Can Groww Help Indian Investor Wealth Grow?

Last fortnight, Groww raised $83MM to become a unicorn, becoming the seventh fintech in India to do so.

Flipkart Bulls

In 2007, two young engineers decided to take on Amazon from a two-bedroom house in Koramangala. 

It took them 5 years before their startup, Flipkart could become a unicorn. 

Both unicorn and startups were not known to many in India. Flipkart changed the story. It not only gave “startups” an identity but also inspired the next generation of entrepreneurs in India.

As Flipkart expanded from selling books to every possible e-commerce category, it acted as a playfield for many intrapreneurs who were part of Flipkart’s blitzkrieg scale-up between 2010-15.

By 2016, Flipkart was already a decacorn and had produced many entrepreneurs who were ready to build the next unicorns and decacorns of India.

Dubbed as the Flipkart Mafia, in line with the famous Paypal mafia of the US, these folks had deep insights on how to build an Indian business.

Flipkart mafia cure.fit, udaan, navi, phonepe

It was a fine balance of jugaad & technology, customer centricity and profitability.

Lalit Keshre along with his colleagues Harsh Jain, Neeraj Singh, and Ishan Bansal had a working relationship with each other. They all were all “Flipsters” and had a commonality.

A desire to solve a problem that was faced by millions.

Apart from this desire, they were a unique combination. Lalit & Harsh knew Product & Business, Neeraj was equipped for tech and Ishan knew Finance well.

The well-rounded team was ready to solve a problem that they identified in 2016 in India’s financial sector. Customer needs were changing, as millennials were ready to invest their newly earned money. But the millennials did not want gold or real estate. This was a reason why a disruption in wealth management became evident.

The team understood this important insight. They were keen because it could possibly create an impact for more than 200M+ users in India. 

On 4th May 2016, Groww was registered as Nextbillion Technology Pvt Ltd. But it would take them a year to launch their website.

While it is easier to connect the dots in retrospect, back in 2016 it was not obvious what was missing in India’s investment space. This required extensive research to fine-tune the customer persona, form a clear problem statement and devise a GTM strategy to make it a viable business.

The foundation would take time to build.

Beating the Market

The team’s initial goal was to build internet financial services with the best user experience. 

While the four wanted to start with investments, they were not quite sure about the product. In fact, they also thought of launching a savings product for millennials! 

It would take time, especially in the fintech space. It was overcrowded with old and new players trying to grab customer’s wallet share. Each player had little differentiation.

The team kept researching, talking to users, understanding their fundamental pain points, looking at the industry level data. This made them realize that the process of investing in financial products in India is complex and opaque. While there were close to 200 million people with investable income in India, only 20 million actively invested.

This was a yawning gap that had to be closed.

The only way to bring the next 180 million on board was to make investing simple. 

Groww aimed to provide the necessary information, resources and user experience for people to start investing in the simplest way possible.

But simplicity is sometimes oversimplified. It is a challenge to appeal to a big cohort of users with often conflicting needs and still satisfy everyone. Add to it was the challenge for fintech startups where RBI/SEBI compliance could give any product manager sleepless nights

While Groww’s small team kept iterating on the product, 2016 was the year when Indian startup ecosystem was also going through a winter. Unlike 2015, even a stellar team like Groww would find it difficult to raise funds.

That meant, working with very limited resources. That was a blessing in disguise as Groww’s team developed a strong DNA to extract the best ROI, both on time and money

The foundation was finally being built.

Finding Alpha

Groww’s first product was built by a six-member team, including the 4 founders.

For the first cut, they needed someone passionate, willing to hustle in a startup, with a laptop. They got a fresher and an ex-Flipkart colleague who took a bet on them.

The team initially started with three mutual funds. It took them around two months to build the first version that included a robo advisory platform.

Keeping user experience in mind, the team kept adding or retaining the necessary features and removed the ones that were not helping the users. 

By 2017, Groww had a product that was simple, intuitive and safe enough for Indian user’s to trust with their hard-earned money. This was validated by more than 1,00,000 transactions that Groww processed between April to December 2017.

Multiple other external factors came into play which actually helped them scale.

UPI, launched in 2016, was gaining traction. Demonetisation led to increased penetration for online payments and that opened up a huge segment of new users. Mobile accessibility was increasing in India. “Mutual Fund Sahi hai ” campaign by the Indian MF industry body (AMFI) generated enough curiosity amongst the prospective users that Groww wanted to cater to.

