How FreeCharge found its mojo, and Snapdeal

The inside story of the largest buyout in the Indian Internet market

Two weeks ago, Snapdeal acquired FreeCharge in the largest buyout in the Indian Internet landscape. In this account, Shailendra J. Singh , managing director of Sequoia Capital India, who saw FreeCharge from close quarters and served on its board, offers a ringside view of the company, its evolution and eventual sale to Snapdeal.

About 10 weeks ago, I remember picking up my phone to the usual buzz of a late night WhatsApp message from Kunal Shah, co-founder of FreeCharge. Over the last four years, my wife had become used to our frequent late night exchanges. I assumed this would be another quick discussion on business strategy or brainstorming a new idea Kunal had about the business. However, it soon became obvious it would be a longer conversation, because of a chat that Kunal had just had with his namesake Kunal Bahl at Snapdeal. The rest, as the cliché goes, is history.

The heroes of this story are Kunal and Sandeep Tandon, who co-founded FreeCharge in 2010. Kunal, a philosophy major, was running a BPO business owned by the Tandon Group. Kunal, who is always brimming with new ideas and creative answers to problems, came up with the concept of marrying mobile talk time with couponing. Sandeep provided the initial angel investment and brought to the table some key relationships in the retail industry. Like all good founders, they immediately launched a simple website with a simple value proposition—free coupons of equal value for mobile recharge.

I was among the few lucky ones who noticed. In those days, couponing was hot (think Groupon during its heyday) and FreeCharge felt like a clever proposition to sell a lot of coupons. I went to LinkedIn and mailed Kunal, first in December 2010 and then again in January 2011. I also requested an analyst from my team to cold-call him. We persisted for a while, but there was no response.

After a few weeks, we heard back from Kunal and Sandeep, and we agreed to meet. We still laugh about the first meeting. I asked them, “What is your CAC (customer acquisition cost)?” Kunal asked, “What is CAC?” They hadn’t spent any money on marketing yet.

I asked them whether they charge their big merchants like McDonald’s for lead generation. They hadn’t thought of that either.

Then I asked, “How many transactions do you do?” Kunal said, “14,000”.

I asked, “Every month?”

He said, “Every day, and they’re all credit and debit customers.”

Every e-commerce company was spending like crazy to acquire customers. I knew from my JustDial experience that customer acquisition engines can become very valuable. There were many questions to be answered, but by the end of that meeting, I told them we would love to invest.

We had found many of the soft ingredients we look for. An improbable set of founders with deep conviction in their approach. A product that needed no marketing to get tens of thousands of transacting customers. An incredibly grounded, creative and open-minded founding team, willing to learn about building a mobile and Internet business.

The only issue was that there was no business model yet. In fact, there was a widespread perception in the venture capital industry that recharge is a bad business because of low margins and supplier concentration. We saw things differently. This could be a customer acquisition platform, and potentially a Big Data play focused on user preferences and brand affinities. To us, mobile recharge was a means to an end.

We quickly put terms together. I remember Sandeep telling me, “Your offer seems fair. There is nothing to negotiate,” and I knew right away this would be a strong and uncomplicated partnership. Our relationship has stayed that way. I know people will find it hard to believe, but in the years that we worked together, there was never a difficult negotiation among us. And yes, such founder and investor relationships are not uncommon.

Soon after closing, we encountered our first major challenge. The technology platform was built in a hurry. Our users were experiencing failed transactions as we tried to grow faster. Kunal and Sandeep needed to hire a chief technology officer (CTO) desperately. We looked hard. However, finding CTOs in Mumbai is always tough, and our first hire didn’t last long. For several months, we couldn’t grow because our technology platform wouldn’t scale with our marketing ambitions.

After six months of struggle, things turned around when Deap Ubhi joined the team. Well known to Sequoia, Deap was the ex-founder of Burrp.com. The platform was rearchitectured so it could scale and the company agreed to move a significant part of operations and technology to Bengaluru. Transactions started to grow again in early 2013, and we regained confidence that this could be a large business.

However, start-up journeys are bumpy, and the next roadblock is never far away. By late 2012, we had run out of money, and the company was in an unproven category. We stuck to our original hypothesis though and Sequoia led an inside round, with participation from ru-Net and Ajay Agrawal of SirionLabs, a Sequoia entrepreneur, who liked the concept.

