Big Billion Startup: The Untold Flipkart Story

by Mihir Dalal

  ‘Haan sir, karte hai. Sir, aap aaiye, mere boss se milwana hai.’ Sure sir, it’ll be done. My boss would like to meet you.

  Indranil and his colleagues in Bangalore and Delhi would keep repeating this exercise until they got their way.

  While such dealings by themselves may not seem too significant, these hair-splitting negotiations with the couriers and suppliers, along with Flipkart’s technological improvements and enhancements in marketing and customer support, together constituted a gestalt. A process of continuous, relentless improvement was in motion at the company every day, propelling its business from one milestone to another. The ecosystem at the time was so resistant, the infrastructure so rudimentary, that e-commerce could have only been willed into existence through such painstaking persistence.

  In the words of Vaibhav Pandey, a former Amazon executive who joined Flipkart in 2010 as one of its senior sales executives, ‘Flipkart was building the road and walking on it at the same time.’

  SMALL IMPROVEMENTS ASIDE, Flipkart introduced in 2010 what would turn into the biggest expansive force for its business and for e-commerce: cash on delivery.

  E-commerce transactions until that point were predominantly fulfilled using credit cards. This was for a variety of reasons, the chief among them being a fundamental mistrust between the websites and their shoppers. Websites were wary of being defrauded, while shoppers mistrusted websites that seemed incompetent when it came to fulfilling their basic obligation to deliver products they had already sold. Banks, too, were sceptical about e-commerce which meant that the technology for internet banking and debit card payments was underdeveloped. Credit cards had become the default payment option online, but less than ten million people owned one. India’s economy worked on cash.

  Keenly aware of this fact, Sachin wondered, as he hankered for faster growth at his company, whether more people would buy products if they could pay in cash. Cash payments would mitigate the worry of receiving wrong or defective products; customers could simply refuse to pay. On an impulse, Sachin instructed the Flipkart operations team to launch a cash-on-delivery payment option. In preparation for this launch, Binny and Sujeet asked Flipkart’s courier service providers if they had the infrastructure to handle it. One of these courier partners, a company called Aramex, agreed to try it out. In April 2010, Flipkart introduced cash payments. A few weeks later, other courier providers began offering the service as well. The orders instantly jumped. But Flipkart wasn’t the first shopping site to think of cash payments. Indiaplaza and Rediff had introduced the option earlier. Flipkart would soon find out why cash payments had never picked up.

  As Flipkart’s orders increased, all kinds of operational issues began assailing them: cash would be stuck with courier partners for weeks, products wouldn’t reach on time, customers would complain of the rude behaviour of delivery workers. The system was a mess. Every unpleasant incident would leave a stain on Flipkart’s image.

  Flipkart executives were initially confounded by the problem. It was clear that they would have to offer cash payments. But there would be a backlash from customers if the courier companies kept messing up. Cash-flow issues also had to be considered. A few months into the launch of cash on delivery, the problems showed no signs of abating. The Flipkart brand had been painstakingly built. It was the only asset the company had, in essence. It had to be shielded. For days, Binny, Sujeet and other senior executives studied the issue, and soon the solution became obvious: Flipkart would have to launch its own logistics service.

  It was going to be risky. A logistics service involved setting up complex processes to ensure that sales, warehousing, delivery and customer support divisions would seamlessly work together. Thousands of delivery workers would need to be hired and trained. Handling cash orders was fraught with hazards, too: fraud, theft, loss, delays. For months, Flipkart remained indecisive about entering logistics. The company’s executives had been studying the Chinese market closely. Tiger Global’s Lee Fixel had made investments in e-commerce companies in China and encouraged the Bansals to speak with Chinese entrepreneurs and senior executives. They soon learnt that even in China, transportation was a major problem for e-commerce companies which had taken to developing their own logistics services. In late 2010, Binny and Sujeet decided that Flipkart would also have to take the plunge.