All these factors meant a massive societal change. 

Simultaneously, the share of users who wanted to invest small amounts through their phone with minimal paperwork was also born.

By making the entire process, including KYC, paperless and seamless Groww could grab an early lead in the rapidly expanding market.

Timing accounts for a 42% difference between the success and failure of a startup. Groww was born at the right time and right place to offer a simple solution to a problem many users resonated with. 

Investors knew they had to grab their seats when such a  rocket ship was about to take off.

In early 2018, Groww raised their $1.3M seed round which gave them the required fuel to build out their MVP. Groww’s mission to make it extremely simple for a common man to invest was taking shape.

But it first needed to make the average Indian part with some savings. 

India’s Saviors

India is a country where people like to save. 

According to April 2021 data, India’s Gross Savings Rate is ~30%, while the household savings rate is also a healthy 10%.

India’s GDP stands at ~$3 Trillion. The total savings (even with a conservative estimate) at 20% comes out to be $600B each year. The historical investor preference has been to invest in fixed assets like real estate and low yield instruments. Equity markets have seen less than 5% of total investments. 

This translates into a massive opportunity.

To give a broad perspective, the AUM (asset under management) of Mutual Funds since the beginning (in the 1980s) till date – is just $450B. Equity mutual funds are just under $200 Bn.

Ironically, when we talk about returns from the various asset classes a contrary picture has been observed.

Post tax returns for equity, real estate, gold

In the past decade, equity has outshone every other asset class. Equity has generated a real return (after taking inflation into account) of around 11%, whereas property has given a real return of around 6% in the same period. 

The future outlook for real estate is expected to be quite poor as the current level of inventory is huge which will take time to clear. In addition, real estate in India provides abysmally poor rental yields of around 2%-3%. 

Considering all of this, the best option for retail investors for long term wealth creation is to invest in stock markets. People began to realize this. 

Between March 2014 and March 2017. the number of folios of mutual funds opened increased by 50%.

The smart people at Groww saw this opportunity and launched Mutual Funds distribution as their first product.

Initially, it partnered with only a few fund houses. This gradually expanded to 34 fund houses giving investors the option to invest in 5,000+ mutual fund schemes.

As it strengthened the mutual fund distribution business, the number of registered users increased from 50,000 to 1 million.

Back on its fast-paced growth, it bagged its Series A of $6MM in Jan 2019. To scale even further, it would need to earn investor trust.

Building Investment Trust

The financial markets in India are replete with stories where entities scampered off with the hard-earned money of investors. 

Drawing gullible customers with promises of huge returns, several Ponzi schemes have been executed. It is no surprise that the Indian investor is very risk-averse while investing in financial markets. 

Groww had to face similar challenges. Customers knew that Groww was not the custodian of their money, but only an intermediary.   

But even for an intermediary, the trust levels were low.  This is reflected in the current macro-state too.

2019 had seen the highest amount of broker defaults in the past two decades with 18 broker defaults on NSE and 16 on BSE. 

In most cases, brokers used investors’ shares to obtain leverage and take speculative positions in the derivatives market which led to losses. Investors were unaware of their shares being pledged. The erosion of investor wealth has correlated strongly with loss of investor trust. 

It was not surprising that the second most searched query on ‘How to find a trusted’ throws up “financial advisor”. 

Groww has proactively tried to tackle this problem.

Groww created a unique proposition to attract participants in the age group of 25-40, tech-savvy and do it yourself, mindset group. It won their trust by leveraging social media. The way to gain investor trust was to not personally provide them with advice, but give them the information and the tools needed for them to make the decisions themselves. 

With close to 400+ articles on the blog, 700k+ followers on YouTube, 200k+ followers on Instagram – the company was democratizing access to quality financial advice. 

It was building the trust loop- one article, one video at a time. Groww’s persistence has also reaped results.

Within 2 years of the launch of Mutual Fund distribution, they bagged 3rd place in 2018 and bagged 1st place in 2019 winning BSE star MF Fintech for highest transactions.

Another big advantage has been expanding the new investor net and deepening financial inclusion. Due to the ease of use of the app and a content-first approach, Groww attracted 60% of users from small towns who have never invested before. 

The focus on small towns was probably deliberate as SEBI’s regulations in 2018, allowed distributors to charge higher commissions for getting investors from B30 cities.