In end 2013, Deap had to return to the US with his family and we needed to hire another Internet leader. Kunal had got to know Alok Goel, an ex-Googler who had recently exited redBus. We worked hard to convince Alok to join FreeCharge. Kunal volunteered to step aside to make him the new CEO. Not just that, Sandeep and Kunal agreed to part with equity to make the offer attractive to Alok. They didn’t even bother to inform the board members of the promise they had made. These were incredible gestures. Few founders have the maturity to do what Kunal did, let alone volunteer personal equity to an incoming CEO.

A few weeks after Alok joined, in September 2013, FreeCharge launched a major TV campaign with Pepsi that Kunal had devised and convinced Pepsi to run. Top celebrities would ask consumers to drink Pepsi on TV in very attractive and fun ads, and get free talk time on FreeCharge. That campaign was a coup for FreeCharge, and won it immediate brand recognition. Alok organized FreeCharge in smaller pods around specific product and engineering issues, which accelerated the pace of progress. FreeCharge now started to aggressively hire and build out a team to focus on the mobile, and Kunal took on the mantle of driving growth.

In January 2014, when the company launched its new mobile app, it accounted for barely 10% of all transactions. But during 2014, mobile app transactions grew almost 50 times. FreeCharge raised two quick, successive rounds of financing, both with significant insider participation. After the company launched its first TV campaign in September 2014, FreeCharge became the No. 1 shopping app on Google Play, at least temporarily.

That did not go unnoticed. E-commerce firms had spent multiples more to drive downloads and transactions. And now, this upstart had taken the top spot within weeks of launching a TV campaign. It then became clear to everyone that recharge has significant potential to acquire online transacting customers fast.

The team was brimming with confidence on what the company could become. In an early 2015 board meeting, the management presented a plan to grow gross merchandise value almost five times in the next one year. And FreeCharge had $90 million (around Rs.560 crore today) in the bank to get there.

Enter another terrific Kunal—Kunal Bahl of Snapdeal. Both Kunals met up one day in late January, and what started as a let’s do more things together conversation quickly ended up in a this can be disruptive if we join forces meeting. Things moved fast after that. In February, the board of FreeCharge agreed to 21 days of exclusivity to put the two companies together. In 22 days, the largest Internet M&A (merger and acquisition) deal in India was signed and closed.

It was important to the board that this deal was a good financial outcome for as many people as possible in the FreeCharge team. While there are no perfect answers in such situations, we managed to achieve our objectives. For this alone, this M&A event probably stands out, as one where the whole team won, and the economics were generously shared by the shareholders.

This is a summary of many years of developments condensed in a few paragraphs. Many others deserve credit, and possibly some material events are missing. But FreeCharge had some interesting lessons that might benefit entrepreneurs and investors reading this account.

Kunal’s talent was realized when he was able to let go and create an institution that could help him achieve his goals. All founders face this challenge as they scale their companies. But Kunal was selfless and the lack of emotional insecurity helped him emerge into a wonderful leader. He did not have a title for 18 months after Alok joined, and he didn’t care. He worked insanely hard to grow the company at an exponential pace. In my mind, he is not only a talented entrepreneur, but also a great leader, and a brilliant mobile and Internet visionary.

It is very rare for us to find companies that have an anchor co-founder like Sandeep. He was never full-time, never drew a salary, and yet was always available for the most important projects. It is unusual to find an individual who brings a founder’s DNA without any baggage or agenda. Sandeep was the true quarterback who guided the team to achieve aggressive goals. This journey would be impossible without his massive contributions.

We always counsel our founders to believe great companies and great entrepreneurs can have room for co-founders at any point in the company’s life. Kunal, Sandeep and the board worked hard to embrace Deap and Alok as though they were co-founders. Building partnerships, treating people as peers of the founders and focusing on the company’s interest first made a massive difference. These relationships were not flawless, but they were very strong. And they helped to build a great culture even through the leadership changes at the company.

As for us, we are never on-field. We are cheerleaders and coaches and assistants on different days of the week. It wasn’t so much of what we did, but how we were able to partner with the founders and the team that really allowed us to have a successful partnership. We were lucky to have a very collaborative board dynamic, and an investor base that was very supportive. It was the strong trust and relationships that allow us to overcome many obstacles and get to a great outcome.