  They assigned the logistics launch to Vinoth Poovalingam. Twenty-four-year-old Vinoth had joined the company in April after graduating from the Indian Institute of Management in Bangalore. Flipkart, much like the American internet companies that had influenced it, wilfully handed important responsibilities to inexperienced employees like Vinoth, Ankit Nagori and many others like them. Vinoth had worked on the launch of cash payments and was familiar with the logistics processes of courier companies. He was thrilled when Binny asked him to launch logistics in the latter part of 2010, and eagerly waited for a team and budget to be assigned. But a few days later Binny asked him, ‘Why haven’t you started it yet?’ With five delivery workers armed with just Excel sheets and barcode scanners, Vinoth launched the service in Koramangala, which had the largest concentration of Flipkart customers in the city of Bangalore. Soon, Vinoth, with help from Binny, Sujeet and a few others, devised a process to make logistics work at scale.

  Having its own logistics service allowed Flipkart to exercise complete control over order deliveries. It could now gain exact knowledge about the movement of each order. When customers called to inquire about their orders, Flipkart was ready with answers. Earlier, customers would feel vexed when Flipkart would fail to explain why their orders had got delayed. ‘That was the biggest problem before, when we had no control over the delivery process,’ explains Vinoth. ‘If there was a sudden spike in volume, the delivery speed would suffer and we were helpless. We were at the mercy of couriers.’

  Within a few months of its launch, the logistics service was capable of handling more than one hundred deliveries each day. It was then expanded to serve other areas within Bangalore. The most telling result was a big hike in customer satisfaction scores. Customers started receiving their books in one or two days, sometimes within hours after the purchase. They were thrilled. The in-house service had been initiated as a hopeful project but it was clear that running a logistics fleet could bring huge benefits. The company began to think about how to implement it in other cities.

  To expand the logistics service, Flipkart would first need technological systems. It would be impossible for people using Excel sheets to track the movement of thousands of orders – the use of technology was essential. Six months after the service was introduced, the tech systems were ready. In 2011, the company decided to expand the service to Delhi. It also decided that a supervisor was needed to oversee the entire logistics operation. Vinoth had got the service off to a promising start. But there was one problem: he wasn’t fluent in Hindi. Sujeet and a few others believed this would be a handicap, especially in the high-demand cities of Bombay and Delhi where Hindi was the lingua franca of blue-collar workers. By this time, Sujeet had convinced Anuj Chowdhary to return to Flipkart. Anuj’s startup wasn’t going anywhere and he didn’t mind coming back to the familiar environs of a company which had grown considerably in the short time he had been away.

  THE INTRODUCTION OF cash on delivery and the subsequent creation of the logistics service was another instance of how Sachin and Binny complemented each other. Sachin had pushed Flipkart to launch cash payments, but to make it a success, Flipkart had to enter a new, complex area of logistics, where Binny excelled.

  By the end of 2010, Flipkart was flying. The addition of new categories, the expansion in books, the website improvements, combined with the introduction of cash payments and other advances, had kept pushing up sales. At the end of the year, monthly gross sales had increased to more than ₹10 crore from less than ₹1 crore at the start of the year. It was like seeing a skyscraper being built in record time.

  What was equally remarkable was that Flipkart had become
a cult brand without spending on advertising. In 2011, as it strived to become a bigger retailer, the company would invest large amounts of cash on marketing, but its initial success was almost entirely based on the customers’ word of mouth. Flipkart users would rave about its service, encouraging others to sign up. Those who did weren’t disappointed, and they, in turn, enlisted their friends. This meant a rapid rise in orders, which helped the company win the trust of its suppliers and courier partners. Flipkart was benefiting from what is known as ‘the network effect’.4 The primary force behind this self-fulfilling vortex was Flipkart’s relentlessness in pleasing customers – just like it was at Amazon.

  With Flipkart’s rise, Sachin and Binny were quickly gaining fame in the startup world. Their ascendance startled their IIT friends and acquaintances. Some of their former flatmates at the NGV apartment complex, and former IIT acquaintances who had declined the Bansals’ offer to work with them, were jealous, filled with regret. Others who knew them were simply confounded.

