In this podcast episode, Dinesh talks to Karthik B. Reddy of Blume Ventures about his journey starting a business in India around the time the internet was first introduced there. He was passionate about doing some business that would be centered around the Internet and in India. He waited for the Internet to be announced in India, and as soon as the announcement was made on August 15th, 1995, he asked his manager to transfer him back to India.
Dinesh also shared his thoughts on business growth and profit margins. The compounding can come to you when your margins are expanding. He encourages entrepreneurs to aspire to this kind of compounding. He also talks about the importance of having a mix of talent in a team, including those who are operationally strong and can focus on present problems, as well as those who are forward-thinking and consider future trends.
On India’s growth story, he emphasizes the importance of small and medium-sized enterprises (SMEs) in creating employment and income in India. He argues that ignoring SMEs could lead to disastrous consequences for the country. Dinesh’s thoughts on SMEs and the importance of employment highlight his commitment to building a successful business in India that benefits all stakeholders.
Karthik: Today, we have the privilege of hosting Mr. Dinesh Agarwal, the founder and CEO of IndiaMART, which is one of the largest online marketplaces in India, connecting sellers with buyers from both Indian and international markets. In the past two decades, Mr. Agarwal has played a vital role in revolutionising the business landscape in India, enabling countless micro and small enterprises to establish an online presence.
His great ideas, long term business strategies have earned him widespread recognition. It's a 25 plus year journey. It positioned him as one of the few founders who not just started in the dot com era and survived it, but grew their companies to greater and greater heights going public in 2019. And it's been a great story post that as well.
Mr Agarwal, welcome to the Blume podcast.
Dinesh: Thank you. Thank you, Karthik.
Karthik: So I think…sort of overview…this hour or so we're going to spend is broadly broken up into about three parts. I'd love to hear the back story. Everyone wants to know the story behind IndiaMART and Mr Dinesh Agarwal and then we will move to a little bit of your views on where you think the market is because I think people's general scepticism has been: is the India market great? And we want a global audience to understand how the market has evolved and how IndiaMART has grown in that and as you know the theme is Power of Compounding.
So it's been a little bit of an obsession this year, at least for Blume, to talk or build a narrative around why compounding is great in the long term and how it starts yielding benefits after you've stabilised the business and then the business tends to take off. So, we'd definitely love to hear your views on that.
No better example of that than IndiaMART. So, if we'll get started with the backstory and, you know, our research, please correct any of this if it's slightly incorrect. Our research suggests you started as a systems analyst at HCL in the US, and decided to come back to India to start IndiaMART in ‘96. Personal savings of 40, 000 rupees.
And this was way before anybody knew what a startup was. So what is venture capital? And forget about being cool. I'm sure there were lots of small businessmen. But in your particular case, what convinced you to take this plunge? I mean, did you have a plan B? I mean, and that's always the question on the panel gets asked even today.
Dinesh: Let's go back a little more. You know, I come from a small town called Nanpara Bahraich near the Nepal border. And that's where I studied until...my schooling.
And then went to HBTI Kanpur. And I was one of the first few batches of computer science. And fortunately, after graduating, happened to work with some of the very advanced technologies… started with the Indian Railway reservation system at CMC Limited.
UPSC automatic, copy checking system at, you know, then at C-DOT working with Sam Pitroda trying to design or trying to work on a domestic, indigenous, digital telephone exchange. So while I was in basic computer science, I think I was exposed to networking and the internet and those kinds of technologies early on.
And then I went, because everybody was going to the US, I also went to US.
Karthik: Yeah. It was fashionable to go into post grad or work in the US if you could.
Dinesh: Yeah. So, and, after staying there for a year or so, two, three things happened. I think I got a lot more conviction about computer science than what I had, because of my fascination during the Rajiv Gandhi era.
Dinesh: And that's how I took computer science. And then this whole internet started to happen in the US between 93 and 95. So one of my uncles was already there in the US for long, I didn't want to kind of settle down and live there forever because I knew the power of compounding of boriyat there in the US is far, far more higher. So my initial enthusiasm of going to the US and being cool and weekend trips all dies down after 4-5 years. Then it's really, really boring. And alone, you start to miss your culture, family. There are still a lot of people. Even now, I can see my sons after spending 8-9 years now.
Karthik: They're done.
Dinesh: They are like India jaana hai. So, and things have changed.
Karthik: Absolutely. It's a very different opportunity.
Dinesh: So, two, three things became very clear that the internet is, the thing which is probably going to be here for the next 10, 15, a hundred years. And it's a much bigger invention than, probably electricity even.
Number two, I wanted to do some business only and I wanted to do some business in India only and, something around the internet only. So these are the three, four things. So I actually started to wait for the internet to be announced here in India. On the 15th of August, 1995, the Prime Minister announced the internet from Lal-kila, on the very day same day, I told my manager, please transfer me back to India. So by October, 1995, I was here and without any plan, but I just knew that I want to do some business in India for Indians to be able to use technology because I didn't like the fact that most of the high tech engineers, after doing IITs or computer science would not find much to do here in India.
And they would go and automate the Western world with no benefit other than sending some remittances back home, which is not the idea of my education was, mine was: how can we utilise this whole education and experience back for India? That was very important, probably because I come from a family which has had a history of freedom fighters and all that.
So, the second part was that I wanted to do something around the internet. So I, for the first six years, months or so, I actually roamed around in Pragati Maidan and different trade fairs. Sometimes, you know, modem selling, sometimes peripheral selling. I also thought whether, computer education is a good area.