The story also appears on www.foundingfuel.com

Shailendra J. Singh, managing director of Sequoia Capital India, focuses on technology, Internet, mobile and services investments. Singh received an MBA with distinction from Harvard Business School and a BTech in chemical engineering from IIT Mumbai. He is also a Kauffman Fellow.

Manufacturers to the world

Our Special Correspondent

Fewer and fewer famous brands actually make what they sell. With protection laws in place, companies have begun to outsource. And it is here that Electronic Manufacturing Service companies are playing a stellar role, says M.L. Tandon, Head of Celetron India.

“NOKIA does not make the cell-phones that we carry around. It is the EMS (Electronic Manufacturing Services) companies that do the job for the company,” says Mr M.L. Tandon, Head of Celetron India, a fast-expanding EMS company located at the SEEPZ Special Economic Zone in Mumbai which is hopeful of becoming a billion-dollar hardware firm.

Not many would, perhaps, be aware of the stellar role that EMS companies play in the making of the modern world. These companies provide vital inputs to almost all modern gadgets that one uses.

Highly technical in nature and usually away from the public glare, these companies have been silently making a mark in the global market. One such company is Celetron India.

Celetron exports PC components such as power supply, head stacks for disk drives and memory cards, with a profit margin that has entered the rarefied 12 per cent region.

In an interview with Business Line, Mr Tandon speaks about the EMS sector and his company’s future plans. Excerpts:

What role is the EMS industry playing in driving modernisation?

Today, we are all very familiar with modern gadgets that define urban and modern living, such as the Palm PDA, the Nokia cell-phone, the IBM notebook and the Microsoft Xbox. These are high-technology gadgets and the brands are ubiquitous, but what many people might not know is that these products are manufactured not by the companies themselves but by a global industry called the EMS industry.

EMS can be termed manufacturers to the world. Fewer and fewer famous brands actually make what they sell. Previously, technology was not accessible but with protection laws in place, companies have begun to outsource. Manufacturing for these companies is becoming capital- and labour-intensive.

What are the advantages that EMS companies provide to the manufacturing companies?

Many advantages. These include rapid time to market as product lifecycle shortens, rapid time to higher volume, sharing of components, asset deployment flexibility, leading-edge manufacturing with reduction in costs, significantly reduced need for capital and provision of buffer to demand fluctuations in the user industry.

Can you tell us something about the evolution of the EMS industry?

The EMS industry has evolved from small- and medium-enterprise entrepreneurs, commonly referred to as contract manufacturers, to large service providers. Till the 1980s, the contract manufacturers limited their scope to a few specific functions, such as board stuffing. Over the years, the digital revolution expanded and demands from the consumer, telecom, computer and network companies increased significantly. As a result, these contract manufacturers started receiving more and more projects and indulging in end-to-end services.

How did the consolidation take place?

The 1990s can be termed as the decade of acquisitions for the EMS industry, as growth through acquisition was a strategic route adopted by the companies. Today, consolidation is in the form of larger EMS entities acquiring smaller competitors and buying their consumers’ factories at low prices.

Could you tell us something about the global EMS scenario?

The technology levels are high in companies catering to consumer electronics, communications, industrial electronics and networking and are by far the highest in medical electronics, automotive electronics and avionics industry.

A significant development has been that China has moved ahead because of the vast infrastructure availability; it is to be noted here that China has over 500 SEZs today while India has four.

What about the Indian scenario?

In the EMS sector, India can become the preferred alternative and thus emerge as a strong contender in the global market. I feel that Indian companies should equip themselves with technology, be well versed in design, new product innovation and complex technology. We need to avoid duplication of products and inculcate better financial discipline. Trust and transparency in EMS operations will bring increased confidence in outsourcing relationships. If these steps are taken, India stands the chance of becoming a global player in the world trade of electronics and information technology, which is projected to have an estimated market size above the $1-trillion mark by 2008.

What are Celetron’s plans?

We are expanding capacity to meet local demand. The Indian arm exports PC components, such as power supply products, head stacks for disk drives and memory cards. We plan to expand capacities, and we are in the process of setting up a production facility in Pondicherry. We hope to touch revenues of $1 billion from the domestic market and from exports.

To read the original article, please click here.