  One such acquaintance was Anil Kumar, Binny’s batchmate from IIT Delhi. When Anil had met Binny in 2008, he had laughed off Binny’s efforts to raise capital, thinking that Binny had lost touch with reality. More than two years later, Anil’s startup RedSeer was doing well. It worked on contract with larger consulting firms such as Bain, earning fat commissions. When he started RedSeer, Anil had no doubts that he had a better chance of success than Binny. Now the truth was out, irrefutable. For Anil, and many others like him, their IIT Delhi pedigree was a badge of honour. It instantly made one more respectable. Many graduates of the institute are known to proudly reveal their alma mater at every opportunity. When Anil introduced himself as an IIT Delhi graduate in Bangalore’s tech circles, he would draw what became a familiar response.

  ‘You’re from IIT Delhi, are you?’

  ‘Yes, batch of 2005.’

  ‘Achha, toh Binny ke batch se ho?’ Oh, so you would be from Binny’s batch?

  Anil did double takes the first few times he heard this. He couldn’t believe that his identity had become linked to Binny’s. It became clear to him that his nondescript, laid-back classmate from IIT Delhi’s unremarkable Shivalik hostel was on to something big.

  9

  BOOM

  By early 2011, about a year after Tiger Global had invested in Flipkart, the e-commerce market was in a frenzy.

  Tiger Global’s investment in Flipkart had changed the rules of the venture capital world. Over the next two years, Lee Fixel financed more than half a dozen e-commerce companies. Later, many founders would come to look at Lee warily because of his outsized influence in the startup world and his openly ruthless approach to portfolio companies. But his aggressive investments in his early years as a venture capitalist paradoxically moved the needle towards founders in the power equation with investors. It also shaped the startup ecosystem into a high-risk, winners-take-all business.

  Venture capitalists in India had been deeply pessimistic about internet startups, writing cheques to these companies sparingly. It was the Flipkart deal that forced them to loosen up. It is a well-known fact that investors display herd behaviour, especially during the extreme cycles of boom and bust. In 2010 and 2011, following the lead of Tiger Global and Flipkart, investors and entrepreneurs moved like hyenas into e-commerce. This pattern would repeat again during subsequent boom-and-bust periods, and always with Tiger Global–Flipkart as the trendsetters.

  The same venture capital pantheon that had pronounced e-commerce dead on arrival now flipped, and investments into internet startups began to soar.1 Most of this money went to online retail companies, which sprang up by the dozen in Bangalore, Delhi and Bombay. A majority of these firms raised very little cash. But there was no doubt that e-commerce had become a seasonal favourite. EBay, which had been quietly present in India since 2004, arose from its slumber and began spending freely. Kishore Biyani, CEO of Future Group, bought Chaupaati Bazaar, a phone and online commerce company. The founders of FabMart, an online retailer that was born of the first internet boom in the late nineties, made a comeback with a new e-commerce startup called BigBasket. Many others like Myntra, Letsbuy, Snapdeal, Homeshop18, Naaptol and Shopclues were either founded or received significant funding in this period. Even Indiaplaza, that e-commerce dinosaur which had wobbled along since 2000, received $5 million in 2011. The hysterical activity in e-commerce drew comparisons with the great dotcom bubble.2

  There was some logic behind this frenzy. By September 2010, there were still only ten million broadband connections in India.3 It was the dizzying growth in mobile phone usage that caught one’s attention instead. The popularity of the iPhone, introduced in 2007, prompted predictions that internet browsing would increasingly shift to smartphones. As other phone manufacturers produced a spate of iPhone rivals, internet use on mobiles increased rapidly. Some eighteen million new mobile connections were being purchased every month. This vast base of mobile phone users would soon have access to 3G services, which could lead to widespread mobile internet consumption. The Boston Consulting Group estimated that India would have 237 million internet users by 2015, an astounding increase from 2009’s eighty-one million. For e-commerce firms, this prediction came like a beacon. In 2010, most people used the internet for email, messaging and casual browsing; it was estimated that less than ten per cent of internet users bought products online.4 This gap was bound to close with faster internet connections – all one had to do was offer a reliable e-commerce service and the market would multiply.

