Last fortnight, 3 year old Udaan raised $585MM, helping the fastest Indian unicorn reaching a valuation of close to $3Bn.

Flipping Around

Flipkart is the poster boy of the Indian e-commerce story. 

Its $20Bn exit to Walmart, which I elaborated on last year, was the world’s largest e-commerce deal and cemented its position as the undisputed e-commerce leader in India.

However, an underappreciated but tectonic ecosystem change brought about by Flipkart has been the rise of Flipkart ‘mafia’ aka the Flipsters. At last count true to the vision and risk appetite of its alma mater, there were 233 Flipsters who started 207 startups and secured over $400m in funding. 

But Flipkart’s contribution doesn’t end there. Flipkart’s founders and early employees have provided patient, early capital to fund moonshot companies like Ather Energy. 

Ex-Flipsters have been instrumental in setting up fast growing Indian business. Some of the most prominent ones include PhonePe, Curefit, Blackbuck, Groww. 

But the fastest, quietly growing unicorn out of the Flipkart stable is a B2B upstart called Udaan.

Flying High

Udaan was started by three “Flipsters”, Vaibhav, Amod and Sujeet who brought the balanced mix of operating and technical expertise to the table. 

Vaibhav led product management and finance, Amod was the CTO while Sujeet was a senior operation executive (and ran Ekart and WS Retail) at Flipkart. While it may appear that the business scaled so quickly in 3 years, the team had been “building” Udaan for more than 8 years at Flipkart. 

The ability for early stage ‘businesses’ to form strong quality teams is crucial. The trio recognized this well. Close networks allowed them to quickly hire 20 people majorly from Flipkart to form a core team. 

The journey began as a horizontal marketplace on which manufacturers and wholesalers could sell their products to retailers. The initial focus was on electronics and apparel, categories where the team had developed an expertise at Flipkart and something they were most comfortable in.

A Series A round of $10MM happened towards the end of 2016 alongside the launch of a beta version, and from day one, the company remained maniacally focused on the users.

This reflects in the company’s unique “non” CEO driven organization structure. The title of the person is irrelevant in the company’s focus on creating an India focused product.

The founders, all of whom come from small towns, were clear about user focus right from the beginning.

They wanted to create a product that would solve problems native to India, have a uniquely Indian flavor, and where they could empower a large number of people with technology.

They were targeting a large, but unsexy, Indian market. 

Killing Big

What do we get when we have a large, disorganized and fragmented market?

Disruption, of course. Udaan, was built on the “simple” thesis to make trading simple, safe and convenient for wholesale business to the retail market. 

This thesis tapped a market that is massive and disorganized. 

B2B commerce is growing much faster than B2C commerce. There are close to 5cr SME’s that need to secure bulk supplies with a high repeat order frequency unlike the ‘cashback’ fueled B2C e-commerce demand.

By efficiently plumbing the system and tackling inefficiencies in logistics, sales, marketing and the market has the potential to become a $1Tn opportunity in the next three years.

According to a Walmart report from 2014, India's B2B commerce industry will grow to $700 billion by 2020 from $300 billion in that year. This is of the same scale as the retail industry, which is expected to grow much slower from $925Bn to $1.3Tn.

2016 was also a watershed event for bringing India online. 

The ‘Jiofication’ which led to a 1,100% rise in monthly data consumption and rapidly expanded smartphone penetration to Bharat digitizing the SMB’s, retailers, wholesalers and kirana shops.

In his now famous TED talk Bill Gross, talks about why timing is the most important factor driving a startup’s success. 

Udaan seemed to have timed it well.

Spinning Flywheels

B2B territory was fraught with challenges, contributing to its unsexiness. 

Wholesalers, traders, retailers were inherently comfortable with their existing buying practices reliant on networks and running on trust aka credit basis. Other big challenges included streamlining the complex logistics and fulfillment process and creating a ‘tech spine’ to build the entire model.

Further while consumer internet business in India had grown to $15.2b by Dec 2015, the B2B internet market was still a minuscule number.

The market’s flywheel was moving slowly, but the team leaned on its learnings at Flipkart to turbocharge it.

It looked for a boost to test its go-to-market activities and ramp up partnerships through extensive networks. 