But somehow, I think we ended up zeroing down on a website making basic idea, which is computers and the internet and whatnot. So that's how I started. And you know, taking a plunge or not, I think in those days when you are five years as a computer science graduate being at one of the best companies in India and the US, I don't think we had too much of a risk. That what will happen and what kind of plan.
Karthik: Your opportunity cost wasn't that high.
Dinesh: Yeah, so we said, we'll do 4, 5, 6 years. And if not, we will find out how to do business in India. Come from a business family, so I knew that kuch na kuch toh business possible hai. So that's how it started. And even the IndiaMART, when we started saying that okay, we'll make a website, I first learned myself, how to make websites, otherwise I was a telecom engineer.
So, I found it to be very easy to make websites. Very, very easy. The question was: for whom do we make websites? Because in India, internet connectivity had just started. Forget about internet connectivity. Even the computers were... very little penetration, very few. So, taking cues from…while I was in the US and finding anything Indian, any Indian product or any people who are importing any Indian goods was very difficult.
You know, unlike China… China was rampant. Chinese products were rampant while Indian products or finding any information about Indian businesses, exporters was… While I came back here, there was a big thrust on export, but no information and no, but not much of…you know, ITPO and these trade promotion organisations were still trying to work.
They hadn't worked since the 80s, but then suddenly they were trying to work on the same model as the offline model. I thought, there's a bigger opportunity there. If we do newer models and use the same trade promotion. And I think we studied Hong Kong Trade Development Center, global sources and some of those models as well.
And how they have modernised their models to take it to the catalogue on the internet and things like that. And from there, I think we got this inspiration that…let us start making websites and directory for exporters.
Karthik: Got it.
Dinesh: Rather than…so it solved many things. There was a need for that information in the West.
Exporters needed a level playing field. Small exporters needed a level playing field against large merchant exporters who aggregated and made it difficult. You know, added the cost. And these people at least have…were mostly visiting the US and Europe, so they were exposed to the idea of the internet and computers. They will sometimes bring a laptop home.
Karthik: So as an exporter, you're saying they were surprisingly more adept at knowing more…
Dinesh: More adoption. Adoption was there. Buyers would push them. “Can I communicate with you on email?” Because international communication was expensive. Adopting an email communication was like 100 times cheaper or 1000 times cheaper and faster.
So doing a fax or doing a phone call was very, very expensive. And not that effective. Email could make all that effective. So all that made sense. When you make websites, because when I was in the US, the only way to find some information for me on the internet was through Lycos or Yahoo or Google search engines.
Because there was no other way to find information. And I thought if you are the only person giving that information, the search engines would have a duty, in fact, this is their business model to bring out this information, because if they can't bring out that information, their customer goes away. So, all that worked out and that's how I think the ball started to roll.
Karthik: Fascinating. No, I threw back to various memories and I'm wondering how much of our audience today even recall Sam Pitroda, etc. And those were the days. So clearly I'm not too far behind in terms of generation. And, some curious coincidences.
I used to work in financial services before I went to the US for my MBA and kind of fell in love with the same idea that technology can transform so many businesses. And this is the future of what is possible. Wanted a pie in every hand so thought venture capital even back then in 1999-2000. Because I was sitting in business school, you're exposed to a lot of these and you see, you know the dot com boom and it looks very exciting and before I knew it it was the dot com bust.
So then I struggled to figure out like what…Where do I fit in? And four, five years later, the emotions were almost very similar. So in my storyline, I call it the Swades Moment 'cause the movie Swades came out in December 2005. And so the part of the joke in the family is that picture dekh ke woh inspire hoke wapas aa gaya.
But in my mind it was already ready. And I think there were two triggers. The company I was working for got acquired, and I also came back. And even here, back here, which is the point I was going to ask you... Even in ’06 with the first of the VCs having landed in the country and a lot more knowledge of startups and one cycle of attempted failed startups that already happened between ‘97, ‘98 and 2003.
That phase felt like a black hole. Very few people who built, lived, even as an early stage entrepreneur, and survived to today. I mean, if you actually go back in history, I think even a Vijay Shekhar Sharma, even Ashish Hemrajani, of course, Sanjeev Bhikchandani, of course, Dinesh Agarwal, all of you were like born in that era of excitement of building something in tech.
Like, in a good and bad way, not horror stories, but like sustenance grit stories from that era. So if you can give us some anecdotes around how difficult was it? I mean, you make it seem easy that need tha, maine dekha, and we started solving it. And you're absolutely right on that front. That's how a great business foundation gets built. But I can't imagine it would have been easy for the next five, seven years.
Dinesh: Yeah. When you choose something very, very, transformative or very forward looking business, which is probably, because my thought itself was that it will take five to 10 years to build something meaningful.
Karthik: Yeah, there was no urgency or foolishness around thinking that in 2-3 years something will happen.
Dinesh: But the beauty of all those businesses at that point of time was that they didn't have this luxury of any external funding or venture capital. I didn't even know what is venture capital.
So they had to find a sustainable way to reach, to pass that seven or 10 years journey. Or a five to 10 years journey. If you'd imagine that you have to live till that long, you have to find a way. How are you going to make money? Or how are you going to keep the cost lower? And still keep on growing because you know that even within my own vision, it is at least five years away, whatever I'm trying to do. It is not something happening overnight or in the next one year or two years. So you have to live through that time. And whether it is family, friends, or whether it is your own money or whether it is.
In those days, money is used to be, you know, thousands and lakhs maximum. So, and that won't...
