The Journey of building OfBusiness – Part 1

In today’s Matrix Moment episode Asish Mohapatra, Co-Founder & CEO – Ofbusiness opens up to Vikram Vaidyanathan, Managing Director, Matrix Partners India, about transitioning from an investor to entrepreneur, building OfBusiness from ground zero, co-founder relationships & dynamics, his thoughts on profitability vs growth and much more.

Rajinder:

Hi and welcome to Matrix Moments, I am Rajinder Balaraman and a Director at Matrix Partners India. Todays episode is special as it covers aformer colleague Asish Mohapatra’s journey of building Ofbusiness. Ofbusiness is an innovative SME financing platform that solves for SME’s need around purchase finance, raw-material fulfillment and new opportunity discovery. They now have over twelve hundred and fifty crore assets under management, growing 100% year on year, while generating four and half percent pretax ROA. Joining Asish on this podcast is Vikram Vaidyanathan, Managing Director at Matrix Partners India, who led this investment. Asish and Vikram have known each for 15 years, starting with Mckinsey then Matrix and now Ofbusiness, they share a fantastic camaraderie and I hope you see some of that through this episode. Tune-in to learn more.

Vikram:

Hi everyone. It's my great pleasure to welcome Asish Mohapatra to this podcast. He's a friend, colleague, founder of one of our highest growth companies and I have the privilege of being on his board. I'm going to quickly introduce him - he's come from humble beginnings in Orissa, which he keeps reminding me of and went on to IIT Kharagpur then ITC and graduated from Indian School of Business Hyderabad ISB and ended up at McKinsey, which is the first time that Asish and I met and it’s been a professional friendship, that's now going on 14 years.

Both of us left within days of each other to join Matrix, and Asish led our healthcare practice at Matrix Partners and at one point in time decided to become an entrepreneur and we of course invested in him and were very lucky to back him at that stage, not knowing what he was going to do but it's ended up being a fantastic journey at Ofbusiness, and the reason that I actually gave you the background and gave you all the places that he has been at, is that he has owned the network in all these places that he's been at - whether it’s IIT Kharagpur or ITC or McKinsey or ISB, and all of those networks have culminated in his team at Ofbusiness. So it's wonderful to see that journey.

Welcome, I want to start with the investor to entrepreneur journey and lots of people who are investors and me included at some point in time think they can be entrepreneurs. And I’ve always told you that you'll make a better entrepreneur than an investor. And now I can say with certainty that you're a fantastic entrepreneur forget investing and so on.How did you think about that transition and talk a little bit about what differentiates entrepreneurs and investors and which investors do you think can be entrepreneurs?

Asish:

Okay. Firstly, thank you for having me on this edition. It's my second installment of Matrix Moments. I thoroughly enjoyed the first one with Avnish and look forward to this one as well. Just to conclude, because you made that remark while I've been a friend and a colleague to you, I think Vikram, has been a great rival as well as a critic to me and has helped me in my professional and, I would say entrepreneurial growth across my last two stints and our association goes to more than 10 years. So, privileged to be talking to you.

I think the key difference between an investor and an entrepreneur is what they enjoy doing. I think an entrepreneur is a guy who wants to get things done who wants to enjoy his every single moment of celebration or grief. Whereas an investor is one who's probably hooked on to a very long drawn out-come and it's okay not doing it himself. So, I was always one who enjoyed doing, I was always very operational, very hands-on. I always wanted to be as they say “in the dirt”, in the filth. And I enjoyed being there. I enjoyed rolling up my sleeves and I think that is a key element of what differentiates an entrepreneur from an investor.

Vikram:

Yeah. I think it's also conviction a greater conviction behind your own ideas on your own self. And I truly do think that's one of the reasons why for me, I always say that I'll probably make a better investor, today I am a reasonable investor then an entrepreneur. Because you have to have extraordinary conviction and positivity and optimism about your own idea and honestly block out everything that the world is telling you and the world is usually telling you that your idea is a bad idea. Whereas investors are inherently much more cynical and more objective and more rational than entrepreneurs are. And I truly think, great entrepreneurs have this irrational conviction about their ideas. And I think that does separate you from others.

Asish:

I agree to that. I will give you a more vulnerable side of it. I think in my professional and academic journey, I, as an individual had never really aced it I had always dented a hole, but never, maybe created a crater and that burning desire to actually, create that big hole in the universe, which I'll be known for is something that that made me move. I think I was a good investor, not a great one. I was a good consultant, not a great one. I think just the fact that it all piled up within me that I'm probably made up for different things, which I'm sure everybody feels at some point in time, is what made me make the shift as well.

