Chhotu – The Logistics Startup (Part 2)

(Part 1 Here)

Today & the Future

Chhotu today has over 160 employees, with 11 warehouses and is present in 9 major cities across India. It does over 1000 transactions a day and though I don’t wish to give you their growth stats, they would probably blow you away. They plan to grow to 20 cities, with 40,000 transactions a day and employ over 400 people by mid of next year. To put this in perspective, in Apr 2012, Flipkart was reportedly shipping 17,730 products a day.                                                                             

After getting their angel funding from Super Angels of India, founded by Rajesh Sawhney, they have been scaling up at a frantic pace while also ensuring that they don’t leave quality behind. It’s the kind of outlook that has helped great businesses persevere. 

Both Co-Founders continued to work based on a strict division of responsibilities and reporting lines for their HODs. Navneet as CEO interfaces with the media, investors, customer service, finance, sales and technology as CEO while Aadhar as COO looks after operations and warehousing.

Aadhar Aggarwal Co-Founder & COO

They now define themselves as an ‘Ecommerce Enabler’ – a startup which looks at logistics, payments, customer support and vendor management for various ecommerce players.

Their mission is to support ecommerce players in doing business in India.

Over the last many months they had to let go of various customers because of a shift in focus. However, they have also had no issues in getting their last 7-8 customers as they were all in-bound leads through the Chhotu website.

Chhotu is now slated to raise its Round A of funding, an unspecified amount, to fuel its blistering growth and scale.

 

The Business Model

In today’s date eCommerce companies have limited choices in logistics. They may develop their own end mile delivery capabilities, develop the entire end-to-end delivery capability or depend on logistics service providers. The first two options are cost intensive and the third is what most players have been relying on. It must be noted here that with over 300+ ecommerce players in India and over 1,00,000 transactions carried out by non-travel ecommerce companies, there is a long tail of players which need support and enablers like Chhotu, if they have to survive.  

The established courier companies consider ecommerce to be only 1%-3% of their total business. So while companies like DHL have created offerings for eCommerce, most haven’t aligned themselves with eCommerce realities. 

Chhotu has created a niche and a business model by keeping various issues faced by ecommerce players, in mind. Commercial and

Navneet Singh – Co-Founder & CEO

performance terms for Chhotu are aligned with the success of the ecommerce player. Delivery in many cases is based on the value of the product, return forward charges are discounted or done away with and the organization understands that when they go to deliver a product at someone’s doorstep it is still a sale in progress. Their delivery boys are trained to ‘sell’ the product rather than just ‘deliver’ it. And commercial terms for the eCommerce companies are created keeping in mind their products, ticket size, category etc.

They have created an in-house customer care department which shows how seriously the organization takes ownership of the delivery item. Technology has been created to track and support various functions so that eCommerce clients of Chhotu can track their shipments, understand any delivery issues and also receive analytics on a regular basis. One would assume that all Logistics players would be doing the above, but as I learnt from my Chhotu interviews, the answer is shockingly No.

 

Challenges of the Logistics World

There are many major logistics players out there who in theory commit to servicing eCommerce players. Over the years they have picked up fancy eCommerce terms, tweaked their existing model of business to service ecommerce players.

This tweaking usually means that they now undertake COD exercises and charge a bomb in return, almost ensuring that COD becomes unprofitable for most players. Charges may be as high as 100 Rs. just to perform COD and then forward return charges in case of returns.  It may be shocking for some to note that certain categories of products have return rates as high as 40%.

To tell you what that means is that if you were to buy a T-Shirt online for say Rs. 400 and select COD as payment option, it means that someone like Blue Dart might charge about 150 Rs. just to deliver the product, then charge Rs. 50 for COD facility and then if the item is not accepted by the customer and gets returned, they charge a return forward charge i.e. money for the item to be delivered back to the eCommerce company. Back journeys mean more profit for these organizations.

People Management is also not a great strength of this Industry as attrition is high, employee engagement is low and skill levels are really not an issue. Lately eCommerce companies have also been affected by the fact that many of their Senior Management and Mid level guys have been directly recruited from major Logistics firms. Sometimes the quantum and level of experience works against a startup organization’s goals where openness to innovation, new ideas and sometimes throwing out due process in return for results is the order of the day. Chhotu has also been affected by these issues, as such employees, with senior positions in distribution are not receptive to new ideas and concepts of doing business. The Co-Founders of Chhotu were quick to let me know that such employees are difficult to deal with even though the top management show great understanding and support. Needless to say, Chhotu refrains from hiring ‘Grey Hair’ from this and other similar industries.

