life space. We'll never get into the transaction only space, which is what a POS is.
01:01:27
Speaker
Okay, so you're saying that loyalty, the product works across industries, be it headlines, be it hotels, be it retail, whereas for POS, you'll actually need to maybe acquire a company in each of these, you need to acquire a company which has a hotel POS and acquire a company which has a retail POS and so on. So like, it's not worth the amount of effort you'll need to put in to build it up across segments.
01:01:55
Speaker
And for something like us to work, we need to be integrated into the POS. So if we were to go and build a POS ourselves, why will the large POS folks continue to give us love? Today, it's just that thing of saying, look, it's not a space where we want to play in.
01:02:16
Speaker
And it's an extremely fragmented space. So if you look at retail itself, I don't think any retail POS player has more than a 5% market share. It was an extremely fragmented space.
01:02:31
Speaker
If you want to cobble up that space, it'll be like 100 acquisitions, not one. Wow. As compared to loyalty management, if you look at the Forester Wave, it's 14 large players globally. It's still a red ocean, but it's not like deep red. If you're good in technology, then there are
01:02:58
Speaker
places where, you know, you could really just, those areas are not red ocean. I think good tech is still blue ocean in the space. That's not true with the POS space as much.
Complexities of Loyalty Programs
01:03:10
Speaker
Okay. What's the, like, what share does capillary have in the loyalty space? Like very rough estimate. Yeah. In the Asia markets, like India, we'll have a 30% plus. In the rest of Asia, we'll probably have 10, 12%.
01:03:25
Speaker
US, Europe, we've just entered, right? I mean, this is our year. We are a series A funded company in the US, right? So it's like two and a half years. Our first customer was signed up in January, March of 2021. So less than a percent in market share. And as you would guess, US Europe is like 75% of the addressable market. So yeah. So Asia, I think, is more like, I'd say, 10% to 30% market share,
01:03:54
Speaker
US Europe, we are knocking on the doors right now. So you said that replacing a POS is very, very hard, like an open heart surgery. Replacing a loyalty program, is it equally hard? What kind of resistance is there from a customer to replace a loyalty program that they are already using? Yeah, so that's a very good question, actually. So Forrester did some, they published a bunch of research that
01:04:22
Speaker
the average customer stays with the loyalty provider for 11 years. Fairly sticky. Very sticky. Very sticky, right? So which is where I think even our strategy has been a little bit on saying, so people do come up with RFPs every 7, 10, 11 years, right? So it's a very sticky buy. But it's like the technology, especially in the West is like,
01:04:52
Speaker
Loyalty programs have been around forever in the West, right? So those tech stacks are, I would say, 20 years old, 25 years old tech stacks, right? So our strategy in the US has been, while Asia has been only organic, we've grown through winning new customers and stuff. The US and Europe, we've kind of said 50% of our growth will come organically. The other 50 we'll actually buy.
01:05:18
Speaker
So we do, in fact, in the last six, seven months, we've done a couple of acquisitions now. We've done three acquisitions in the last two years in US and Europe now. And the idea there is you buy a book of business, you then are easily able to move those customers to your tech platform rather than wait for those customers to come up with an RFP and then do a whole new thing.
01:05:48
Speaker
And that's working well, because what we do is we convert the existing software that the customer is using, the company we bought into like a middleware. So that helps as the integration platform in some senses. So the customer then gets access to a much better tech platform. You get access to much bigger, larger customers. So that's our way of dealing with this very large sales cycles and very sticky business that loyalty is.
01:06:18
Speaker
Okay, amazing. Are acquisitions, are they a bet you take or is it like a well oil strategy? You know that if I spend X dollars on an acquisition, it'll lead to Y dollars of value creation and it's fairly predictable and you know, what is it like? Because acquisitions can be very risky.
01:06:42
Speaker
like, you know, lost a lot of value due to wrong acquisitions and so on and so forth. So, so, you know, including us, including us, including us, you know, I think we did a bunch of acquisitions in that 2015 16 space where those didn't work out for us. Right. So, uh, so I think lots of learnings that, you know, I, we, we, we wasted at least 30% of the equity of the company doing acquisitions, which didn't work out. Right. So, uh, so we have made our,
01:07:11
Speaker
our fair share of mistakes there. I think my learning there, Akshay has a little bit of, I think the biggest risk on acquisitions usually ends up being product. So if you're buying a new product, it ends up being, whether it will work, whether it's good enough, whether it's feature rich, whether it's the best product in the market, all those end up being very large risks.
