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storytelling - funding your start-up #startup
SQRRL Away, Save and Invest
Have you ever sat in a park and watched squirrels action? Try it sometime-you'll find it extremely relaxing. And if you have, you would have noticed that these cute little creatures locate small nurs and berries. Some of them are eaten, but, most importantly, others are stored away for a rainy day. One by tiny one. In the process, the squirrel actually builds up a large 'corpus' of nuts and other edible items.
Fascinating though squirrels can be, we need to move away and focus on start-ups. Specifically on an interesting person called Samant Sikka. Samant was a senior vice president at Axis Bank and an investment adviser to his clients. In other words, his job was to help clients save and invest money. One day, he was sitting in a park near his house and doing precisely what we have discussed above watching squirrels in action. Suddenly he sat bolt upright-and scared away the squirrels in the process. Weren't the squirrels doing exactly what he asked his clients to do? Saving small amounts bit by bit and ultimately building a large corpus?
That was the time Samant decided that he would form his own company, which would do precisely this-help clients 'squirrel away' small amounts of money, and thereby grow the corpus over time. He spoke to a couple of friends who were as excited as he was, and agreed to become co-founders. Quite naturally, the company was to be called SQUIRREL, but he ultimately plumped for the shorter and more interesting SQRRL (he was a bit averse to vowels, you see).
Now if you are a normal human being (sometimes we do need to make such baseless assumptions), you would agree that saving is a very tough thing to do. There are just so many terrific spending opportunities around you that you never get down to saving. Or perhaps you are abnormal and do manage to save, but inertia prevents you from doing it too often. Too much hassle. You may do it a couple of times but it ends there. And that, dear reader, was the barrier Samant and his colleagues needed to overcome. Getting people to save on a regular basis. Something that was most unnatural for most human beings.
So how did they do it? For the answer to this question, let's take you back to your grandmother's days. Now, in those days, most women did not work-or rather, they did work at home but did not get paid for it. So your grandmother did not get a salary. But she did get money from your grandfather for household expenses. Very likely she would keep what was called a gullak, or piggy bank. A small, round earthen container-usually striped with a slot for putting in coins. Now, every time she spent some money on buying vegetables or milk or whatever she had to buy, she would get back some change. And this is the crucial bit-a small part of this change would be pur away in the gullak-perhaps as little as 25 paise or even 10 paise. That's it. Every purchase would lead to one or two coins going into her 'corpus'. Importantly, she could not take this money out unles she broke the gullak. And therefore, the corpus got built over time.
Now please note something very, very important. This approach to saving was entirely painless, simply because the amounts involved were small. She might have spent, say, Rs 12 on vegetables and 10 paise extra didn't really hurt. And that, ladies and gentlemen, was the key to Samant's thinking. He had to make the process of aving painless. So if you spent Rs 680 and this was rounded off to Rs 700, it wouldn't hurt you just as the 10 paise didn't hurt your grandmother. And this extra Rs 20 would be saved. Now if you've understood this concept, you've just understood Samant's offering!
How does it work? Well, you are aware that every time you make a purchase which can be through a credit card, a debit card, netbanking or even by cheque-you get an SMS on your phone. SQRRL. then accesses this SMS and extracts the amount you have spent in this transaction. At the end of the day-or week, depending on what you prefer these amounts are added up, and SQRRI rounds this up to the next hundred. This 'rounded-up amount is then SQRRLed away and added to your corpus. As an example, if you have spent Rs 754 during the day, SQRRI rounds it up to Rs 800, and this additional Rs 46 is then SQRRLed away.
Of course, there are a couple of caveats. When you sign up for this service, SQRRL has to be given permission to access your SMS and it doesn't pick up anything other than financial transactions. Definitely not messages from your girlfriend or boyfriend. Secondly, you could specify an upper limit per week or per month so that you don't go bankrupt!
Aha. Can you now see one major benefit of Samant's approach over your grandmother's? Sure you can here, the squirreling away dane automatically. You do not have to remember to save those titbits every time. They are automatically saved, simply because you have given instructions to your friendly SQRRL gullak to save the amounts at the end of every day or week.
And, by the way, what do you think Samant called this offering? Guess?
SQRRLAWAY, of course!