 

The Yapper Analysis

1. Successful Startups may have major business model shifts but not commitment shifts.
2. Delimitation of responsibilities and roles is pre-requisite to a startup gunning for great results.
3. There is always value in experience, though not in ways in which we may imagine.
4. If a bunch of your existing customers aren’t in line with your business model then you either have the wrong target audience for your product/service or you need to lose those bleeding you/those who create a loss of focus
5. Try and move up the value chain – Service Provider to Partner – when working in a niche area
6. Hustle and Talk. All the time. That’s the only way to develop great contacts and unearth opportunities.
7. Chhotu has never had an issue in attracting major investors. The secret is but obvious. Build something great. Solve real world issues. Be the Band-Aid for someone’s pain. And then go out and Talk about it.
8. You need co-founders (Mostly). You need a great team (Always).
9. There is great value in working in a messy market with messy opportunities. Embrace them.
10. Getting Funded is not just about the money, it’s about the Big Boys aka Investors who offer advice, contacts, connections and rock solid belief on days when you are down and out.

Things NEVER to Say at your VC presentation

Here is a list of things never to say during a VC Presentation

1. Everyone is our customer – This is never ever true. Figure out the Market Size and your customer demographics. Give numbers and a good idea of what your customer is like.

2. We will kill the competition – Yeah? Unless you are Rambo reincarnated as a scrappy Startup you won’t kill anybody. Facebook has taken years to ‘kill’ Myspace. Don’t say it because you can’t prove it.

3. We will win because of First Mover Advantage – It’s obvious you haven’t done your homework or been in the real world. This statement is inexcusable. Being a First Mover means you are developing the market, educating partners, customers, developing standards, making mistakes and hiring expensive manpower… all by yourself. Except for a few cases, this is not an advantage.

4. We want to grow from 1 store to 3 stores in 5 years – VC investors want you to think Big because they make money only when you grow fast and grow well. If your goals are modest, you will put them off because then even if its a sure-shot idea, it makes no financial sense to them.

5. Exit Strategy? Only IPO – A miniscule number of startups end up living through a public offering in the world. To bet that you are one of them, is going against probability. Even if in your heart you know that you will make it to an IPO (and gut instincts count for a lot) you should be able to underline viable alternatives to your prospective investors.

6. We need $10 Million…because it’s a nice round figure – Please tell them why you need the money, how much, when and what you want to do with it. Don’t just put it there because it looks good.

7. We will promote our product/Service using ‘Word-Of-mouth’ – No one has ever been able to control this force of nature called ‘word-of-mouth’. How can you claim to use it for your goals? ‘Word-of-mouth’ is the final result of your marketing/promotions, it is not a promotion activity in itself.

8. Customers will shift as soon as they see our cutting edge technology –Apple makes better laptops than most other players. So even though it is known and respected as such, you don’t see people dumping their netbooks/laptops in dustbins for the Macbook Air. It takes more than just a better mousetrap to get things going.

9. We are technical guys and we will hire people for sales after funding – If you aren’t doing selling on your own, you should plan on getting a senior guy as part of the core team to handle Business Development and Sales. However, if none of you takes ownership for sales in your startup, then investors will have a hard time figuring out how you plan to convert your product/services into hard cash.

10. We don’t have a product/service yet – Then don’t ask them for money. They want to see proof of concept. (Admittedly some angel investors and VCs might still invest)

11. We will start as soon as we get funded – An extension of the above statement. If you haven’t started then why will VCs invest on the basis of your Powerpoint Slides?

12. We have no competition – If you say this… Then you are an idiot. There is a famous example related to this statement. When the first Insurance company started working in India, they had ‘No Competition’. But then why didn’t they capture the market without any issues. Till date the Indian customer shies away from Insurance. The answer is because LIC had a big competitor. It was God. The customer’s intrinsic belief that God will look after him, negated the value of an insurance scheme. You always have competition.

13. 2 line definition for my Product? Ah… it’s a little more complicated than that – Albert Einstein answers this one – “You do not really understand something unless you can explain it to your grandmother”. VCs think of it in the same way. Customers definitely behave like Grandmothers.

14. I don’t really have a presentation ready but… So you aren’t prepared? Too bad. We may have still been interested had you just discussed the concept with us, but the fact that you aren’t prepared at all, puts us off.

15. We will keep our customer acquisition cost low by using Social Media – Social Media is a difficult to crack medium which has been capitalized by major brands like Axe, Coke, Pepsi etc who spend big dollars on creating great social media experiences. If you think its low cost, then you are going to be ineffective at best and shoddy at worst.

16. We have a better product/service because we sell it cheaper – Subhiksha sold stuff cheaper than other stores. Look what happened to them. You should be able to communicate Benefit and Value offered to your customer and to the investors. Just because you make a handbag which is cheaper than Gucci doesn’t mean it will sell better. Point – Don’t play on the price, but on the value/benefit even if it is related to the price.

17. We will outsource the (Core Part) of our Idea – That’s just dumb, you have to prove how you will own, grow and execute the core part not outsource it because it is painless. That’s like Apple deciding to outsource the development of the Mountain Lion OS to Infosys.

