Generally, the two biggest nightmares prevalent in the startup ecosystem are how the startup will get VC(venture capital) funding to implement or scale up their idea and the other one being how can they get everyone talking about them to increase their consumer base. But there is a unicorn that has been able to fly even without these two wings of venture capital funding and advertisement.
It goes by the name of Zerodha, which is actually a portmanteau between two words ‘Zero’ meaning 0 and ‘Rodha’ in Sanskrit meaning barrier. Zerodha, in June 2020, became a 1 billion dollar company in less than 10 years of its existence when it bought back ESOPs (Employee Stock Ownership Plan) at 4 times its book value. Zerodha is founded by Kamath brothers, Nithin (elder) and Nikhil (younger).
Nithin Kamath who was working at a call centre back then, was going about his day at the gym when a fine gentleman asked him what it was he did for a living. Nithin, who had been trading ever since he was introduced to the stock market by a bunch of Marwari friends, showed him his portfolio which flaunted huge returns. That’s where Nithin got his first client. Soon this one client became ten. Nithin was now trading on behalf of them.
As it became increasingly difficult to manage clients, Nithin registered himself as a sub-broker with Reliance Money. Nithin had been in this industry for a long time and was aware of the fact that when the world was moving towards lighters, the broking industry was still busy with their flintstones. Those days, the big boys in the broking industry were charging a heavy brokerage commission as a percentage of the transaction value even though they had to apply the same amount of effort for a trade of Rs 1000 or Rs 1 Crore. So, Nithin started charging a flat fee for every trade executed. This model is called the discount broking model.
It was pioneered in India by Zerodha. Computers were reaching every house, still, the brokerage houses were hiring and doing business through relationship managers. Also, the interface provided by the brokers was very complex with all reds, greens and complex graphs. Zerodha identified this barrier and went on to create an interface that was so clean and simple that any newbie could easily work on it.
In a stock market, the relationship between a broker and his client has a foundation of trust and the strongest pillar of this established trust is transparency. Old school brokerage houses had an advantage of trust as they were doing business for a long time, but Zerodha by being radically transparent ended up winning the trust of the masses. It’s very interesting to know that a very simple tool of brokerage calculator which enables one to calculate all the charges on a trade became an instant hit for Zerodha. It was so simple that anyone can work that out on an Excel worksheet. In spite of being such a simple idea, it portrayed Zerodha as a company that was transparent with its customers.
Zerodha soon became profitable and started investing their money back into the business. Now, Zerodha is the No. 1 Broker in India in terms of active client base with 6+ million clients. All of this earned without spending a penny on advertisements. So, what is the reason Zerodha was able to sail through without even taking a single penny from VCs or spending on advertisements? The answer to this question can be explored in the model provided by Kunal Shah who is the founder of CRED and Freecharge at his INKtalk.
Kunal says humans have this ability to hack evolution and become more efficient. By taking the example of a lion he says, a lion will have to wait for the evolution process to be more efficient, say by having bigger claws, faster speed but, we humans are different as we can build systems that make us more efficient. He further went on to ask his audience to do an efficiency scoring between 0-10 on two alternatives- getting an ordinary taxi and booking an OLA/Uber Cab.
The average rating for the alternatives were 2 and 8 respectively. And here, he highlights that there is a gap of 6 between the efficiency score of these two alternatives i.e. △6 (delta 6). He further explains that all those products/processes that have a delta greater than 4 possess the following 3 characteristics-
1. High Consumer Tolerance– viz consumers are highly tolerant and cannot stop using the product even if there are some issues in the experience. For example, WhatsApp despite having privacy policy issues has been able to retain users due to the high delta that it had over traditional SMS services which cost a lot of money.
2. Unique Bragging Proposition– He says when people find a more efficient process, they scream at those who are not aware of the efficient process to make the transition to the more efficient product. And that’s the reason why Zerodha has been able to build the biggest clientele even without spending on advertisements.
3. Irreversibility– As people have now transitioned to a much more efficient process and are now comfortable using it, they cannot move to the old one. Zerodha changed the whole investing and trading system and substantially reduced the brokerage costs. And now the investors cannot move back to the old school way of investing and trading.
Zerodha is now the market leader in digital stock brokering and has realized that the pond is too small for this fish. They need to focus on increasing the size of the pond itself. As per IIFL(India Infoline), only 1.5% of the Indian population invests/trades in stock markets. Recognising that having developed financial markets is essential for any economy to develop, Zerodha, is currently aiming to increase the awareness of people about the stock market by launching Varsity, which is the largest online stock market education book in the world covering everything right from the basics to advanced level trading.
Zerodha, a bootstrapped company that is now the market leader, is indeed an interesting startup case study.
Written by- Roshan Kukreja
Edited by- Ubai Sura