Karthik: Yeah, sustain you for all this. Any excessive spend over what you can make...
Dinesh: Yeah, so what you have to do is find a way to make money. And in our case, we were building websites and many other, Naukri and other people, I think they were all trying to make some microsites. We also did email solutions, basic intranet softwares, anything that we could do around the internet, which would give us a lakh or two as a services business and somehow if it is adjacency to my IndiaMART basic exporter directory business.
Now where do you start because if there is no base of trade promotion or anything, people don't have computers, you definitely need an email ID. So few innovations or few compulsions came in. We would have our people going in front of every trade fair wearing T-Shirts noting down their addresses and some free listing form. We would send hundreds and thousands and thousands of free listing form to every directory so that they can come back with the better because we could digitise much more information than what was there in a yellow pages directory. A yellow page directory typically would have just four liners or three liners.
You could digitise the whole page. So you need to collect all that information. So we did that and for a long period of time. One of the innovations was that we compulsorily had to do… every day when the inquiries come from West and especially America, every evening we will print those inquiries, fax them overnight and next day send them by post to the suppliers in India.
So it was buyer on the other side is on the internet. Email. Sellers here are on the normal way of doing business. And we will print those inquiries, fax them overnight and send them by post. And that continued for five years for us from 1996…late 1996.
until 2001, this happened and every day for the initial few days I would go with two bags full of envelopes containing inquiries, sit down in the post office for half an hour, sometimes doing the stamps by myself. And I don't know whether that worked or not, but that gave us a lot of inspiration that we could do even if we can. We were so bought into our idea that we could go even to that level to make it happen. Just like today, people say that…we will pick up the goods from you, collect the goods, deliver somewhere else, then take a return, refund it back to you. No questions asked. So there are people who believe that e-commerce can make them money and that is why they are doing all this, right?
Going all the way to pick up the goods and do all that. Similarly in our time, whatever money we had, we still could not gather any courage even today to touch the goods. We feel that touching the goods is a different business. It's a very different business.
Karthik: Yeah, it's so fascinating. No, so I'm going to switch gears a little and actually try to see if you can recount this. So for me in these compounding journeys, sometimes one of the great milestone markers for what compounding truly means is potentially, I know I haven't set you up for this question, but I'm sure…this number, when did IndiaMART reach 1 crore, 10 crore, 100 crore, 1000 crores of revenue?
Dinesh: I actually remember all my 27 years of revenue by heart. So, 6 lakhs, so in the fourth year we reached 1 crore, 24 lakhs. And then, we reached 12 crores, 12. 5 crores in FY 2005. And we reached 100 crores in FY11. And we reach 1,000 crores in FY23. There you go.
Karthik: No, it's like a fascinating run off revenue growth and amazing that you know these numbers inside out. And so, while we were prepping for the conversation, if you recall, I think you spoke about… ompounding happens all the time, even at an earlier stage. The only difference I wanted to project is it's very difficult to compound at scale, and that doesn't happen if you've not built a baseline off phenomenal organisation, culture, profitability at some lens, because otherwise you're at the mercy of investors giving you money to compound.
So as long as investors are paying for it, it feels easy and maybe a lot of startups get away with that. In your case you've shown that just hard work and product market fit back in as early as 97 drove that kind of growth. Even back then. So philosophically, that's what I've been trying to drive to my founders, right?
As a VC, we want to be able to propagate a certain type of entrepreneurship and just wanted to hear your views and insights on compounding…
Dinesh: You know, I've seen even day to day businesses. Yhey also grow at 10%. I mean, they generally keep 10% as their baseline. Did I grow 10% from the previous year?
5, 6% inflation for 5% inflation. So you're trying to grow at least 5% over and above the inflation. So that's anyway, the basics of business. I know everybody in the salaried employee also expects a double digit growth in their salary.
Minimum double digit kind of a growth. So, that's a given. You are right at the earlier levels, at the lower levels or lower volumes, you could grow even a hundred percent, 50%, but that's not what is required, even at the larger volume. So at a larger volume, people's expectation is typically 25, 30%, 33%. You know, I have seen some of the best companies….
Karthik: I call it like the HDFC, IndiaMART, like models.
Dinesh: Yeah. So even Amazon or Google's of the world, they typically…when they grow upwards of 30, they take a lot of pride even in 20, 25. Anything when it goes down to below 20, is bad.
So I think, you know, 10%, anybody can grow. And if you've taken venture capital, if you've taken many years, and if you want yourself to be called not a businessman, but an entrepreneur, whose spelling I still don't remember, then, 10-20 is that much at least you can manage. Now the question is, between 20 and 30 is the rating. You know, you tread at 30, you become a rockstar. At 20, you are like…good to survive. So I think, and then compounding at the latest stages also is not about revenue compounding only. That's good. Or customer compounding. Compounding is about growth in profit.
So there the compounding can come to you…a higher, better compounding can come to you when your margins are expanding. So if your business is structurally set up in a manner that there is a hockey stick going to happen sometime and then there is a cost versus revenue, even if revenue is growing upwards of 22, 20 5%, profits are growing fastest, is growing, only 20%.
The profits are still growing at 30% or so. So that compounding, everybody should aspire to. It's not that very difficult, and don'tcome back and say “you yourself is growing 22% and how giving Gyan is easy”, but I think it's not very difficult also.
I mean, doing a 24, 25% with 1% margin expansion, I think it's possible, is possible, should be possible. Otherwise you need to go back to your product market fit or strategy.