18. Our competition numbers aren’t relevant because we have a vastly different product – Your competition is always relevant in some way or the other. It’s only by using their numbers that you can build projections, costs, standards, salaries, market assessments. Not being intimidated is great. Not acknowledging or being aware is a sin.

19. We are infinitely scalable – Everything is infinitely scalable given the right resources. Just like how your foolishness is infinitely scalable with the right exaggerations. While your idea may be scalable because you have a web based business or a mobile app, you need to underline the related investments for that scalability.

20. Me Me Me Me Me… The best way to turn off VCs is to go on to monologue mode about yourself/your team and how you are God’s Gift to mankind. They are interested in you, but aren’t going to be partners in your endeavour to startup narcissism.

21. We don’t really understand the finances yet –Then be prepared. Don’t go in without the numbers. Hire a CA if nothing else.

22. Our Sales in year 1 will be $1 Billion. Why? Because its common sense – In the 1940s most Germans thought that they, the Aryan race, were the most developed race on earth. Why? Because it was common sense. Some things, which you may take for granted, may not make much sense to the VCs. Please backup whatever you state with plausible numbers and facts.

23. We only need your Money – That’s what Newbies do. Sure, you primarily need the money to make your Startup grow and prosper. But for VCs, many of whom expect to be in the thick of things, this is like a red flag.

24. Let me tell about how AWESOME the internet is – Don’t start off/bore them with the obvious stuff. They know that clean tech, internet, web 3.0, eCommerce, Mobile Apps, Cloud technology etc is hot and amazing. They probably know the contours better that you. Don’t waste their time or test their patience.

25. And as you can see on Slide No. 137… No point, they slept off/were brain dead by slide 15. Please follow Guy Kawasaki’s 10/20/30 rule.

26. I am sorry I am late – We are sorry we are no longer interested. (Please never ever be late, unless you lose your arm on the way)

27. This presentation will only take 10 minutes (and then go on to 90 minutes) –Be truthful in the real sense and don’t expect them to be comfortable with IST (Indian Stretchable Time).

28. I know Bill Gates very well – Don’t drop names. And if you know Bill Gates then ask him if I can get a discount on the XBOX 360. 

29. You Guys? No I don’t know what you (The VCs) are all about – Insulting. But more than that it shows you just aren’t aware enough or care enough to google them.

30. There are really no major risks here –Bullshit! In that case Banks should be running after you to offer loans. There are always risks and you should be honest enough to acknowledge them. The investors will find it difficult to trust you and your intelligence if you don’t.

31. As you can see on this slide… no… sorry it’s the other slide… – Major turn off. You aren’t prepared well enough.

32. Knock Knock…who’s there… – While a little humor is a great thing, especially for ‘bored-out-of-their wits’ investors/VCs, no one wants to invest in a Joker.

33. Excuse Me. I need to go pee – You will pay for breaking the momentum. VCs, due to their profile and time constraints have major ADD (Attention Deficit Disorder) issues.

34. Today we are here… to Blow your mind! – Even if you have that one Idea which will change the world, this statement ensures that VCs will no longer be surprised. So unless you have suddenly invented time travel, conducting safe nuclear fusion in your bathtub or have figured out what women really want, stay away from it.

35. Let us begin with the Definition of Marketing – No, this is not college, you don’t get marks for the definition. You get funding for changing the world. Keep it nice and meaty.

Profit, Profit and Profit (Yup there are 3 kinds)

Rainbow Cake - Because I couldn't find a great picture for this post

Ever had the feeling when you think you know something, because it’s so simple in theory, until one day you don’t because you have to put it in practice? 

Like knowing how to make an omelette.

In theory, its fairly simple. Pour well whisked eggs on hot pan, add salt + pepper and voila!

In reality, you could be stuck forever when it comes to breaking the eggs. By the time you get the basics right and get to adding tomatoes, onion, herbs, etc you are already a veteran.

I find this analogy fairly apt because I have found, over the last many years of waking up with a bad hangover in the homes of strangers, that even the most intelligent set of people can’t make good omelettes. And that’s because, while they possess a deep and unshakable confidence in their ability to make omelettes, in reality they just don’t know how to.

The reason why they are so wrong is because their template of a ‘Good omelette’ is flawed. 

The same stands true for our understanding of profit. Unsurprisingly most ‘accounts/finance unaware’ entrepreneurs get it wrong all the time. The theoretical understanding of Revenue – Cost = Profit is good enough only when you are trying to impress your 10 year old niece/sister, who is trying to run a lemonade stand. And even she will probably get over it in a day.

I had the concept of Profit wrong, well after I had finished my MBA. I had slept through all my accounting classes and struggled with debit and credit to the point of antipathy.