Now, here it is important to understand Samant's thought process. Who was his target audience? Samant was very, very clear. He was looking at young people. Those who had not yet got into the habit of saving and investing. After all, older people would perhaps already be into some kind of monthly savings through SIPs (systematic investment plans), which are offered by all mutual funds. Samant realized that he would find it tough to get such people to switch to his offering. And, therefore, he was attempting to tap young people before they had got into such investments. Essentially college students and young professionals. So that he could inculcate the savings habit in them at an early age, when they were not thinking about SIPs. And perhaps hadn't even heard of them. He realized, rightly, that he needed to catch them young and then make them customers for life.
So you have now understood the critical part of Samant's offering-namely the automatic and painless saving. And now we come to the other equally important part-this corpus that was getting created incrementally needed to be invested, so as to give some returns on the savings. Unlike your grandmother's gullak, where 10 paise would remain 10 paise, Samant had to ensure that you got some returns on your savings, and therefore the corpus grew. Now here you must appreciate the thinking of the young person who had begun his or her savings habit with SQRRLAWAY. What if the corpus was to be invested in the stock market? Sure, the returns were likely to be high. But what if Donald Trump were to initiate yet another trade war with China, and therefore the stock marker tanked? Or the United Kingdom decided to get into Brexit mode again, and once again the market tanked? Or a war were to break out between Upper Lamaria and Lower Lamaria, and therefore world trade collapsed, once again sending the stock market crashing (by the way, we are not sure if Lamaria is a real country, but it sounds like one, doesn't it)? Anyhow, to get back to SQRRI, Samant could use all his persuasive skills to try and convince the young saver that the two Lamarias would kiss and make up, and therefore the stock market would ultimately revive, but would that convince the saver? For perhaps the first time in his life, the saver had started saving and suddenly, due to events in the US or the UK or Upper Lamaria or anywhere else in the world, his savings had crashed. And he was l with less than he had put in in the first place. Would SORRL ever be able to convince this young person to persist with his habit of saving? Of course not. He would probably leave immediately, use a few choice swear words for SQRRL (which we cannot reproduce in this book for obvious reasons), and also get his friends to leave.. Now, Samant was smart. And he realized early on that he could
not take a risk with the money put in by first-time savers. So rather than expose them to the ups and downs of the stock market, he decided to offer them something simple and safe. Liquid funds. Easy for customers to understand, with better returns than a savings bank acount and, above all, non-volatile. All amounts SQRRI.ed away from a customer were invested in liquid funds. And if you are aware of what these are, you would know that they are safe, in the sense that they do not tank. And they give you returns every day-even though these returns are very small. Typically an annualized return of around per cent, similar to fixed deposits. But they are returns all the ame, and the important thing is that the saver could actually see his opus growing every day, thanks to the liquid fund. Even better, he could ask for his corpus back whenever he wanted. And so Samant was able to add the icing on the cake for the saver-even though it was a very thin layer of icing. In the process, he believed that he could get the first-time saver to gain confidence in SQRRL and therefore get hooked to the habit of saving.
Having got several young people hooked, Samant was now ready to take them to the next level and therefore to his next product. That of goal-based investing. Here SQRRL would start by getting you to define your goal which could be a foreign trip, or a car, or that heavenly motorbike which your girlfriend was dead gone on (and the one her other potential boyfriend was planning to buy). Along with your time frames for this goal. And one more critical piece of the puzzle-namely the levels of risk you were willing to take. Based on these inputs, SQRRL would do asset allocation for you appropriately. Does this sound like Greek? Or Hebrew? Okay, let's take a single example. Suppose you wanted to give yourself a foreign holiday in two years. So that was your goal as well as the time frame. Now if you were a risk-averse person, you might have to put in, say, Rs 10,000 every month, which would be invested in some debt fund g you returns of, say, 7 per cent minus tax, and with that you could manage. But if you were willing to take a short-term risk, you migh need to put away only Rs 8,000 every month, and this would be invested in the stock market-through equity mutual funds-w could give you 12-15 per cent returns per year. So with this highe risk, you would need to put in less every month to reach the same gal within the same time frame. Obviously, the higher risk meant de if the stock market crashed, your corpus would actually come down and you would not be able to ski in Switzerland, or play with gin in Namibia, or whatever it is that you wanted to do. Of course, in de long run, you would recover your losses and make much more than you would with a debt fund, but your vacation would be pushed in the future. But that's the meaning of risk, isn't it?