Vikram:

Let's talk about the early days. I remember we invested in something which is more call it health-centric because that's where the healthcare experience was coming into play that quickly moved into a B2B commerce company. And the B2B commerce company was to off to a very fast start. And it had grown to a 100 of crores very quickly, in terms of GMV and it had some reasonable margins. I forgot what the margins were - 3 - 4% margin, maybe a little bit more but I remember calling you on, or you calling me one night and saying I can't sleep. And you kept trying to figure out what is the real business within this. And it ended up being a FinTech business. So, we'll talk a little bit more about it, but talk through the early journey, great start and usually when people are also great start, they keep doing what they're doing versus you were questioning if that was a real company. And that was a real business.

Asish:

So, we started sometime around Jan, February 2016. Our first operation started around February and in about three to four months, we were clocking a GMV of easily close to between 15 to 20 crores a month. And we were in NCM 3 positive and burning as little as anywhere between 50 to 60 lacks cash at the corporate level in a company in a month, right.

Vikram:

For our listeners, NCM 3 is net contribution margin three.

Asish:

Yeah, net contribution margin three, wherein you just have the corporate salaries to be taken out. And NCM 3, we were well in addition of about 30 to 40 lacks a month, which for three to four-month-old company was a great start. I remember a lot of people coming and telling me as friends, as investors and stuff like that, that we are probably the highest GMV company in a quarter. I realized though back then that that there is something amiss because fundamentally I have always believed in my life that the biggest differentiator that a company can have, or the biggest calling card that a company can have is profitability. And I believe that the profitability while we were in a great march towards that, the reality is the health of that profit is under question because every commerce company, once it attempts scale, essentially has to solve for financing because B2B commerce companies fundamentally have a credit term involved, the business is not done in advance. So, to do a financing transaction, you need to have different capabilities. And the capabilities are around debt raising because debt is cheaper than equity by a distance, around underwriting, under collections. And those are capabilities. We were not investing in while we were building a commerce company, but fundamentally those capabilities were required for us to scale profitability, right? You could easily build an unprofitable company unless you care about these three capabilities. So, if these three capabilities were required, I fundamentally thought that those are capabilities that we need to invest in internal. Now, if I take a customer view, I also realized that most of the people were buying from us. Not because we were cheaper or we were faster, but they were buying from us because our credit terms were better.

Just to give you a sense. If we were offering a seven-day credit term versus a 90-day credit term, the deal conversion was far easier. And it gave me the clear sense that the customers are coming to me because of the financing problem and the capabilities that I had invested in during my first three to four months of the journey were not ones which were attuned towards financing. And that's when I realized that this is something that is not going to scale to that crater that I was talking about. This would probably end up being a dent and a hole again. So, in three to four months at the peak of our performance with the team at the peak of its euphoria, in about June 2016, we realized we had to change. It was an arduous journey after that, but we had to change. because otherwise we would have, again, ended up being a hole and not a crater.

Vikram:

No, I, still remember that conversation very clearly. And both of us were new parents at that time. And both of us had to step outside our homes to have conversations with each other because we had baby’s at home. And I remember walking down around my house and you had said credit terms and collections, and I asked you, what is the core that makes the company tick? And you had said we can collect money from anyone, and I remember you were staying up at night because you had so much to collect the next day and you were like, this is not making sense, I have so much money to collect from the market and people are buying because of the credit terms. And at that point in time, everything I was investing in was financial services in fintech and I said this is actually a financial services company, not a commerce company. And I remember you saying, I don't know anything about financial services, I don't know anything about fintech, you're saying that this is a finance services company, I don't know anything about it. How can I make a financial services company? And from there you hack, and you built a outstanding FinTech, early FinTech, and financial services company.Talk a little bit about that journey, both personally for you and how you converted a very young organization into a FinTech, which is highly focused on risk, understands how the balance sheet works, understands how important collections is. First talk a little bit about your own journey, where you had to shift that mindset to say, what, I'll make money on financing margin, much more so than anything else. And then how did you gear the institution towards it?

Asish:

Yeah, so I think fundamentally four skills are required to build a large financial services company. I think technology is a necessary condition. So, let's not call us since FinTech because all fin services have to be FinTech. So fundamentally those four capabilities on the ground are the following:

• You need to have a great Salesforce. Now it could be automated, it could be driven by technology. It could be helped by technology, but you need to have a great sales mindset because finally, you need a customer, who you need to acquire.
• Second is you need to have the ability to actually study the risk in a way that it is a great correlation to what he does as his real business. So, you're putting it to estimate his current financial condition to the best way possible, which is risk.
• The third is around raising debt because fundamentally the business is about creating a leverage. So, if you're building an equity lead financing business, then you are, then you're going to be hard spent in a very short term.
• And the fourth thing is around collections wherein because it is a business, wherein you have to get money out, whether it is through your own efforts, through outsource efforts, through your business model or whatever it is, those are the four things. I think first realizing that these are the four capabilities that need to be invested in as an organization, as well as an entrepreneur is the starting point

And many people forget that all of these four are important, to begin with. In the very beginning itself, that’s point no 1. Point no 2 is that you as an individual or even as a founding team will not have all of these four. You need to build these capabilities across the organization. For example, when we started off, liabilities fundamentally was easy for us because the CFO of our company, Ruchi, who happens to be my way better half in life, she was actually very adapt and already had the network into banks and NBFC’s, so that was ticked out. I was a great sales guy, I was hungry, I could sell a fridge to an Eskimo, so that was ticked out. So, there were two things that remained. One was collections and the second was around underwriting. So, we believe that underwriting is a specific technical skill. So that capability, we actually built it from outside. We hired people as very senior members on the team who actually built out the initial structure while we learned. And the four things around collections to me that was a DNA problem. It was to be solved through the DNA of the organization and hence I build systems around it. I build a culture that was always hungry to collect the next penny that was due.

