Entrepreneurship is the new buzzword, and founders are becoming role models for the youth. The recent release of Shark Tank in India further took it to new heights.
Apart from the sharks, one of the most celebrated entrepreneurs in India is Kunal Shah.
He is known for his wit and ideologies and is called a successful founder of two fintech startups, the second one being CRED. However, have any of the two startups managed to amass wealth, a thing we most intimately associated with entrepreneurship?
Let’s decode the FreeCharge and CRED story to dig into the real truth behind Shah’s startups.
FreeCharge – From Hundred Millions to Few Millions
Kunal Shah and Sandeep Tandon founded FreeCharge together in 2010. After receiving seed funding from Sequoia Capital and Tandon Group. The company received Rs. 200 million from Sequoia Capital in 2011.
What initially started with just prepaid mobile recharging services later expanded to DTH, post-paid mobile, data card, electricity, gas bills, landline bill payments, etc.
Further, it went on to provide discount coupons that were equal to the recharge value at popular food and retail outlets. Partnering with various food brands helped it amass a 1.50 million strong customer base, generating 10,000 transactions per day.
The funding continued and the cash burn as well – a typical Kunal Shah model was operating. In 2014, it indeed became a leading company in recharge and utility payments.
More investors joined and more funding was raised. In 2015, mobile commerce gained popularity and over 80% of the FreeCharge transactions took place on mobile.
The company further raised $80 million in a Series-C funding round post which Snapdeal acquired FreeCharge for approx. $400-$450 million which is touted as one of the biggest Merger and Acquisition deals in the Indian startup ecosystem.
However, Kunal Shah continued as the Chairman of the company. FreeCharge further partnered with Axis Bank to launch a Unified Payments Interface (UPI) system to allow instant banking transactions.
Snapdeal’s parent company Jasper Infotech invested $60.8 million into FreeCharge but was struggling with cash. There was a change in leadership roles as well. As Snapdeal continued to struggle with cash, it was in talks for selling FreeCharge.
It was then in 2017 that Axis Bank acquired FreeCharge for just $60 million.
While Snapdeal’s purchase of FreeCharge can be touted as one of the biggest M&A deals for startups, Snapdeal’s sale of FreeCharge was also a significant example of how a startup loses more than 75%-80% of its wealth in just 2 years.
Who’s to be blamed?
CRED – Shah’s Paradise or Another Curse for Wealth?
CRED was another stint of entrepreneurship for Kunal Shah. It’s a no-brainer that Kunal Shah is yet again on another loss-making spree.
While the company is different, the tactic is still the same – raise funding and report losses.
The financials of CRED made it even more apparent. It’s high time we start pondering whether posting mind-boggling losses in the shadow of scaling and customer acquisition is justified.
CRED was founded in 2018 by Kunal Shah. In the second year of its operations, CRED reported operating revenue of Rs. 52 lakhs against spending a whopping Rs. 378.4 crores.
Rs. 17.56 crores that it earned through interest on deposits was the only silver lining in the dark clouds.
It raised Rs. 828 crores in Financial Year 2020 following which it ramped up its spending across different verticals. Further, it managed to onboard 5.90 million credit card users having good credit scores.
But the fact is, the company wasn’t able to monetize its users yet. To further simplify, CRED spent Rs. 726.7 to earn a single rupee. Advertisement and marketing became the biggest cost center for the company, aggregating 47.6% of the total expenditures.
Coming to FY 2021-22, the expenses of the company shot up to Rs. 1702 crores, with 60% being directed towards marketing and promotions.
In the previous fiscal year, it posted losses of Rs. 524.3 crores which rose to Rs. 1279.9 crores in FY 2022 while managing to increase revenue from Rs. 88.6 crores to Rs. 393.6 crores. Further, Shah is committed to the further growth of the platform.
As per his statement, more people are engaging in his platform in depth and breadth, leading to an increase in revenue. However, his commitment to growing the platform further might come at the cost of further losses and erosion of the capital.
The tricky part is that this is done consciously and sometimes turns into a never-ending loop. At a certain stage, the startup might be forced to spend to retain customers as well as acquire new customers.
This especially becomes challenging when the competition increases. Let’s hope Kunal Shah has a solid plan to avoid this stage otherwise, the trajectory can be the same as FreeCharge.
Is This Brand Building or Wealth Eroding?
FreeCharge’s downfall has raised serious questions about the success of CRED, as it is more or less operating along the same lines. CRED and Freecharge, both have lost hundreds of millions of dollars with at least CRED still on that track.
Millions and millions of dollars were wasted on CRED to build a multi-decade old multi-sided platform that has zero utility whatsoever.
Further, Kunal Shah is also known to be an aggressive investor in startups, having invested in 224 companies – without a framework.
His investment philosophy further came to light after reports that he’s accepting investment pitches on WhatsApp, and apparently, you don’t even need to meet him or have a business deck. What kind of entrepreneurship is transpiring is truly worth a second thought.
Entrepreneurship is all about innovation and solving a certain problem. However, there is a new trend noticeable in the startup community, i.e., to raise funds, and burn huge capital for customer acquisition leading to reporting of huge losses. Eventually, these losses are passed on to the last set of investors.
Kunal Shah has never created something innovative but deployed so much capital into “product-less” projects like CRED which could have been used to create something meaningful. Something truly helpful.
Hundreds of millions of dollars that have gone towards funding CRED could have been used for a much better project having real utility for the customers rather than just reward points and some contests. None has any idea what the product is. I bet if I ask any of the product managers at CRED, they’d fail to answer what is the “product” they are working on.
When it comes to business or entrepreneurship, profitability is a must. No company can survive without profits. Kunal Shah seems to be missing this important element in his startups.
Ultimately, the bubble of high valuations and losses will burst on one or a few of the investors, while others will book their gains and exit from the back door. In the case of FreeCharge, that unlucky investor was Snapdeal.
If the company goes for IPO, these losses are passed on to the retail investors, which leads to a loss of faith and investor confidence in the long run. Remember the Paytm story?
Entrepreneurs like Kunal Shah need to keep the long-term goal in mind. Since they inspire hundreds of thousands of entrepreneurs because they carry a certain charisma and have a story many can relate to.
Rather than just building a company, passing on rewards doing cash burns in the name of customer acquisition, achieving high valuations, and then exiting while passing on the valuation bubble to the buyers.
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