By Aug 2017, it was selected into Microsoft Accelerator’s 11th cohort, effectively using the deep networks of the technology giant. 

By early 2018 it had expanded its categories to include FMCG and staples. It also scaled to over 500 cities with sellers in 80+ cities through third party logistics

It’s also important to recognize and appreciate the dynamics of the B2B e-commerce market vis-à-vis B2C market. Early metrics from Udaan suggested that the average purchase rate was around 7 times a month with a strong conversion rate of 40% (compared to under 5% for B2C)

The learnings from Flipkart clearly helped. 

The ability to create teams fast, set up processes and focus on systems thinking to scale tech helped the company hit the phenomenal vendor growth. 

But, this was just the beginning.

Rapid Raising

Udaan raised money rapidly to fuel growth in a market that digitized almost overnight. 

As one of the fastest companies to become a unicorn, Udaan raised close to $1Bn in a span of 3 years. 

The rationale for the velocity of raising capital was clear. 

A strong, qualified team with a clear mission; huge, untapped market which would benefit immensely from digitization and access; and a large customer base on both sides of the marketplace that would benefit on both sides if a marketplace or aggregator were to intervene. 

What Udaan did to the extremely disorganized B2B ecommerce industry wasn’t necessarily ‘unique’ - it was what Flipkart had done with books, Oyo had done with housing, and UrbanClap had done with services. 

Find a market where you can bring every stakeholder involved onto one platform (or app) and provide them with the benefit of choice.

For a wholesaler, this meant an exponential increase in his market for customers while for the small kirana store, it would mean price discovery, increased product knowledge, and predictability. 

The use case to customers is, in some ways, even more foundational than in B2C.

Becoming Robinhood

While the biggest problem that consumer e-commerce solves is convenience and choice, Udaan intended to become a central fixture in the day to day operations of businesses.

The moat was to create stickiness and a repeat behavior on the platform by offering complete support through logistics, payment, and technology to the different players.

The B2B Aggregation gave it a recurring and predictable revenue model rather than building around flash sales and discounts like B2C Aggregators Flipkart or Amazon. 

As Stratechery elucidates in Aggregation Theory, the internet has made the cost of distribution near zero. Distributors would earlier integrate with supply as the distribution would be localized. 

With the advent of the internet, the new distributors, aggregators like Google, Facebook, cared more about owning the customer relationship rather than backward integration.  

Similarly, with the advent of the internet on India's mobiles, Udaan could suddenly become a very effective aggregator.

Udaan owned the relationships with retailer while onboarding suppliers, rather than becoming a supplier itself. Viewing Udaan with the aggregator lens, its platform starts to become more beneficial to its customers once more stakeholders are using it. 

Having collected millions of data points since inception, Udaan was able to understand buying and selling trends for different customers and make recommendations accordingly. 

For a wholesaler, this means that they need less time to manage their stock of products because Udaan was able to provide them with a snapshot view of current supply, current demand, and potentially future demand as well. 

Taking this a step further, Udaan has the potential to become an India wide intermediary for asset allocation, a distribution machinery for India.  

Udaan could become an internet age, B2B Robinhood identifying states/areas supply is outweighing demand and re-allocates accordingly. 

Udaan’s aggregation, though, isn’t limited to India. 

Gentle Disruptor

To expand into products in electronics, Udaan began to add suppliers to the platform from China

Using their built out logistics network with over 900 locations within India, it seamlessly integrated additional suppliers onto the platform. 

The key drivers for the massive raise was Udaan’s immense growth, and this ability to provide a “full stack service”. It leveraged its strength as a horizontal marketplace platform as opposed to vertically focused companies like NinjaCart

Soon after the raise, Udaan announced that its logistics service, Udaan Express delivers 65% of its products - pointing to its ability to become vertically integrated and touting its operational ability. 

The rapid capital raise was also indicative of Udaan’s growth and path forward - they were not trying to solve a small problem and exit, Udaan was here to stay and rebuild what for years has been an inefficient industry. 

This meant going to Tier 2 and Tier 3 cities and having conversations with small businesses about relationships with ecommerce. 

Understandably, apprehension is expected. As we had elaborated earlier, these corner stores and wholesalers have been doing business in a certain way for generations, why should they change their methods? 