Karthik: No, good points. That's what I think we keep debating. I'm saying this is exactly where I was at. Why do current modern age entrepreneurs seek so much capital and so much time to validate exactly what you said is a baseline for great compounding? It feels like a lot in the context of being operating in India, so if you're doing radically new technologies, which takes 10 years to mature and that was the purpose of venture capital.
If you think about it, 50 years ago, semiconductors, mainframes, personal computers, chips, networking equipment, all built by venture capital that I can understand where you had to put in the CapEx and the R&D to get there. But as you said, a lot of the businesses in India, whether it's B2C or B2B, dhandha from day one.
You either…there's a PMF…
Dinesh: Is there a network effect? Is there an exit barrier? Are there not entry barriers? Entry barriers are…there is plenty of capital. Today you can say in case of Amazon, there is an entry barrier because they have made so many warehouses and fulfilment centres that now it's an entry barrier to even match that kind of delivery.
Karthik: network wasn't there in 2012 when they came in and competed with Flipkart?
Dinesh: So I guess, the entry exit barrier. What is the exit barrier for your customers or what is the stickiness and what, how does it help, what is the flywheel and what is the network effect? How your business grows when the client business grows?
So I think some of those parameters, if they are not thought well..and that's why I try to always classify all the venture funded business or private equity funded business into trading kind of business or a technology network effect kind of business.
Karthik: It's a great lesson for all the young, investor VC personas who are listening to you today cause I think fundamentally that when the difference is not made, then you, you get the wrong bet for what you think you've made, it becomes too capital intensive. It becomes capital guzzling. And as you said, the exit barriers are a tool.
Dinesh: The best example is the duopoly of cab hailing services. Evverywhere in the world despite the fact that every time you pick up your wallet or pick up your phone, you end up paying them 500 rupees.
I don't think any other great business model is like that. And, even in that case, Lyft and Uber are struggling to make money. That's it. So I think there has to be something else to that flywheel otherwise somebody will come back with a hundred million dollar and create non profitability for you.
Karthik: And so if you had to summarise lessons on what did you have to face this dilemma of compromising growth for profitability at any point of time, would you make a choice? And what is yours? I know you've expressed enough views, but what is the summary view for young entrepreneurs in the country when they're making these choices for themselves?
Dinesh: So I think I did whatever I did was from the first principles and trying to do this and trying to do that, when I look back, a lot of that is actually now found in the books, what we ended up doing, and it's well researched and written, and especially in the network effect or SaaS kind of businesses, when do you press the pedal and when do you press the break? Especially in the subscription kind of businesses. When do you find that there is a enough product market fit and then you go into a loss making knowingly that the CAC versus LTV is going to improve over a period of time? And then the mistake most of the people have made is that initial thought was that it is 18 months to break even then it became 36 months and then it became unlimited.
So I think that's when you have to course correct and it says very clearly in various articles written by different people, when to press the pedal and when you can actually go for growth and leave the profitability and when to revert back especially in a subscription CAC LTV kind of business.
Karthik: Your business lends a lot to that kind of predictability and you can get a grip on it. You're absolutely right. Most of them talk about it in the SaaS world because that's better documented, but it applies very much to your subscription businesses. Maybe a little bit more insight on your core business, marketplaces themselves. Whenever we're back to the marketplace, the challenge is not necessarily achieving, like how you knew the exporters had a need.
And you made sure that need was fulfilled as you got the customer inquiries from the US. It's that easy to do one way. But how does the flywheel actually begin to operate? And we found anecdotally, that a lot of your sellers are also buyers on your platform. So it's clear validation and multiple levels.
But how… what does it take to get this flywheel moving? How does it accelerate? Because most marketplaces seem to get stuck on a suboptimal scale. And maybe it just happened naturally because you built very well, took a little bit more time and then it started kicking and that's obvious.
But is there any other cue that you can give us and maybe related to that? And maybe you can weave both of these, what might've started as your original presence in NCR and some international buyers. Today you have a presence in a thousand plus cities, right? Across big towns, small towns. How do you do it?
As you're building that flywheel, you know that these are all not identical customers as well. So they're different buyers and sellers across these segments. So how do you keep adapting to that as we went from a web world to a mobile first world, etc. So trying to get a grip on understanding how this business grew into what it's become today.
Dinesh: Let me first break it down to two different eras. Out of these last 27, 28 years, first 13, 14 years, as I said, we were purely focused on export and we didn't entertain Indian buyers because our customers were exporters and they didn't understood.
Karthik: Yeah. They didn't serve anybody here.
Dinesh: So our suppliers were here and buyers were in the US, Europe, Middle East and those places. There, it was lesser of a network effect, lesser of a flywheel. It was a very basic flywheel or a network effect because there was a directory and since there was a directory, when a buyer wanted to search for something, say, ceramic cup from India, they could at one single place find 10 ceramic cups exporters. And as the 11th got added, the 11th buyer found it more more useful.
Karthik: Interesting as a direction…
Dinesh: Yeah, however, that was still two separate sides of the network effect, two different creatures. Sometime around 2008-09, 2010, we started to think and realise that one, that India export story, which started from 1991-92 until 2007, 2008, is kind of again, plateauing because of whatever government. And so nothing new has happened during 2006 or 2004 to 2009 timeframe, which could actually re-propel exports for a 30%, 40% growth and we could sense…
Karthik: Yeah, you have ground data. You're seeing the sentiment.
Dinesh: Also, the smartphones were about just coming in. And the Google searches became more local, the search responses became more local. Third, whatever you say, India, by 2008 had enough number of internet connections and reliable internet connections.