As with the rest of his business model, Samant was clear that the keyword here was simplicity. Most of his customers were unlike to be interested in the complexities of investing. If he were to brag in terms such as NAV (net asset value) or alpha or beta or price a to-earnings ratio, the effect on the customer was likely to be, Ta complex for me. I don't want to get into all this.' So Samant simplifie the whole business of investing by creating three categories d savings-high risk, medium risk and low risk. But that still sounded complex, so he cleverly branded them as 'Adventurous', 'Practic and 'Cautious' portfolios. That's it. If you chose the Adventu portfolio, your money would be invested largely in the stock ma through mutual funds. For the Practical portfolio, it would b combination of stocks and debt funds. And it would be entirely debt funds. And of course, given that he dealing with young customers, the obvious interface for them was app, which he developed, along with his team. Simple, isn't it? Define your goals and time frames, specify your risk levels, and SQRRL would help you figure out how much you needed to put away every month, and where. All through an easy no-use app.
So that was Samant's brilliant concept-getting people to save, and subsequently invest. But, of course, you are aware that every business will have competition lurking around the corner. Now Samant's initial offering-SQRRLAWAY was rather unique. Yes, there were a few small-time players doing something similar to encourage people to save, but there was no biggie in the business. However, for the second product, namely goal-based investing be was competing with literally an army of agents selling mutual funds Agents who anyway exhorted people to invest small amounts regularly through SIPs. Which essentially is what his goal-based investment product was. So how could Samant hope to compete in ach a crowded space? How was he different, and therefore how could he get his customers to invest through SQRRL, rather than leave and levest through the many, many other agents lurking around?
Well, first of all, Samant was 'catching them young'. Most of his customers were college students or young adults who had not got into the SIP culture as yet. Hopefully, with SQRRLAWAY, they would have built some level of trust in the company. Because of which they were likely to buy their mutual funds through SQRRL, rather than through some other agent. It wasn't guaranteed, of course, but it was likely. Next, notice what Samant was doing. He wasn't just selling mutual funds. He was actually doing some level of financial planning for his customers. The kind that financial advisers would do for more wealthy guys. The regular agent selling mutual funds would simply ask the investor to start an SIP of, say, Rs 5,000 in some specific mutual fund. Which was largely an arbitrary piece of advice. But Samant was doing much more. He was asking his customers to define their goals, time frames and risk levels. How much they would need to invest every month and where would be decided based on these inputs. Samant had actually made SQRRL into a simple, basic-level financial adviser for his young clients, which typical agents wer definitely not. And that, ladies and gentlemen, is why he stood from the crowd.
Finally, we come to a very, very important question-what abou revenues? Sure, through SQRRLAWAY he was able to enrol young adults and get them into the habit of saving painlessly. In that see he was solving a real problem. But would people pay for this? Maybe or maybe not. And if they were asked to pay, the numbers he coud enrol would probably reduce dramatically. Further, in the goal bed investing option, he was helping them plan and achieve their gra Once again, would people pay? Unlikely. However, by now must have realized that Samant was a smart entrepreneur. He hut decided that revenues were not really his immediate priority. H priority was to catch lots and lots of young men and women, and gr them into the habit of saving through an automatic, painless proces Hopefully, these customers would stay with him for life, or at least f a long, long time. And there would be lots of opportunities to offer other products and services to these customers over time-such share trading, financial advisory services, sale of insurance produ etc. For which he could charge a fee. By the way, if you have noticed this strategy is very similar to what some other smart people d as Mark Zuckerberg) had adopted in the past. Get lots of customer hooked, make it a habit and only then focus on revenue.
The Fund Raise and After
A few months into the project, the founders decided to raise funds Now their fund raise was a little different from what you've seen wi MyCute Office, so you need to wake up and read carefully. Wa your face if that helps. This was a B2C business, with no immedi revenues. Revenues would only come in the future. At the san time, it was vital to grow rapidly and have a large base of exceed and hopefully loyal users. Which meant major marketing spend Also, Samant would need to build a completely automated sys which would include a smooth, easy-to-use interface for the users. So he would also require funds for product development. In other words, the company was in a position where it was unlikely to get any significant revenues in the foreseeable future but at the same time it would require large funding. In fact, about a million dollars (around Rs 7 crore, for those of you who are too lazy to do currency conversion).