Therein lies the crux of Udaan, described by one of their co-founders - “If you build a product that suits the business of the traders, retailers, and manufacturers, and it is for their benefit, that in itself is a validation of how relevant the product is.”

Udaan aimed to be a valuable partner, not a ruthless disruptor.

Flight of Fancy

If you survive the push against gravity, you might just see the world go round.

This is exactly what Udaan has managed to do. The sheer depth of the services provided by Udaan would justify to its rocket fuel supported breakneck speed. 

Udaan is now a marketplace to over 3MM retailers and more than 25,000 sellers from 900 cities and towns in India. 

Udaan acquired these customers by offering low commission fees and subsidies on logistics services, in addition to supporting them with these logistics, helping them make and collect payments, providing them with customer support, and lastly but most importantly providing trade finance.

Udaan was doing roughly INR 5,000 Cr ($800MM) annualized sales around September 2018, which has more than doubled this year. 

Udaan through it’s NBFC entity - Hiveloop Capital - has disbursed loans to over 1 lakh businesses with cheques ranging anywhere between INR 10,000 to 2 lakh. 

How does Udaan make money, or plan to, one may ask?

Udaan, not only has a large base of sellers and buyers on its platform, it's also in prime spot to make money by giving them money. As our piece on Razorpay showed, when you sit on the flow of money, you will make money.

Or perhaps, you sit on the flow of commerce itself, like a giant Chinese e-commerce player.

Alibaba and Its 40 Retailer Tools

Alibaba started as a B2B marketplace, and Udaan is more similar to Alibaba than you think.

Started in 1999, Alibaba first spent time in the market learning about the dynamics of the B2B industry - charging low fees for transactions and collecting data on the buying, selling, and working capital needs of different businesses.

Alibaba was able to create a payments platform, AliPay, to provide safe and secure transactions on a unified platform - a huge improvement to the extremely disorganized system at the time. 

The Chinese upstart developed a ‘one-stop-shop’ app that all parties could transact on and achieve price discovery, easy comparisons, and historical analysis. This gave small retailers a ‘window-shopping’ feel to purchasing their materials, making daily purchases more seamless and gamified. 
Alibaba began to gather data on Chinese businesses and build a financial system around them. This allowed them to provide quick and accurate working capital loans, expanding their potential market exponentially and giving them the boost that they needed to go from marketplace to financier. 

As more stakeholders came onto Alibaba’s platform more benefits unlocked. Alibaba was able to build ‘archetypes’ of customers and preempt capital needs to ensure their consistency on the platform. 

With scale, Alibaba added an e-commerce platform Taobao. It setup a logistics platform called AliExpress. Replace Alibaba with Udaan, and you’ll see Udaan is flying to build an Alibaba-esque ecosystem. 

If you didn’t notice, Udaan could potentially build a Flipkart within itself. 

Building Everything B2B

Why does Udaan need to keep raising new capital?

To build the Alibaba for India, as it still doesn’t have Alibaba’s multi-billion positive cash flow, of course.

The groundwork needed to really build the infrastructure required in bringing B2B online. While you may be reading this on your iPhone while waiting for your Ola, a vast majority of India operates without using their phones for anything more than making calls. 

Even today, the organised retail segment accounts for just about 10-12 percent of the sector and is expected to reach 22-25 percent by 2021. 

Just like Alibaba, Udaan tapped into this small business ecommerce segment when no other players were spending big to leverage technology and make the lives of small entrepreneurs easier. 

With $2Bn in annual gross merchandise value and five million orders monthly, the next step in the vision for Udaan would to become an all-encompassing tool for businesses across India and bridging the gap between Bharat and India. 

What Udaan could add to become ubiquitous is already visible in Alibaba’s stack today. The Chinese ecosystem has a lot of similarities with its Asian neighbour India, and it is indicative of why the Alibaba playbook would work well. 

In providing a B2B ecommerce and credit platform for India’s offline entrepreneurs, Udaan has become a way to grow business and profitability levels. Udaan has become a force of empowerment for the community of tens of millions of small businesses that form the backbone of India’s economy. 

In the process, Udaan has also created a lot of value for itself. It looks certain to begin quietly monetizing the massive amounts of commerce already flowing through its platform. 

Udaan is on track to be bigger than Flipkart, and potentially India’s answer to Alibaba.