It was very difficult for us to keep the Indian audience away from IndiaMART because the exporters did not like them and the Indian audience kept coming to them for Indian inquiries. And that was a tailwind of Indian buyers looking for this kind of a product directly. So we purposefully said that, now let us...since, export we can sense that it is not growing. India is giving a signal that there is enough demand now in India. Why not focus on domestic B2B? And domestic B2B has one more advantage. Because it's a domestic and B2B every buyer is a possible seller and every seller is definitely a buyer, that's good. Because if you are selling something, you are definitely a buyer of something.
And every buyer is also, if he is a business buyer, he must be selling something, kind of thing. So, that became another strong community effect. And that is why, for the next 3-4 years, we pumped money heavily into the India market - domestic. And we built this whole supply side - domestic supply side and also I think we found few more innovations around product, whether it is, virtual number through number masking or whether it is RFQs, which are generally used by large corporations and governments enable them on the platform or whether it is prices on the B2B to become transparent, which is very opaque. Nobody wants B2B prices to be upfront. Just like general consumer goods. So I think three, four things that we did actually made it much more easier for us to create this whole better community and network effect. And that…any new buyer or any new seller joins platform, he not only finds it interesting and useful for the rest of the already accumulated buyers and sellers who were there for a period of time. I mean, just like a Facebook or something like more of your family, more of your friends are linked, LinkedIN for that matter, join more of your photos, more of your check ins, more of your linkages, keep happening and the network gaps, deeper and deeper.
So that level of flywheel and network effect is very important to understand in our kind of business.
Karthik: Fascinating examples and shows how close I think the organisation's ear is to the pulse of the market and each of those additions have become mini flywheels, which are then creating the level of consistency that you don't generally see.
And that's what I meant by compounding as well. This seems like a classic customer compounding story.
Dinesh: The good part is that when you create a product market fit. One is that small product market fit over the years can generate many, many micro product market fits. So these RFQs are by-leads what we call..we gave them, then we started to re harvest them.
Then we found that this is the first time sellers are themselves coming on the platform every day. Otherwise, sellers advertise on the platform and then next year you collect renewal. And then only they will tell, saal bhar mai kuch fayda nahi hua. No buyers came in. But because these RFQs were there, the people started to come on the platform every day.
And then we started to know, okay, whatever is in his catalogue, only this portion of the catalogue is far more important because he's consuming only these leads. Rest of the catalogue is actually not... he's not interested in. So while we gave him 200 inquiries; he only wanted these 20 inquiries.
So we actually started to push, more like these 20 to him and, take away more like these 80 and started giving those to him. The data tells you a lot at that point. And then we introduced what you liked and what you didn't like. And that today is laying out the foundation of further RFQ recommendation as this one was rejected by me, this one was selected by me, this one was..so it's a foundation of ML that what all kinds of RFQs do I like and what kind of RFQs do I don't like.
Then, based upon "don't like”, further regions started to come up, whether I don't like the location, whether I don't like the specification, whether I don't like...
Karthik: You're getting better and better with matching this every day.
Dinesh: ..and information to correct my own taxonomy, to correct my own things. So, what happens is, one small seed that you sow, if that becomes ingrained into the product market fit, it can give you multiple outcomes every couple of years. And while your initial cost was the same, you could get more and more compounding effect of outcomes from…so I don't think we do too many product market fits every year, we actually end up doing maybe one product market fits once in three years, but then I'm harvesting three product market fits for the last nine years. So every year we end up harvesting three additional benefits of those product market fits.
Karthik: So that's fantastic. Inadvertently, we have already cut over to the next section where you've touched upon compounding of the customer need, compounding of how product market fit plays a role and then leads to sort of revenue, et cetera.
Then I'm going to touch upon..they're all different topics, actually, whereas I'm using compounding as a theme but they touch upon two, three different things. One is this amazing stat about your leadership team now being intact for almost a decade, right? What does that mean for your ease of building out the business to become bigger and bigger?
Within that is culture.. a different aspect, or is it ingrained in how sort of leadership takes the organisation forward..
Dinesh: Your own long term view, the founders long term view on the business, if it is not percolated to every employee, then that founders vision that I would work here for 10 years, and while employees can keep coming, because the natural duration of millennial employees is only two and a half years, it doesn't work because at least at the middle senior level, I do a very candid conversation that are you even thinking five years, 10 years with us? Then only join. Otherwise there's no point because in three years, you can't really make a difference. Can't really understand how this is, what we did in 2014, how it played out in 2017, and how if we don't do this today, why would it not…so I think it is very important for a large number of people to keep it one well oiled machinery and two to understand by doing happens and what can happen and what cannot happen.
So it is very important to have a longer view of the organisation and of the vision. And that is from day one. So we try and do that as soon as you complete one year, three years, how do you become a five year, 10 year, seven years…So in our case, last year we had 3,000 employees, out of that we had 1,000 employees who were more than 5 years.
And 300 employees more than 10 years. So I think that is very important because if you can't again,it forms a base for like…it's a knowledge company and people are the main ingredients because you don't have a factory, you don't have a patent whatever…you have the knowledge which is residing in the…yes, you can put a lot of process, so that people become irrelevant…but at the end of the day, they're nine years of experience or seven years of experience. It's very important to say when we did this, that didn't happen.
Karthik: So any, any pro tips on… I know you spoke about propagating vision to everybody. So then you're probably giving them direction and a sense of why they need to build what they…you're asking them to build collectively.