This helped it grow the number of users from 1M to 2.5M within a year. Validation from investors followed with a Series B round of $21.5M in Sep 2019.

With that, the transition to providing broking services began.

Minting Money

The broking industry is an asset-light business. 

However, the companies need to spend to acquire customers and the customers take time to generate enough business so that the costs related to maintenance are covered.

You can compare Groww and ICICI Securities. 

In FY 2020, Groww spent a total of Rs. 8.9 Cr to manage 780,000+ active accounts which comes to about Rs. 114 per active account. But at the same time, ICICI Securities spent ~Rs. 6,100 per active account.

Why the huge difference? 

The answer lies in the number of employees. ICICI Sec had 3700+ employees vs. Groww which had 400+ employees.

Legacy companies run as full-service brokerage houses which provide research and advisory services, in addition to their broking revenues. The operating costs in the full-service brokerages are much higher, which skews their cost metrics. 

For example, Zerodha, a discount brokerage, which has the highest number of active accounts (3.8M) operates with just 1,100 employees.

If implemented correctly, the discount broking business is a classic case of a ‘low operating leverage’ business model. 

Low fixed costs and almost zero variable costs, increase your profitability disproportionately. However, this model limits your customers to those who are tech-savvy because the brokerage house is not providing any personalized service to individual customers. 

When we look at the profitability – we can make certain assumptions. Groww has 900K+ active clients. Assuming the platform has 5% active daily trading users with 2 order a day in the F&O segment, it fetches Groww 40 (Rs. 20 per order). 

Groww financials, revenue

On a daily basis, Groww earns INR 18L. In a year they will be able to earn Rs. INR 45 Cr ($6M)

We can then turn our attention to CAC and LTV. Groww launched stock trading in Jun 2020 and they added ~700K+ customers by the time FY 20 ended. 

The industry averages around INR 5K for customer acquisition. With this number, Groww needs 125 days (Rs. 5000/40) to be profitable on a per active customer basis.

This is the power of users and leveraging the users.

Groww is a platform where the costs will not increase drastically even if the participants using the platform increase in an exponential manner. It can layer on more services to cater to more users.

This advantage was recognized by investors as it raised its Series C round of $30m followed in Sep 2020

Fresh on new capital, it introduced options to invest in Direct Mutual Fund plans. It launched a stock trading platform in the first half of 2020. And users gave an overwhelming response. 

Within a span of 8 months the company had more than 780K active Demat accounts on the platform with 8M+ active users.

For Groww the game had just begun

With the expertise and the fast execution pace, Groww launched intraday trading, ETF investment and digital Gold investment options. This provided the growth impetus.

Launch of new products helped Groww acquire 12M+ users on the platform in a span of just over 3 years.

The fast growth also meant that competitors would not be lurking far behind. 

Fighting Overweights

Overall competition in this space is ultra-intense. 

This has only accelerated over the last two years with the entry of new players. Many of Groww’s competitors are considerably larger and have been operating for decades. 

Groww is the 5th largest brokerage house in India (nearly as large as HDFC) based on the number of active clients. 

However, the top 3 brokerages have at least twice the number of active clients as Groww. Out of the active clients, the number of customers who contribute to the top line of the firm is far lower.

According to a report, 14M new demat accounts were opened in FY 2020-21. This was ~3x of the cumulative accounts added in the previous three years and ~3.5x of that added in the last two years. 

The pandemic induced stay at home provided working professionals with the spare time to participate in the market. Similar trends were also seen in the United States with the Robinhood craze and Gamestop saga. 

In India, the dizzying market return in the pandemic lowered the risk aversion of retail investors encouraging them to participate in the rally. Buoyed by this sentiment, the people whose incomes dwindled, took to the market as a source of supplementary.

On the other hand, those who were able to switch to remote working without loss of earning saw lower spending on entertainment, food and travel which was ready to be invested in the financial markets. 

These headwinds have allowed Groww to increase its active client base by ~18% over the FY-21. 

However, similar growth was been seen by most of its competitors. 

For example, Upstox, which is approximately 2.5x bigger than Groww (by active clients), grew its active clients by around 11%, and market leader Zerodha increased its active client base by ~6%. 

However, this is not the first time that we have seen buoyancy in the market valuations driving newer investors to the market. The challenge has always been to retain these investors when markets fall. 

Unlike other sectors/commodities, the drive towards investing is not controlled by the individual firm. Companies, which increase their costs to cater to the new wave of customers, can get woefully exposed when the tide goes bad. 