01:07:37
Speaker
And hence our thesis has been to say, look, I think we have the best product in the loyalty space. So let's buy other companies in the space and add to revenue. So you're actually, hence, eliminating a lot of the risk. You're eliminating a lot of the product risk. You're anyway the best product in the space. That's not what we are saying. That's what a forester is saying. That's what a bunch of these large consulting firms are saying. So when you then go to a customer and say, look, hey, we'll upgrade you free.
01:08:07
Speaker
to what's the best product and the space. A lot of them then just are happy to move. So I think we've somewhere got to a space now where we know that we are buying sub-scale competitors of ours. We know that you're buying companies which are not great on technology themselves. And hence, we're able to make the math work very well. I think the thing with acquisitions is if you're buying with 10% margin of error, God bless you, you're not going to get too far.
01:08:38
Speaker
If you're buying with a 50, 60% margin for error, things will not work out in an acquisition. There'll be some pieces that will definitely not work out. If your margin for error is 50, 60, 70%, then what do I mean by 50, 60, 70%? If you're trading at 6, 7, 10 times revenue multiple, and you're buying at 1 to 2 times revenue multiple, then you have massive margin for error. And you will get at least 20% of your thesis wrong on every acquisition.
01:09:07
Speaker
While if you're buying something at like, you know, you're trading at 10 times revenue and you buy something at 9, which is kind of what we used to do in 2015-16, then God bless you. Right. Then you're definitely going to have like a rough time. Okay. Phenomenal. Can you explain the smiling forever with some example using numbers and all? I just want to like get a little more clarity on this.
01:09:32
Speaker
You know, as you know, we've generally traded at 10 times revenue, right? Like whenever we raised money as a business, we've kind of raised on the ballparks of like the 10 times ARR or 10 times last 12 months or next 12 months or something like that. Right. So and so when we did a bunch of acquisitions in 2015-16, we went and bought companies at like eight to nine times.
01:09:56
Speaker
So it still looked like you were buying at like a 10, 15% discount, which is kind of the margin for error in some senses. So what I'm meaning by that is after the acquisition, you realize that 20% of customers churned or that the technology was not good. You have to invest X million dollars to get it to a good place. Your margin for error is all gone. While what we're doing now is essentially we're saying, look, we have the best product in the space.
01:10:25
Speaker
So I'm buying a book of business. And what are the companies we're buying? We're buying companies where we know that, and they also know that if they have to build a tech platform like Capillary, it will cost them like tens of millions of dollars. And if you're a $10 million revenue company or a $20 million revenue company, investing $10 million to build a tech platform is not going to work for you. So the founders there or the management there already knows that, look,
01:10:54
Speaker
you know, I think we are going to be disrupted just a matter of time. And so they are happy selling it like, you know, five times a bit or, you know, one times revenue or two times revenue, because they know that if you look at a five year view or a 10 year view, most of the customers are going to move out if they don't make that big tech investment. And making that big tech investment will mean, you know, it's a big risk, right? Even after you make it, you don't know if you will
01:11:22
Speaker
really end up being competitive enough and things like that. So the more recent acquisitions we've done have been more in the companies that are not growing very fast, one to two x revenues, that kind of space. So it then gives you a lot of margin for error. And acquisitions, I think, are all about the margin for error.
01:11:49
Speaker
Amazing. So you would buy like a 10 million ARR company for maximum 20 million. But that 10 million ARR getting added to your ARR would increase your value by 100 million because that's what you've been historically raising. Probably let's say in an year, right? You will have to move those customers to your platform. The companies you're buying will also be at lower gross margin. You will be buying companies at like 50% gross margin while you operate at 75.