But are there any other tips that young founders should be able to pick up saying,.. how do you build that kind of culture? I know you asked the tough questions, but how difficult is it actually? I mean, especially given what you said, it's difficult to hold talent nowadays…
Dinesh: I mean, what do you call talent? You know, so there is a alpha talent, what we call very highly talented, but sometimes the more alpha it is, because they can do many things…he wants always run. bhagna hai to the next new thing, next thing, FOMO, because that's what makes him an alpha, while we continue to look for stable alphas.
We stay away from unstable alphas… We are better off with the stable betas and few stable alphas because if you get too many alphas who just keep thinking, what's the future. Because then who's thinking what's the present? Who's doing what is the present?
Because get things done is important, right? Fetting that done. Typically Alphas don't like it. So I think, you need to have a mix of talent. Talent who are operationally strong, who can do, who can think “ our today's problem is this.” We can't live in the future all the time.
At the same time, some people are always, reading the newspaper or articles… what's going to happen three years down the line, five years down the line. It's a healthy mix is basically what you're saying. The mix is very important because if you get that mix wrong…and managing that mix, how to value them and how to value them, is also very important.
Karthik: So two, three things around compounding of value to all stakeholders, your employees, investors. Phenomenal story, I think, which is undertold in the Indian venture ecosystem around, so similar to revenue. I don't know if you recall your journey and were you ever cognizant of valuation or value that you had created at a point in time?
And how do you distance yourself from that on a day to day basis before you went public? Now you have no option. Somebody or the other will remind you of how much your valuation is, your market cap is. It's public news. But before that how do you stay away from that? And therefore the core correlated question is, why do you think if you have an opinion... I'm trying to change that perception in the market, but with my portfolio first and then by writing publicly that it is more imperative to try and find a path to build a long term sustainable organisation and then compound in the public markets.
So I know you waited a long time before going public. Were there any reasons for or against that? And how did you understand the value marker until you went public and then it's been a phenomenal story after going public. What do you make of your life that now that you've gone public and it's actually worth 18-20 thousand crores given whatever the market price is on a particular day when you actually IPO'd at three four thousand crore ranges…
Dinesh: So two three answers. First of all for the first five ten years of my journey.
I think the valuation itself was not established in the first. No. Probably it came in for a little time during ’99. Few people before it could even be understood by Hindi medium, sarkaari school people, you know, students like us. It just vanished. Okay. So bust ho gaya, before the boom.
So, fortunately, for the first 10 years, the only numbers which were important was, what is my revenue? What is my cash flow problem? And how much am I able to pay to my employees? Because I had them when I didn't have money. So can I make their lives better, make my life better?
And two sets of stakeholders other than customers. Customers are always in the centre. So without customers, none of these two is going to happen. So keep doing everything for the customer or the product. Because they were the only payers. We didn't have any investors, financers. So customers' money is the only money.
And how do you maximise that between revenue, profit? So maximise revenue from customers. And see how it can drive some profit so that you can give back to the employees and yourself. That was the only model. Between 2006 and 2016, I think, or 2007 and 2017, this whole valuation, paper valuation that…even if you hold 5% of a billion dollar versus 50% of a hundred million dollar…you know, said by you guys to market your things, I think a lot of founders bought that, and that was a wrong bet that they took. I don't think that that is correct. 50% of a hundred million dollars is better than 5% of a billion dollars. Okay, for sure.
Karthik: We're playing for our incentives. You're absolutely right. From a founder lens, what you're saying is probably much saner.
Dinesh: So because there were a lot of VCs, they were more, more educated came from the US, so they knew how to market themselves in this whole. And then brought the term Unicorn, which, I think now, but hopefully between 2007 and 17… 17 and 27, people will realise and this will, this will balance out.
Some balance out. And you yourself are receding from that fact. So I think because valuation on paper is very frothy and can be… we all have seen how even a company like Naukri which has been listed for like 16, 17 years has gone from half a billion dollar to, you know, close to 10 billion dollar to 6 billion, 5, 6 billion dollar.
So it can be very frothy and even if it is there, it is there for investors to cash in, cash out, not for founders. You sell two shares and you will be news! I don't even have a trading account because of this. So paper valuations are for your investors.
Not for you as a founder. And if you get carried away from there, I think you're playing for the wrong instances. You're trapped by other people into their game. Now coming to the other part. Why did I take so much longer?
So it is not, see both the times that this 13-14 years of the first business and 13- 14 years of the second business, it took us five years typically to find the product market fit and become profitable enough. First time also by 2003, we were making a good amount of profit and if the export story would have continued, we would've gone public then, in whatever, 2007, 08, 09 timeframe when now went public.
But then we changed the business model completely. So it's a new company, which was born in 2009 December or something. So from 2010 January, We started to build a completely new company, which Only the name is same, everything else is different. The ingredients were exporters, now the ingredients are local manufacturers and buyers were all foreign buyers. Buyers are now foreign. So again by 2014 end, we had found the product market fit. It took us four or five years.
And then you wanted to see numbers to have a credibly large access. And then, from 2016 onwards, we started to look for IPO. Because in 2016 we found another distraction where we went into a journey where we actually touched goods and tried to deliver and tried to do that.
I think it closed down in 2017 or so, between 2015, 16. So that's when we did another private round for Tolexo. Not for IndiaMART. IndiaMART had actually found the product market fit in by the end of 2014-15. So we could actually go do IPO in 2017-18, anyway. 2018 it could have happened, but then ILFS crisis happened, so it got postponed by 8-9 months.