Groww has to keep this in mind and tailor its business appropriately. A sudden rationalization in market valuations can make Groww’s journey very difficult.  

To derisk, it was clear that Groww had to find newer revenue sources. 

Finding Value

Groww realized that they had to consider a new revenue source. 

Having been in the mutual fund distribution business since 2017, Groww decided to backward integrate and launch their own mutual Fund.

A mutual fund distributor can expect to earn around 1% per year of the investments they bring to mutual funds. By setting up a mutual fund AMC, Groww can hope to earn another 1-1.5% of the amount invested in their funds. 

Instead of setting up a mutual fund organically (which could take up to a year due to regulatory approvals) in May 2021, Groww acquired Indiabulls AMC for a price of INR 175Cr. 

Indiabulls AMC had a measly AUM of only Rs 570 cr (as of April 2021) after being in business since April 2008. According to data from Morningstar, IndiaBulls AMC ranked 37 out of 41 AMCs by the Assets under management (AUM). 

Irrespective of the past history of the mutual fund, there is significant potential to grow the mutual fund business. 

Groww has an upper hand because of its experience in running a mutual fund distribution business since 2017. Their superior knowledge of customer needs and investing behaviour can give them a significant advantage.

The challenge would be to adhere to regulations from the market regulator (SEBI) which has been very proactive with its regulations in the mutual fund space. 

But Groww has continued to be a rocketship

The platform currently has more than 15Mn users which include investors in MF, investors in both Indian and US stocks. 

More than 250,000 SIPs are being managed every month. Helped with favourable regulations, Groww has reached 900 cities with 60% of its users from Tier 2 cities and beyond. All of this was achieved in a remarkable time of just 5 years. 

Groww funding rounds

It should come as no wonder then that Groww secured Series D funding of $83M and achieved unicorn status being valued at $1.2Bn in April 2021.

With technical capabilities, product know-how, execution capabilities and enough cash in the bank account, Groww looks set to continue its solid growth over the next few years.

Going Long

Groww’s breakneck growth has come on the back of rapid product expansion. 

It has now enabled F&O trading on its platform and will allow customers to trade in US stocks from India, a facility provided by very few broking houses. 

However, the intense competition in the industry will ensure that any product which gains investor traction will be quickly imitated by other firms. 

Groww is looking to offer its customers all possible options for investments in various financial instruments. Indians are notoriously risk-averse to investing in equity markets. Lower risk options such as fixed deposits and gold have historically found a lot of takers. 

Knowing this need, Groww allows its users to invest in low-risk instruments, 

Expanding the market for digital investing is the prime target for internet companies. Only 10% of the market with investable assets actually do. With that objective, Groww Originals has been a source of valuable content for new and intermediate investors.

Groww’s biggest strength lies in its ability to understand customer needs and market financial products according to that need. This knowledge and ability will be Groww’s biggest asset while taking on the top three brokerages. 

It is a distributor that can plug in any financial product to its machine. 

The growth that Groww has observed by working only on a single product i.e. distribution of MF schemes was probably what convinced investors to invest. In addition, the profitability of the discount brokerage Zerodha would have given its investors a taste of what the future can be in this space. 

It is critical for Groww to make a success out of the Indiabulls AMC acquisition. Failure in this aspect would make Groww the latest entry in a long line of businesses that were unable to handle a mutual fund. 

Essel Group, Sahara, Standard Chartered Bank-backed Lotus India fund all tried and failed. Mishandling the fund may cause a run on the AMC, which has the potential to wipe the entire business.

India is entering an exciting decade where we will see increasing financialization of the Indian economy. Groww has built distribution and trust to be in the flow of this financialization. 

It will enable more products to service the distribution it has built. 

Fast tech startups like Robinhood in the US, Trade Republic in the EU and Webull in China have scaled on exactly this strategy. 

New Indian investors will come, learn and transact adding to the depth of the financial market space. The influx of financial technology will lower the hassles and frictions that investors have had to face till now. 

Groww will be well placed to replicate this in other untapped markets like South East Asia. Indian is poised for a gigantic leap in how we use and perceive financial products. 

Groww is in pole position to help Indian investors see their wealth Grow.

The NFT for this article is owned by theicogeek (Adithya Thota)

Story by Nilesh, Parth, Abhinav, Keshav and Aviral | Visuals by Omkar, Mehak and Saumya

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