  AT THE AMAZON headquarters in Seattle, Jeff Bezos was excited by the burst of e-commerce activity in India. Amazon had set ambitious targets for its international business. But there weren’t many countries that could satiate its appetite for growth. In China, Amazon was floundering. Now India looked like an obvious new avenue. For the last several years, its strengthening economy had been drawing global attention. Indians were eagerly taking to the internet, and Amazon wasn’t unfamiliar with the country’s booming tech scene. Although the company had discarded its plan to launch its India operations in 2006, it had continued to expand its office here as a support centre for its US headquarters. The time had now come to revisit the retail space. Just as it had done in 2004–05, Amazon first considered the acquisition of a local company. In early 2011, Amazon officials approached Flipkart, which had become the most prominent e-commerce brand in India’s rapidly developing market.

  The Amazon officials who were in charge of international expansion for the company, were led by Amit Agarwal. Amit had previously headed the company’s India office. In late 2007, around the time the Bansals had started Flipkart, Amit had moved back to Seattle to take up the role of technical advisor to Jeff Bezos. This was a coveted position as it gave the chosen employee access to the Amazon founder and his singular mind. Amit impressed Bezos enough to be rewarded with a promotion in 2009 – the IIT Kanpur graduate would soon lead Amazon’s international expansion.

  When Amazon approached Flipkart in early 2011, the latter’s business was on a tear. The Bansals were convinced that Flipkart would become a huge company over the next few years. They were discovering their entrepreneurial prowess, like gifted sportsmen discovering their talent. They were in no mood to sell. Lee Fixel, the company’s most influential investor, didn’t think they should either. Flipkart’s growth had taken him by surprise. It had become his most promising bet, a potentially career-defining investment – an investor’s dream. It made little sense to cash in so early.

  Sachin and Binny decided that they would ask for an outlandish valuation to which they knew Amazon would never agree. They would not be cowed down the way they had been with Infibeam. This time, they would direct the discussions.

  The teams met at the plush ITC Maurya hotel in central Delhi. Sachin made his terms clear to Amit, his former boss: Flipkart would agree to a deal only if the company would be valued at $1 billion. This was truly an outrageous demand. Here was a company that had been valued at less than $40 million
only a year ago, that was generating about a few crore rupees in gross sales, operating in an e-commerce market which was smaller than most US cities. It was yet to make any profits; there was not even any likelihood of it earning profits for many years.

  Predictably, the Amazon executives scoffed at the Bansals’ demand. Amit Agarwal said to them, ‘What is [it] that you’ve built? We can do all this in a month.’ But the Bansals stood firm, and the discussions had to end.

  While Amazon did not buy Flipkart, it was clear that the American online retailer would enter India one way or another. Sachin and Binny used the occasion to send a clear signal to the company: Flipkart was ready for it.

  After the talks with Amazon, Sachin returned to his offices in high spirits. He said to his men, ‘Maine unko bol diya: “You can’t afford my team.”’

  A few months later, around June 2011, Tiger Global invested $20 million in Flipkart.5 This was the single-biggest round of funding secured by an e-commerce startup in India. Flipkart’s valuation soared to more than $200 million, making it by far one of the most valuable internet startups in the country.

  After this fund raise, Flipkart made a startling statement of intent. The company set a target of generating $1 billion in gross sales within four years. It was a wildly ambitious goal. In the financial year 2010–11, it had pulled in sales worth ₹44 crore.6 While this was an impressive jump from sales of ₹11 crore in the previous year, it would take consistently stellar performance to get there. No one took the target seriously.

  By now, Flipkart regularly featured in newspaper stories and news channels. It was held up as the most promising e-commerce company in the country. Some newer startups had even adopted ‘kart’ as part of their names, Healthkart and Lenskart being just two such instances. It was an echo of what had happened during the US dotcom boom of the nineties as Amazon, called Amazon.com at the time, saw scores of new online retailers add ‘.com’ to their names.7