Karthik: So, the final question on that segment is like...what is going public and seeing a notion of this, and maybe the related question is...we've talked about various types of compounding. What is your north star on compounding? What do you obsess about when you say… obviously it's not market cap. I know you better to ask that question, but is it revenue? Is it profit? Is it people? Is it customers? Which guides the rest of your decision making?
Dinesh: I've spent enough time with company and no longer even obsessed by my personal money or just for taking a number, how many customers can I make? What kind of contribution to the GDP can we make? So today, we make anywhere between half a percent to 1% contribution to GDP. How does this whole thing get further? How do we make it cheaper and easier to do business in India?
How should we not fall prey to 20% commission marketplaces? How do we…a proponent of 0% commission marketplaces or 2% commission marketplaces rather than 20% commission marketplaces? How do we extend the benefit, instead of say just a couple of thousand sellers?
And millions of buyers to a couple of million sellers and billions of buyers. So unlike transactional marketplace, where there are you know, 10, 20, 100, 2000 suppliers serving the needs of millions of buyers. Yeah. How do we make millions of suppliers? Because India is a country which can only flourish if there are because we can't create formal jobs like like in US, , where everybody is
Karthik: I’m fully with you.
Dinesh: I can see that we can't do away with the SMEs. And if we somehow ignore them, this will become a hell. Yes, the country will become a hell.
You have to create employment and income. They're not engineers, they're not MBAs. And if you don't give them business, what else can they do? They can't go back to labour in the fields. They're not kissan.
These are the only four or five employment ways. And one of the biggest, very big employment bases, is the inefficiency that we live in. Why do we have every kirana shop every 10 metres, every a hundred metres? Why do we have a paan shop every 10 metres? Why can't people walk half a kilometre?
And because that is where he makes one rupee per cigarette more than if you walk one kilometre and you are happy to pay. So something like this when you are trying to cut the middleman's commission completely and do away with that. It might be good for you for the short term, but it's not good for you for the long term in the country. And you'll not be able to survive if your people around you are not employed.
Karthik: I love this avtaar of Dinesh Agarwal of dekhbhakt!,
Dinesh: Not deshbhakt, you know, how would you survive? You wanna see that progress? Because it is imperative for all of us to be able to grow. Because if you want to survive, the country has to grow. Your surroundings have to absolutely be happy. You can't be happier alone when your surroundings are not happy. At the same time, I'm going to make money.
Karthik: I wish everybody thought that, you know...it is selfish and it is unselfish.
It's a great way of thinking about business in a self preservative way, but the construct is beautiful.
So last question before I get to rapid fire. I know you've dabbled with a little bit of angel investing and you support a bunch of founders. We've seen you on certain cap tables. What is your motivation? Is it just to give back? Or do you focus on sectors and people and ideas that you love?
Dinesh: So, I mean, in 2012-13, we were about to find the product market fit. I knew this. I'm there knocking at the door. So that's when I know. So I started thinking, you know, if we, at some day, if we generate a good amount of cash flows, how do we, how will we look at capital allocation going forward? What is going to happen? And I didn't want a company to suddenly start wasting its money without any experience. Also, between 2014 and now, so much new innovation is happening, you know, and we were a B2B boring company trying to do just a few things. How do you keep your eyes and ears on the ground? What's happening? What's new? How people are, and especially this mobile device, artificial intelligence, voice, video.
So that was the motivation. How do I learn this? You know, learning has a fee. So you just can't go to seminars and learn. The best ways to either invest or something like that. So I aligned with, fortunately, Rajesh Sawnney at the similar time joined our board and he opened GSF.
He will typically bring five to ten founders for a screening. And that screening is the main purpose for me to learn. Then we just put… initially we started one, one lakh ten founders. Now we do ten, ten lakhs. It was five, five lakhs.
So effectively, in the entire year, you are hardly spending 50 lakh rupees a year. But you get exposure to some great ideas... And also, over the last 2, 3, 5 years period, you come to know who raised, who busted, who got acquired. So, before I started to invest IndiaMART’s money, I wanted some of my own money or... to put at stake to learn how things actually play out. And that came very handy when in 2019…‘18, ‘19, ‘20, when IndiaMART started to invest and acquire and do M&A. Because by that time I could at least get some sense whether it is work or not respond work, capital work.
Because, you know, I was not the venture capital. I never took too much investment, right? I didn't interact with too much venture capital. How do they think? So I think this was the only way for me to learn.
Our fund is also $250 million to write today at IndiaMART to be deployed. That's right. You have the capital to invest. So if you really see…
Karthik: You have to become a quasi venture capital.
Dinesh: If not venture capital, at least like strategic capital is to grow. Yeah. Strategic capital. So we need to learn that also.
And apart from doing this business, and as part of my elevation, I think, as I delegate, better product market feed and execution, I think it's a natural fit. Because, investing and acquiring requires a lot more operating knowledge as well as some investing knowledge.
Karthik: I know some founders like you, or think like yourself..basically they're educating themselves for their own company's future.
Dinesh: And my money got returned.
Karthik: If you do it for the right reasons and you're doing it with the right people and you're networked, right?
Usually you you might not make tons of money, but you won't lose too much. One or two hits will pay off for all…so great. And then the last part of that is all these youngsters, do they come to you for advice? And what do you find yourself telling them the most? What are the one or two things that you feel happy telling these young founders?
So I think my biggest thing is thinking. You know, don't even think five years from now, in our case, five years, we became profitable at one crore revenue. We became profitable. And then by 10 crores, we became comfortably profitable. But I think those were days, saste zamane. Competition nahi tha. VCs nahi the. Now, you know, five, seven years, if you're successful, there'll be 10 people funded in the same space doing the same thing as you. Okay. So, 5-7 years would be gone to kind of just establishing differentiation.