 So to benefit others who partied hard, slept in classes and are now embarking on entrepreneurism, I have decided to take up the issue of 3 profits and how we need to keep an eye out for all of them, while running a startup.

The 3 types of profit are

A. Gross Profit

B. Operating Profit

C. Net Profit

A. Gross Profit – The true representation of that cute ‘Profit’ formula for your niece/sister. To an extent. 

Net Sales* – COGS ** = Gross Profit

*Only revenue from sales of goods/services and not other sources like selling off assets and investments. Also after deduction of sales allowances and discounts.

** Cost of Goods and Services i.e. the direct cost of making the product or delivering the service

Now this may look simple but how do you determine what is COGS, when the definition of ‘direct costs’ may differ based on how you apply them? Issues of when you recognize revenue are also important.

Anyway, the point here is that if you are in the red (-ve gross profits or gross loss) here, then one or more of the following may be the case 

1. You are still trying to negotiate better rates with vendors for input/raw material costs. You have an idea of what it will cost when you have negotiated good deals with vendors/suppliers and are supplying customers products based on that cost.

2. To acquire customers and entice channel partners you are offering a lot of discounts to them to make your product/service available or to get potential customers to try them. You plan to increase prices once you have a good base of customers.

3. You hit a bad year and were getting rid of your inventory at heavy discounts.

4. You hit a bad year and delivered goods/services, promised in the past for a particular negotiated price, but now have to deal with higher input costs.

5. You are being a loss leader. Basically putting people out of business by offering cheaper products on the strength of your cash.

6. You messed up and don’t really know what it costs you to make a product/deliver a service

There are other reasons but if you suddenly realised that the last point applies to you, just stop here. Please go back and figure out the COGS of your company and read the rest. Chances are that if you have a gross loss instead of a profit then you are going to be in deep shit if you don’t take corrective measures soon. You will be -ve for the rest of the 2 profits by default.

To be sure, a number of well funded start-ups may be bleeding red here, but they are doing so just to get scale, reach or to develop the market (Points 1,2,4,5).

B. Operating Profits – This profit is the real deal when it comes to determining the health of your startup. 

Now some people feel that Operating Profits are shown by EBIT = Earnings (Another name for profit) Before Interest and Taxes and others feel it is shown best by EBITDA = Earnings before Interest Taxes Depreciation and Amortization.

However you do it, this profit shows the amount of money you make from all operations related to selling of goods.

This includes, salaries, sales, marketing and other overhead costs. 

If you are thinking of taking a loan on your business, then bankers will have a look at this metric since it shows them your ability to pay back the loan amount. 

A healthy or slim Operating Profit Margin basically shows how healthy and efficient your company is. Slim margins are more susceptible to small changes in costs or other factors and can be maintained only when volumes are very high like in the case of Wal-Mart.

If you have a healthy Gross Margin but a bad Operating Profit Margin it could mean that your overheads are killing you.

However a slim or -ve Operating Margin may also mean the following

1. You are busy building assets and infrastructure for the future and have been loaded with the costs even after amortization and depreciation this year. This is when we used EBDITA to derive Operating Margins. Many startups, being pushed to develop assets to increase their valuation by investors may show -ve Operating Margins due to this.

2. You have scaled up well but the revenues haven’t followed just yet. This leads to higher overhead costs which are necessary since resources have to be maintained in anticipation of scaling up. So you could be spending lots on rent and salaries for now.

3. Your overhead costs are killing you. You have too many people, too much rent, too many things on lease, spending too much on supplies, maintenance, insurance etc. 

Most startups feel comfortable being red in this regard as long as they have a good gross margin since most are concentrating on scaling up rather than hitting profitability just yet. They know that once the economies of scale catch up, they will start turning black in this part of the P&L as well. 

C. Net profit – When we finally decide to subtract all costs of interest, taxation, depreciation, amortization and other charges from the Net Sales we get Net Profit.

Net income = Gross profit – Total operating expenses – taxes – interest – amortization – depreciation

This is where you get to know how much money you made during an accounting period. 

So when someone asks you “What’s your bottom line?” This is the number you should ideally quote.

When talking to vendors, dealers other stakeholders this is the number you should be most interested in.

Having said that, most startups may take a long time before they show a profit here. That is because investors (VCs in particular) aren’t inherently interested in the dividends they make, but the valuation you show at the time of their exit. 

So the next time someone, goes around mouthing fantastic profitability numbers at a cocktail party, be sure to ask him about all three of these. But before that, make sure you know these numbers for your own Startup and how your CA (hire one for heaven’s sake) got to them. Once you know them, understand why they are the way they are and where you would like them to be in the future. 

You can be sure that once you know these three numbers, you will be on the ball about the health of your company/startup.

Hey! by the way, Profit is NOT the same as cash in hand. But that is for another post.