01:12:15
Speaker
Now that movement from that 50 to 75 is going to happen by you moving tech platforms, right? Once you move to tech platforms, you know, then we tend to have a average upsell. Like if I have a hundred dollar book of business that grows to $120 on the existing customers every year, right? So our net retention is 120. Now a lot of these companies you're buying are probably going to have a
01:12:41
Speaker
0%, you know, we just breaking 100% retention rate. So some of those changes happen when you move the tech platform, right? So it's going to take you that effort for an year, year and a half. But at the end of an year and a half, you know that this will be a 20% free cash business with, you know, and we've proven that now with a few customers that like the first set of acquisitions we did, the second company we bought is again on that same track. But essentially, you're able to show that
01:13:10
Speaker
You're able to migrate customers. You're able to get those customers to buy more from you the next year. Stickiness is far higher. Customer NPS is at least 20, 30 points higher than what it was on the old platform. So a bunch of very tangible things which you're able to then move, which then adds, which then makes that two times revenue multiple or one times revenue multiple like nine or 10 times revenue multiple. Amazing, amazing. What's your error now?
01:13:41
Speaker
You planted that well, but I can't answer that. Let's say we'll get close to 100 in the next 12 months. Amazing. So your next round will be a unicorn round. You know, I hope we don't need to raise the next round. The business is profitable. You would have a pre-IPO round. Typically companies do like a pre-IPO fundraise before the actual IPO.
01:14:07
Speaker
We raised $40 million in March of this year, right? So the option we had was continuing on the IPO path where we had an approval from SEBI and all that. But the markets were in the dumps in March. They're brilliantly doing well now. But the good thing was, in spite of the funding mentor, we were able to raise like a $40 million round.
Financial Goals and Company Culture
01:14:32
Speaker
So, you know, the business has been doing well, it's kind of at a break even for the last couple of years, we've been growing like 30, 35% organically, you know, we have a very good inorganic thesis of buying other companies now. So we were able to raise. So with that, I don't think we need to raise more primary as such as a business. Of course, we have investors, so we have the responsibility of getting them an exit.
01:14:58
Speaker
So there might be second race. You will probably, in the next 18 months, want to go out when you're at that 100 million type revenue run rate, when you're at 10 million of free cash getting generated in the business. I think a 10% free cash, 30% organic growth is an all-weather public company. What happened last year, or probably a little bit of what's happening this year also, is a little bit more
01:15:29
Speaker
Great weather companies, right, which is the markets are going very well, you do very well, otherwise you get slapped around like quite badly. Do you regret not doing the IPO? I'm actually very grateful we didn't go public. I'm actually very grateful we didn't go public, you know, because if it if it had happened, we would have gone, right? I mean, who would not?
01:15:51
Speaker
But in all the conversations, we had a lot of love in terms of meetings. So we had 15 investor meetings, all kinds of folks, like the largest funds to, mid-size funds to, market makers, et cetera. So there's definitely interest in SaaS in the India markets. That was proven very clearly. But one thing we realized was that unlike the US, where people are OK with loss-making companies and all that,
01:16:19
Speaker
I think in India, folks want to have a 10% free cash. And we were at a breakeven. I mean, our numbers are public in the DRHP. And we were at a breakeven for a few years. But probably an year or two to get to that 10% free cash on a sustainable basis without impacting growth. I mean, you also want to grow at this around the 30s and the 10% free cash organically.
01:16:47
Speaker
And then you do whatever you do in organically, right? If you're able to add another 20, 25% growth or 10, 15% growth through inorganic, I think that's the right mix that we kind of want to get to. And then probably another 18 months before we go out again. What's your stake? Like what percentage? It frankly doesn't, you know, my view on money action has been that
01:17:16
Speaker
beyond the first 50 crores in life, it doesn't practically, and 50 also is with a great margin of error. Money doesn't change the quality of life. Yeah, it's just a number. It's just a number. And thankfully, very early in life, I realized that there are many better things to change in life than money.
01:17:41
Speaker
So let's say that my my equity in capital is worth more than 50 crores. So anything more beyond that is not really going to change like quality of life for me. Although capital for me is not only about money. I think it's about building a great company. It's about culture. It's about building the best product in the space globally, building a market leader globally. I think some of those money can be an outcome. But you know, so what's my
01:18:08
Speaker
What's my value and what's my worth in terms of capital? More than what I need. I think it's the right answer to it.
