We bring you an UnPluggd conversation with Phanindra Sama, redBus Co-founder and CEO on the company journey and importantly, the funding milestones and how the company kept executing its plan irrespective of minor setbacks.
The redBus Story : How did it all start? Funding milestones?
We started because of a personal pain point. Couldn’t get bus tickets & we wanted to fix that problem. We didn’t know much about entrepreneurship or starting up. Initially, we wanted to do it as a non profit open source solution for free and give it to the bus operators. We were 2-3 years into bachelorhood and didn’t have much to do on weekends. So we started writing the software, went to operators. They didn’t take the software. That was our first challenge.
We felt really bad. Then we came in touch with TiE and thought maybe they could help us with some mentors. The mentors introduced us to venture capitalists and so on. They taught us all about venture capital. There were three venture capitalists interested in us at that time. Only one (Seedfund) was an early stage fund and the rest were large fund. At the time, as per our mentors advice, we raised funds from Seedfund because they were the only early stage fund. Such funds tend to be more patient. We then formed the company, hired people and set up offices.
During the course, we got educated about companies and entrepreneurship. We came in touch with other venture capitalists and raised capital. The second round came when we were doing very well and had a lot of venture capital interest. Almost every month, a venture capitalist would come to us and ask us about our business. In fact one of the VCs gave us an oral term sheet. Because of all the interest, we thought things will be great all the time and decided wait for some more time. But then, it was too late. We had about 10 months money and suddenly Lehman collapsed. All the VCs who were interested were not even talking to us. It was very severe. We panicked a bit. This is when we came in touch with Kanwal Rekhi, at an event. He said he would invest. They came up with a term sheet.
In almost all the rounds, the investor came up with the term sheet. We didn’t try to negotiate and get the best deal. The perspective was that if it was a fair deal, we took it. In series A, we were overwhelmed. They gave us a huge offer. In series B, there was no funding anywhere and the offer was lower than our previous round but we still took it. But we had a term called full ratchet.
Which means that if we raise capital at a lower valuation than the previous round, then we have to make it up to them. The first investor had done a bridge round. Until then, we didn’t even care about going into the details of the term sheet.In all the three rounds, we never hired a lawyer. There was a lot of good faith that was put forward. In almost all the transactions we trusted the investor and it has always worked for us. Some of the things we did were quite unique. Coming back, when the full ratchet kicked in, it was a little painful. But it was okay in the end. We never anticipated that the company would do well and in spite of that the valuation would go down. The company had grown 6x from the time of the bridge round and valuations went down because of a global impact. That was one learning.
After that came the series C round. We did not need the money at the time and the investors were ready to invest. After learning from series B, we thought it would be better to take capital when it is available than stretch it to the last minute. The money was never used and redBus turned profitable.
The Naspers offer came up when we were thinking of Series D. We had been telling investors that money from the previous money was still in the bank and we didn’t need it. But then we got some good offers and we thought of making the company robust. To do that, we needed a healthy balance sheet. Say for some reason, if the receivables don’t come on time, we needed about 15-20 days of money in time. Otherwise, an impact at some part of the world would make us vulnerable. That’s how we started on series D. The money was cheap and we got a record number of term sheets. Eight terms sheets were given and two more were on their way.
While we were evaluating the deals, Naspers came in and said they were willing to invest in whatever was available. They moved really fast. Our lawyers and bankers say that this is probably the fastest deal they have seen. Things fell in place. They were open and things matched. We didn’t negotiate because the valuation was fair. We had decided that whenever we exit, we’d also make the buyer successful.
We said that if the money was good for us, we would not worry about what we aren’t going to make. Deals don’t fall apart because of 20-30% here and there but we said we don’t want to put pressure on the buyer. We spoke to our investors. Some of them were fine, for some, it was too early to exit. But in the end, we all decided to go ahead with it. That’s where we are now.
What would you do differently?
Many things. But one thing that comes to mind is that we should have used an executive search firm to find senior management. I didn’t do it at the time because I thought it was expensive. But the value they can add is huge. I would hire early rather than wait until we can afford.
Your Facebook profile briefly showed Former- CEO?
Apparently, it was always like that. I noticed it after I read about it on NextBigWhat & changed it.
What are your immediate priorities with respect to the company?
Make it successful for the purchaser. Execute the plan and beat the plan.
What’s the plan?
Being a 100% subsidiary of a public listed company, we need to respect their governance practices and not talk about numbers. Our growth momentum shouldn’t change.
What are your immediate priorities with respect to your personal life?
Actually nothing much. At least the entrepreneurial life has been built over 7 years and I don’t intend to change either. I like to be simple and really hope I will continue.
Don’t you think rather than acquisition, redBus should have raised another round and aspired for an IPO?
I don’t think so. Going for an IPO is a big thing. You need big scale. With bus ticketing in India, it is possible but not any time around. If you are really practical, I don’t think it would be possible in the next 4 years. It would take us time to build for an IPO. The option was to wait for another 5-8 years or take the deal. These exits are a rare thing in India. How many times do we hear of such an exit? It was a good deal from all perspective. The valuation was fair, the deal structure was good and we get to run it as an independent company. Maybe if we had waited 1-2 years, we may have gotten a better deal. That was a personal decision. It would have affected 3 investors and 2 founders. These deals don’t come every now and then.
Now that redBus is being owned by Naspers, which has a global footprints – will redBus go global – especially in Asian market?
We want to continue to do what we are doing until the market is saturated. There are a lot of infrastructure problems that need to be fixed. For instance, the road transport corporations can’t take our load. The technology needs to be robust and someone needs to solve it. The return on our time is higher if we are working in a known market especially when there are fundamental issues to be solved.
At one point, we said we should be like Google. Innovate, be in many countries etc. But when we asked ourselves why, why and why? We arrived at a conclusion that Google was there because it has a cash cow in terms of its search business. If we need to experiment, we needed that.
How was the ESOP story played out?
There are a few crorepati employees!
Is there fresh infusion of cash? How much?
The short answer is no. Naspers has a very strong balance sheet and we don’t see any reason why we should manage cash at a subsidiary level.
Will the redBus APIs remain open?
Absolutely. We provided APIs to all our competitors. So it doesn’t make sense for us to close them because they compete with one of the group companies.
Watch Phani’s talk at first edition of UnPluggd: