Bhat's Notes

Do you know the traits of a good businessman? Whenever a good opportunity knocks on his door, he grabs it with both the hands and quickly puts his weight behind it. Do you know what makes a good businessman great? When he rightfully credits his success to the one who walked in with that opportunity. Do you know what makes a great businessman highly successful? When he lets his team drive the operations while he takes care of the big picture. Kishore Kothapalli of MRL Posnet is that three-in-one businessman.

Do you know what’s common among Kishore Kothapalli of MRL, Satya Nadella of Microsoft, Shantanu Narayen of Adobe and Ajay Banga of Mastercard? All of them went to Hyderabad Public School.

Kishore, an MBA from Kelloggs, is a Hyderabadi serial entrepreneur who got an exit of $100 million last year. MRL Posnet is into selling and servicing Point of Sale (POS) terminals. While many businessmen faced the wrath of demonetization, Kishore is one among the rare few who turned demonetization on its head and quickly scaled his business to triple its valuation in four months.

Kishore is very clear in his strategy, execution and communication. Clarity in thought is a rare asset and he has it in abundance. Add common sense to it and you will know what makes Kishore stand out in the crowd.

Kishore is lively and joyful. Most of my interactions with have been full of smiles. He worked as President of CEO Clubs. When I met him recently for lunch, I was nicely surprised with the traditional lunch arrangements he made with the help of a malayali cook. He  knows how to care. Kishore is man for his friends. Relationships are important for him. I want to acknowledge the presence of Vijay Menon, global ED of TiE Global.

Payment space suddenly caught fire after the demonetizarion in November 2016. We got Hyderabad son who got a $100 million exit because of that and we are very proud of him.

Moderator: Suresh Reddy, Vice President, TiE Hyderabad

Kishore: I always prefer to talk to next genetation. The specific business that we were in is into payment processing. It is in the financial space of curve going through the roof and valuations going through the roof. We asked ourselves the role we play. Are we B2B or B2C? All the success you see in the market is around B2C. In B2B, the fundamental question is to build versus buy. Multiple is the derivative of something. We arrived at a value based on how much of investment is needed for someone to build our business.

Kishore: I always say I am one of the blessed children of God. I never havr had hardships. I came from a family where my father got education at the sweat of his brothers. I went to a boarding school. I have always been made out of accidents. After boarding school, I went to HBS in Hyderabad. I got deep rooted friendships with everyone and it is my foundation for life.  Everything happens for me by chance and opportunities have walked into me. I don’t know whether I am a serial entrepreneur but I am a serial businessman.

I was working in USA and I went to Kellogg there. I made $85k per annum with $12K bonus and I spent so much that I never had any money left to pay off my year end taxes. I have a commitment to my dad. My father was running MRL into building material space. While I was driving to work in USA one day, I realized my next four weeks were packed. If I continued like this I would never meet my dad’s committment. I gave 90 day notice at work. As promised, I joined my dad. After I got back to India and I got married. I started working like a dog. What I have learnt at Kellogg in marketing helped me take a million dollar business to eight million dollar business in just couple of years. I did logistics of today in our own scale in those days. We have become very successful. Market changed and we couldn’t sustain but I retained MRL name for POSNET (Point of Sale Network). My friend Prathap referred MRL as the prefix.

Prathap and I met in Hyderabad Public School. He worked as CEO of a medical transcription company and returned to India.

Independent Sales Organizations (ISO) took care of payment processing. These ISOs are sold at few million dollars and is a lifestyle business. He wanted to bring this to india. He showed me an executive summary. I connected him to Lony Anthony from Mumbai. Lony told me he would come in as backend process entity if I were to be the front end. He decided he would make it year one play instead of year three play if he did it on his own. Three of us have come together to build POS (point of Sale) business.

We decided ISO in India can’t be the marketing play alone. There is a successful branded company in payments in long term. Any multi national company by definition is process-driven and its success lies in processes. Hence they can’t change and hence are rigid. Owing to regulations and MNC, systems continued to be legacy.

Kishore: I met the Khaitans. They said this is a tough business. They said these businesses take long time to make money. They told me that we need to have 50,000 POS terminals to be cash positive. I told both the brothers, I neither have resources nor patience. I will enter this if I breakeven at 10,000 units. They laughed and I got back to office.

We went to the drawing board with Prathap. We started looking at global companies and looked at the economic twist we can give. The one that caught our attention was Apple. Everything is geography-dependent in payment industry. If you have engineer, you need to have density. Unless we have those many machines in a sense area, we will continue to bleed in paying that engineer. These swiping machines are super sophisticated. We questioned why do we need an engineer to go there to repair them with a backpack. We realized the manufacturerers of the machines controlled the industry. It was a Kellogg moment for us.

We said let us do 100,000 machines in India. What would it cost us? It is $18 million dollars. Two more million for customization. We needed $20 million dollars. $170 is the cost of each terminal. Many built  efficiency on the top with $2 million switch. I told Lony to give me a price of the switch. I started buying the machines with all the software rights. Now we build a switch for managing the terminal. We owned the software that went to the terminal. When I did 400 terminals, my cost of maintenance is the same irrespective of the geography. We went to Karur Vishay Bank and they are happy. Others have legacy systems. We automated every single process.

We built processes for everthing which is very profitable.

Every inbound call to us is a cost. We decided not to have calls coming in. We decided no backpack people. We couriered terminals and we called the customers and trained them over phone and with videos. Now we what’sapp the GIF. We worked around automation and no inbound calls.

Kishore: I am an average guy and my intelligence is average. A friend of mine became managing director at Reebok India. We enjoy training teams in things beyond business. This has been the culture. We let teams do two Saturdays in a week to have a friend of mine spend time with them. Reebok guy Siddharth talked about retail. After his talk, I thought I should invest in retail. He said whatever he did got to do with adding value to his firm of Reebok India. The more we kept talking about value to Reebok, we become indepspendible with Reebok. Apply metrics with everything.

Kishore: A friend of mine went to school in Puttaparti. His friend came along with him and read Kesoram cements sign and called the number of Sunil Jain’s son. He asked them how to decide where to put an ATM. That conversation made me go to Mumbai just for few hours. We kept buying clothes for everyday and my few hours turned into four days. We get paid per transaction on ATM and not on real estate. Citibank paid us $1 per transaction. This we converted into a financial play. ATM costed 10 lakhs in those days. We wanted to get into steady state Cashflow. Cashflow becomes fixed as customer footfalls become constant after some time. We converted ATM business into discounted cashflow business. We bought 10 lakhs one and sold it 13 lakhs. Instead of selling an ATM, I sold cashflow to someone else after discounted cashflows.

Kishore: Emaar had gone through challenges. A friend of mine and his wife from Coimbatore stay with us whenever they come to Hyderabad. He asked me what would do you do with 1000 acres in Coimbatore. I put him to a developer. He asked the developer of Emaar whether he would buy the land. Everyone has seen the land. Emaar developer wanted me to be part of the deal for the deal to happen. That is how it happened.

Kishore: Function of leadership team and my role in the leadership. I watch sports but I don’t play the games. American football is my favorite game. I am like a quarterback where my job is to throw the ball and stay back. I don’t run day by day. I never get into operational responsibility. This is my day one requirement and I have the team in place.

Kishore: A lot of times. All my private time I spend on individual sports. That is my personal time.

Kishore: When there is not brand loyalty to a store, it means the lesser work you do as a non-brand retailer, the more is the freedom of choice you are giving to the consumer. Company like Amazon won’t allow us to do much. They make us do a little bit and they do all the real work including the delivery guy who does the real job.

Your success story is not given even if you got 2000 employees. Any company got to be defined by financial balance sheet or social balance sheet. That is the success. Either you play at volume like Amazon does or you build a niche.

Kishore: I tend to stay away from marketing as I don’t have any experience.

Kishore: Define what is business and what is entrepreneurship. Business is a resource to guide an opportunity to make it real. Entrepreneurship is about maximizing the metrics between opportunity and resources. Take Posnet. Opportunity is to break open into established POS market of India. Resourcing requires us to get into deep technology and ability to buy the terminals. When both are under our control, entrepreneur can take risk and it is his dream. At 13,500 terminals, our CFO declared profits. We got profits from year 2 and this is real money. Out growth is strong. What do with it? Are we building this for exit  or growth? We told exit or retain got to have no difference to our businsess and we chose it to be a cash cow. What is the problem then to write a larger check and taking business bigger? Even equity also is repayable at the time of exit. Why should I have equity when I get more cashflows? We did receivables finance. We could do this as we got 70% gross margin business. Today sub 30 is big number. This is power of technology and processes.

Kishore: End of 2015, we got 30,000 terminals. The growth has been only 8-10% in the market and we have been just above it. Is this opportunity really there? We started to wonder. Resources we got. Then we decided to create the opportunity. We decided to go international. We had no clue how it would be. It is risky. Now as an entrepreneur, I have to assess the risk. Then we said, may be, we shall look to reduce our risk. Then we started our journey to do partial divestment. That story was getting over on 15th of November 2016.

Then 8th of November, Modi announced demonetizarion. On 10th we flew to Hong Kong. I shook hands on for 100,000  order through we only had 35,000 till then. On 15th, I backed out on the investor as they got panic about demonetizarion. That is where life helped me. Karur Vyshya Bank that I knew and I asked loan of 30 crores. Decision maker asked me whether that would be enough. Next morning the banker gave the money and by evening we transferred a million to China.

The earlier PE investors came back to us in February. With 35,000 terminals, we got 138 employees. By March 31st, we got 185,000 terminals. Our employee count got to 140. That is when the investors got confidence in our scale. I didn’t say no and it started to unfold. When an opportunity came, we grabbed it with both the hands.

The rest of the market has grown by 400,000 and we could grow by 125,000. In all fairness, those PE guys have new valuation. The whole story started again.

Nandan Nelekani said ATM and POS would be dead soon. My take is that people won’t change overnight. It is only a form factor difference. But change is never abrupt. All these things that people talk about but nothing is disruptive. Basics remained the same. Heart never changed except for forms. My friend heard me and went to Nandan. After hearing my view from my friend, Nandan toned down on how disruptive UIDAI can be. Couple of months later, first president of YES Bank went to Nandan. Later Nandan talked to me to reach out to SignalHealth in USA. I got to go after this company anf finally got them to sign with us. By this time the other PE firm upped the Valuation to $45 million. Chairman of SignalHealth of USA has advised me that this is the time to sell at $100 million. We took it and started a global process. We paid them 3% success fee.

If you can’t talk to your friends about what you are doing, huge injustice you are doing to yourself. A friend got me Nandan for ten minutes and he advised us to bring in SignalHealth. Brilliant people run the entire process and there is a value in paying these big brands like Amartya and Mangaldas. Don’t compromise on the quality of the people around you. Don’t worry that they are a big expense.

Kishore: My definition of bootstrapping is different. We have alway brought people at market pay. Upside is ESOPs. I don’t want them to doubt their decision. Always mark to market. Bootstrapping is about viable product at minimal cost. Doing it low cost a high tech work is bootstrapping, People should feel proud to work, else how do you attract the talent? The best of the brains are not just IITs and IIMs. They are across the world. Hire the rural ones and teach them how to dress and polish their English. They get super confident.

You can’t achieve nothing without affording people. Anyone who gives 18 hours a day, he is not giving his best. Bootstrapping is about not playing the human arbitrage. WorldLine aquired us. They are 1000 times bigger. But our EBITDA is closer to theirs. Our company is not built on human arbitrage but on technology and sustainable business.

Kishore) We needed three crores. We started with it. We jacked it upto 8 crores and we lost it all. We had a retail model. We created a pre-paid wallet by working with a bank. People recharged it at Rs.10 and to resolve it we spent Rs.5-10 rupees. We realized we were making losses through value added services. This is how we lost 8 crores. We were forced to think like Microsoft Dynamics. Then we reinvented. We started offering this B2B2C to directly to banks that don’t have the digital business. This is how we turned into profitability. That time after I burnt 8 crores, I started pumping in. At 15 crores, I told my CFO, I could give 5 crores more and after that I would not expand.

Kishore) I don’t think. I think j am a happy blessed guy with no issues in life. My associates or friends are the reason for my positivity.

Kishore) People like Prathap. I am a village guy. Everyone in Hyderabad talked and dressed differently. The fact I could blend in made me confident. When I was in Banaras, I was Banarasi. HBS taught me structure. In Banaras, I learnt about life and I matured there as individual. Kellogg gave me turning moment. 396 out of 400 got 4 years of average experience and I got no working experience. They talked about difficulty in work environment. Seeing them gave me confidence. A priest is one of our best friends there. He came in to study how to manage people. Another friend got questionable life from Costa Rica.

Kishore) Demonetizarion means I knew they would be for rough roads. When I saw the shape of the new bank note, I knew they would be in trouble. Changing a note means physical recalibration. I knew the only fallback would be debit cards. I also knew cash would be back in three months with full force. That is when I picked on my entrepreneurial moment. If I make a shirt, I need to make sure someone buys the shirt. I shall go with the flow of what consumer wants. The product must have certain non-disposable catch or hold on the consumer. The hook is what is that consumer can access beyond product A and product B as he is indifferent to both the products.

Kishore) Our tensions were about growth, technology and obsolescence. Our catchphrase is “we are not legacy”. Prathap understood the difference between marketing and revenues. All of our presentations are on cutting-edge high-tech elements but the revenues are on brick and mortar. I never let my tensions seep into my leadership team. I always walked into the room cheerfully. Someone told me we lost 3 crores in a meeting and I controlled for a second and told them let us move on. Satvik food I take now got to do with probably my past tensions I didn’t realize.

Why would a super star move into Hyderabad for a Startup in Hyderabad? I hired them to work from their own place. Tinge of regret is there whether we could have done things better if stayed under on roof. Leadership team is spread around major cities. 100 of the 140 could choose to work from home if you want. Work from home is our normal culture.

Kishore) UPI, debit card, credit card, Paytm and American Express are all fundamentally the same. I authenticate the consumer. On the backend, I ask the bank to money transfer between two parties. Noone has created anything new except the method of payment with technology. Nothing has changed in payments. UPI might be dominant payment mechanism. MRL is about recurring revenues of 30% and 70% non-recurring. 30% comes from value-added services. Verifone wants to get into value-added. They couldn’t transition to value-added and hence Verifone ended up being sold.

We built a company that I thought is worth 300 crores but 700 crore we landed in. We got signed by large customers and also long tail. Future value got captured by the sign ups by large firms after demonetisation.

Kishore) I wanted to retire. Less creativity and more growth work. It is not my strength. Micro teams is my strength. It means I got to replace myself with a CEO. Then I got options of partial divestment or full. I chose full. This is what I told the chairman of World Line.

One year after acquisition, MRL Posnet still runs as it is with the same team. None of  World Line employees ever came in.

Prathap, cofounder: When I showed him executive summary, Kishore told me instantly we needed Rs.20 crores. That is what we brought in over 3-5 years. He made that decision in five minutes. I am always surprised how he could say the business would need 20 crores and how it became true. Kishore is very strategic. His brain is free and uncluttered. He knows how to manage time. He never does routine things. He does non-toutine critical activities. He even deletes sent items also. He is the only one who does it.