01:18:16
Speaker
Yeah, I'm, I'm guessing it would be like a single digit percentage at this stage, which is typically, you know, when companies are nearing IPO and you know, a lot of founders of early stage companies have this, you know, dilemma of should I dilute and do I really want to be just a 5% owner of the business, which I'm building. And, you know, so what's the way to think about that? You know, I think I would say that, look,
01:18:45
Speaker
ownership is not just about how much you own in the company. Other than the financial ownership, if the company is doing well, the investors don't get all the laurels. I mean, you get all the thing. If you build a great company, the satisfaction for that sits with you. I mean, if you're having companies coming out of your company, if you're as capital, we've been very lucky to get a lot of entrepreneurs coming out of us.
01:19:12
Speaker
So, so all that satisfaction sits with you. So just saying, you know, so the way I would look at it is, okay, I have single digit financial ownership in the company, which is more money than I ever needed in life. Right. But everything else, like, you know, I think I have reasonable ownership, right. So, unfortunately, and look, I don't come from I come from 2008, right, when, when building a company was not about money. So I am not from that mold of
01:19:41
Speaker
You know, I don't connect with this whole unicorn valuation. I don't connect with this whole, you know, I'd much rather tell an investor, don't invest at a much higher valuation in me. Like, let's come in at a reasonable place, you know, so that you make money, we make money, everyone makes money, then try and maximize this, you know, multiple or whatever.
01:20:05
Speaker
Okay, one last question I want to ask you. What's like an M&A success playbook? You know, when you acquire a business, do you, for example, keep the existing leadership? Do you send in someone from Capillary to make the change happen? You know, what are like some of those steps which you've learned that if these steps we do it, then it's likely to be a successful merger. You know, I think every acquisition is different. And what do you realize is that
01:20:33
Speaker
We diligence a lot more before than after. And the thesis has been very different. So the first acquisition we did persevered, which was in 2021, September 2021, that is our US business today. So we rebranded it as Capillary. And so it was the same team that ran for at least the first 18 months.
01:21:05
Speaker
So the second acquisition we did, however, was slightly different in the sense that they were slightly loss making. So we had to turn it profitable. We had to take some cuts on day one to get it to that place. Now, this team also had a lot of great talent. The second acquisition we did, Riley and Partners. So we actually ended up promoting the head of HR there as our global head of HR.
01:21:33
Speaker
Our global head of consulting is also from Riley now. So I think it's very, like, you know, I hear a lot of people who we've spoken to saying, fire the entire leadership on the first day, plant your people in. I don't think, you know, I think these are, these are very, I would say these are very specific to each company decisions. Right. So if you have great talent, you'd be stupid to fire them. Right. Now,
01:22:00
Speaker
Now, have we let go? Have we have we asked a few of those leaders to leave on day zero to get it to profitability? Yes, like we had a very large finance team which we didn't see any need for. So.
01:22:11
Speaker
because we anyway have a good finance team and whatever. So we asked that CFO to leave, I mean, of the company we were acquiring. But again, I'm saying it's not like one thing fits on. It's never that way. And should you move your people into those companies? Definitely, yes. Because it then gets to a unified culture
01:22:38
Speaker
What you don't want to do is build a Frankenstein, that there are 20 acquisitions or 10 acquisitions and each of those has their own culture and they run very differently and all that. So we do believe that integrating on day one is critical, but integrating on day one doesn't mean finding the entire rest of team or none of that stuff. Integrating on day one is a very thoughtful, who do you keep, who do you not keep, what are gaps that you have that you fill,
01:23:08
Speaker
So there's a lot of thinking that goes on into, and each one acquisitions have, hence margin for error is similar. But what you do in terms of people is extremely custom to each acquisition.
01:23:23
Speaker
And that brings us to the end of this conversation. I want to ask you for a favor now. Did you like listening to the show? I'd love to hear your feedback about it. Do you have your own startup ideas? I'd love to hear them. Do you have questions for any of the guests that you heard about in the show? I'd love to get your questions and pass them on to the guests. Write to me at adatthepodium.in. That's adatthepodium.in.