Dinesh: Just establishing that you are in the top 3 or not. Because you may become top 3. Top three, five in the first two, three years. But then there would be, then there would be too many “me toos”.
And today's Me Too will come with a lot of part of capital and even intelligence. So, then to cross the weed out, you will need another three years. So effectively, your business will start in the sixth, seventh year.
Karthik: No, it's just what it feels like. I know we're living through these journeys and we go and pitch the idea that it's a 10 year fund and the reality is I told you I was giving an example. We just rotated our position so that we can hold for 15 because the journeys felt like they started in the 7th, 8th year.
Dinesh: In India, especially because the paying capacity is limited. Yes, they're evolving rapidly. So even the times are evolving rapidly. Three plus three…three years for your own product market fit and then three years to weed out that I am the best.
Three plus three is the bare minimum to say that okay, now I'm here. So, you know, then for you to enjoy another six, it makes 12.
Karthik: Thank you for all of those. We're going to wrap up, but before that a fun section, just a bunch of rapid fire questions. One line, one word, whatever works for you is great.
So, um, what does a successful business mean to you in one line or what is the notion of success? You can answer either.
Dinesh: So I think success is very different to different sets of people. One, obviously you are not dependent on capital all the time either to any financier. You know, when you are not dependent to run your business on external capital, whether it is bank capital or venture capital, that gives you a very good freedom to say that, okay, that itself is a success. And then, I think, the important thing is, do you feel that you have done better than last year? Sort of growing yourself every year. And that is success. Not comparing to others. There is Mukesh Ambani and Warren Buffet and I mean, you are like how do you… there's no end to it. So I think you can be happier with your family with you.
Karthik: This is almost an impossible hypothetical question because you've been at it for 27 years. But if IndiaMART didn't happen, do you at times think, Ye bhi karte toh accha hota?
Dinesh: No, I did. I don't think I... left any internet business model untouched. I did e-commerce, I did gifting business. I did travel. I did classifieds, I did ClickIndia. I mean, I did anything and everything. Because, while there are times when you think IndiaMART toh sab ho gaya understood and then you want to do things differently, or there are times when you say India is not moving. I need to find the new thing.
Karthik: So the short answer is you would still keep testing the power of the internet to build great business ideas.
Dinesh: Yeah, I think the bigger question is can technology and the internet do something for businesses? There are hundreds and multiple businesses.
Karthik: That's your passion from day one. You can do that. One activity outside of IndiaMART, that you would think you would like to spend more time on or do you get enough time to do everything you like outside of India?
Dinesh: So now I don't get enough time to do it because suddenly things changed from 2019 or 2020 onwards… especially post COVID. One, obviously the whole business model has undergone change. I know work from home, then work from office, then work from home, then work from office again. And now, this whole artificial intelligence boom has… you need to play a lot of catch up and it's very exciting. So I don't think I get a lot of time. I wish I could get a lot of time.
I wanted to do a lot of work on girl child education. You know, especially in the area where I come from. Some kind of a scholarship. I also try to put Jyoti Kalash Scholarship still haven't been able to find time on that.
Karthik: What… fun question… is the strangest product you've seen listed?
Dinesh: Oh, many, many, many strangest products. So totapari bakri…
Karthik: So animals also trade!
Dinesh: Animals means livestock. That's what I mean. How would you eat chicken otherwise? The amount of variety that you don't realise in general..and very specific items, like for example, um, hathkadi log kyun khareedte hain?
Karthik: Let's just leave it at that!
So that will end on that note and Mr. Agarwal, thank you again for your time today. It was a truly exciting, inspiring conversation and plenty of food for thought. For our listeners to think really, really long term, build sustainable businesses. We have a lot of wonderful guests this season, but I don't think there's a more remarkable example of this than you. And once again, thank you for the time.
Dinesh: Thank you very much for inviting us to Blume.
Part of Blume Podcast
Welcome to The Blume Podcast, where we explore “The Power of Compounding” through insightful conversations with industry leaders. In this season, we bring you four captivating episodes featuring Peyush Bansal, Raamdeo Agrawal, Nithin Kamath, and Dinesh Agarwal.
In the first episode, Peyush Bansal, founder and CEO of Lenskart, shares his journey of building a successful eyewear company and the importance of hiring the right people. Discover how his clarity of purpose and long-term thinking shaped Lenskart’s success.
Next, Raamdeo Agrawal, Chairman and Co-Founder of Motilal Oswal Financial Services, shares his investment philosophy and insights on India’s growth. Gain valuable advice on building a strong brand identity and the dangers of building a startup for the wrong reasons.
In the third episode, Nithin Kamath, founder and CEO of Zerodha, reveals the secrets behind building and scaling an online brokerage firm without external capital. Learn about the power of compounding and the importance of trust in the financial industry.
Lastly, Dinesh Agarwal takes us on a journey of starting a business in India during the internet boom. Discover his thoughts on business growth, profit margins, and the significance of small and medium-sized enterprises in creating employment.
Tune in to The Blume Podcast and unlock the power of compounding with these inspiring stories and valuable insights. Stay tuned for new episodes coming soon!
Karthik ReddyKarthik Reddy founded Blume with Sanjay Nath in 2011. Karthik has shaped Blume’s investment approach and philosophy over the years, and in turn has overseen investments in some of Blume’s leading portfolio companies such as…
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