Now, how did I make that journey? So, for me, there were two things to be learned, one was around collections, I never bothered about liability, and the second thing was around underwriting. It was just pure hard work, pure perseverance. I promise to myself that I'm going to read through at least three balance sheets a day for the next three months. I'm going to talk to as many people and just listen. Listen, read, persevere at it, just be at it. And I think I developed that capability wherein I understood the theoretical part of it. Then I started underwriting myself for the first nine months - I was actually doing underwriting on my own, I used to go for cases on my own. And I understood as the cases actually behaved as to what we were doing, and what is more real.

And collections, I think we have had it relatively easier because we've built a culture that has been very, very successful. I'm sure we'll talk about it in the later part of the podcast, but that's how I solved my thing that. Hey! there are these four elements, I'm responsible for a few. Others have to be built out.

Now, how do we get the organization aligned?

• I think people at the top have to start it, people at the top, have to speak the exact same language as what I did to you right now, which is they have to say these four elements are important. One is not more important than the other. Everything has to be invested in. You can't do everything yourself. So please respect other people who actually bring in those capabilities. So, it starts there.
• Second, you have to force people to consciously actually develop a risk mindset, which not many of us do because fundamentally we are empiricist in nature, and we want to be imperial in the way we build our businesses and hence, it has to be drilled down slowly, steadily, patiently with people who actually come in with that kind of a mindset. But when they see that seniors around them are doing that business outcome is dependent on that slowly steadily, they'll change. It's a slow process. It needs you to be at it, it needs you to persevere.

Vikram:

I think the two, three things that you said, and I just want to call them out. One is the vocabulary of the organization, and I think that vocabulary of the organization changed, I wouldn’t say overnight, but changed very quickly from being a commerce centric vocabulary, which was talking about GMV, which was talking about margins and CM to suddenly talking about yield, collections NTA’s very, very quickly. And I remember initially when I was talking, we were trying to architect the business model. And I remember putting the words on the board where, it was yield, name, ROA and NPA, and you're like, okay, what is all this? And I remember the last board meeting you are educating me about ECL and how ECL for Ofbusiness is very different from everyone else. And, you truly grown through, so that journey, and then for the non-FinTech guys, ECL is expected credit loss where systemtically important NBFCs need to move to that kind of methodology.

The other thing I would call out for, young entrepreneurs who are trying to make this transition sometimes from a commerce company to a FinTech company, because everybody thinks there is a FinTech in their company, is that when I looked at Asish journey - he was highly customer-centric, he would know exactly how that customer's business work. And even today he will know names of most of the customers, where they are, which tier three tier four town they're in and architected his entire financing business to that, to the pulse of that customer. And I think that's what actually helped you make that transition, you still focused on that customer and it was customer centric. And then you architected this business model just based on the customer and whenever there's a new product or there's a new geography, I see that you as well as the entire organization goes toward that customer that you’ll are serving.

Asish:

So, I will tell you something that I realized very quickly into a journey,

• Being customer centric is necessary but it is never sufficient. You cannot stand on your ground unless you are a customer centric. Being customer-centric is never a differentiator. It's a necessary condition. You obviously have to build it for your customer. If you can't do that, then you don't see, you don't need to exist. And the reality is, it is something that will not make you profitable. It will not make you grow. It will not make you a sustainable differentiation. It is just a basic necessary condition. Everybody does that. All good organizations do that. So that's number one.
• Number two, I hear a lot of people talking about technology-led. We are technology-led. We are algorithm led, again that is a pure, basic necessary condition. You need to have technology in your businesses because without that you won't have access or low-cost access. And without that, you cannot have efficiency in your processes so that you can cut costs. The question comes that having been customer-centric, having been technology-led, how do you build a business model after that? Because in India, first thing that you need to be is that you need to be very cost-efficient for a customer. So, the customer is not going to pay you a premium, like it doesn't developed countries, right? So within that, how do you manage and how do you build a business that is profitable, that at the end of the day delivers a return on equity, which is attractive to both you and other investors is something that you have to think about. According to me, if you spend too much time thinking about customer-centricity and all that, you've not solved the problem in your head. That is something that you have to start off before you build a business. The promoters basic I would say responsibility towards the organization is to build profitability. It's to build a business model that delivers returns. I think customer centricity, technology, innovation are very, very abused because according to me, everybody has some of that and they need that to exist.