Clearly, this was a major challenge. Samant and his colleagues realized that most angel networks would not be able to arrange this kind of funding. So what did they do? Obvious, isn't it? They simply skipped the angel stage and went directly to a VC. Happily, it worked. The VC was impressed with the founders-senior professionals with just the right kind of experience. They also liked the concept. And what really worked in their favour was that the founders had walked away from successful corporate careers and invested a large chunk of their personal savings in the venture. Which spoke volumes about their commitment. As a consequence, SQRRI was able to raise its
first investment of a million dollars from an early-stage VC fund! At this point, it's interesting to hear what Samant has to say on the subject of fundraising:
There is too much hype in the media about funding. It seems to have become a kind of validation of the business model, ast well as the team. So instead of focusing on the business, many entrepreneurs get distracted and spend unnecessary time and effort on fundraising. Which has huge ramifications in the long run. The really tough job for founders is to strike a balance between business growth and fundraising.
Incidentally, fundraising is a double-edged sword. You must remember that a VC is a fund manager who has taken money from investors for a fixed time period-say five years. At the end of this period, the money needs to be returned to the investors, hopefully with significant gains. And that means the VC needs an exit. So by design, the start-up is expected to give the VC such an exit. And that's the trap the entrepreneur can fall into where he is building to sell rather than building a great business, as was true in the good old days. You cannot build to sell. Build a great business-if, along the way. you ger an opportunity to sell some stake, maybe you could. But your aim should not be building to sell.
Fortunately, the VC from whom we raised money wa completely aligned with our vision and backed the team. And that's my advice to all young friends reading this book Choose your investor carefully. The investor's thinking must be completely aligned with yours. They should be a partner in the business rather than just an investor. I would go as far as to say, 'Who you take the money from is as important as the money itself. Don't take the money if it comes from the wrong investor. It can be a pain.'
As you can imagine, the money Samant raised helped him to grow the Fa business. At the time of writing this book, he had well over three h SQRRL savers cum investors on board. And the number is growing to rapidly every month. Incidentally, now that he has these customes th he has started offering them paid services such as insurance produs as well. Yes, dear reader, Samant is very much on the way to realing an his ambition-of becoming a giant in the financial services busines
And by the way, if you were to check out the business channes on television, you might just catch Samant advising young inves on the concept of SQRRLing. We strongly suggest you tune in. And we can guarantee that you'll benefit from it.
Analysis
Most of this analysis is obvious, so we'll leave it to you-definie
a PROBLEM waiting to be solved, a very large MARKET SIZE
highly SCALABLE business, a great TEAM led by founders w
just the right experience, catching customers young before they booked to the SIP mutual funds bandwagon, and hopefully them for life... But there is one issue that we must discuss, because that goes strongly against our PERSISTENT model. Yes, there was a PROBLEM, and Samant had worked out a terrific solution to it. but the key question is, 'Would customers pay? Aha. Most likely not. Because investing in mutual funds which is what Samant was ultimately doing on behalf of his customers-is free. So why would customers pay? In other words, did he have an EARNINGS MODEL2 retaining
Samant was very clear that he did not want his customers to pay. At least not right away. He simply wanted them to sign up, get hooked and make saving, and therefore investing, a habit. And he wanted lots of these customers. Over time, he could get revenues out of them through other paid products-which he was able to. Or use advertising to generate revenues rather like his illustrious predecessors Facebook and Google. So in the long run, he expected to get revenues, but in the short term, he simply wanted to maximize his loyal customer base. Crucially, he was able to convince a VC abour his thinking-numbers first and revenues later. And that's how he got his money.
That's an interesting thought to end this story on. You may not be earning revenues right now. But if you are adding a large number of sticky customers who can give you revenues in future, that's fine. Investors will buy into the idea. Just remember that you will need a large amount of funding possibly multiple rounds before your revenues kick in. So yours would not be a typical angel-investor Rory. You'll need some big angels-the real HNI variety-or a VC fund, for this kind of fund raise.
The Impact of the Coronavirus-or Any Other Crisis
While the COVID-19 crisis has made things tougher for everyone,
at least in the short term, just look at the opportunity it has opened up for a company like SQRRL. You would agree that habits w change and people will spend more time at home-at least in the short to medium term. They are less likely to go to neighbourhood agent to buy mutual funds or insurance policia. That's where a business such as SQRRL can benefit. And that's where you, dear founder, can benefit as well. If your business largely online, you have a better chance of getting funding. If it's ou online, well, pivot your business so that at least part of it goes online And therefore enhance your chances of getting funding. their friendly.
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