Decoding CRED : Part 2

There is nothing unique about acquiring customers by offering something extra for free, even our vegetable vendors have been doing this for ages. This is the reason he throws in those extra curry leaves in your bag whenever you buy vegetables from him. How often though have you seen a vegetable vendor giving away curry leaves for free but no vegetables to sell. Right now that is the situation of CRED. They have a customer acquisition strategy, but no core business model.

In my last post I talked about CRED transforming into a digital mall and offer their digital real estate for a fee to various D2C brands, however the unique part about these brands in D, they want to sell direct to the consumers by cutting the middlemen and pass on that value to the customers because internet has made it possible. Introducing CRED as a middle party defeats the whole D part of D2C. Also when the nearby shop with same footfalls in available for almost free, why would any brand pay high value for opening the shop in the Mall. This is the digital world. These brands when they are new might use CRED for few months of promotions and then divert the customers to their own digital shop (app or website) rather that sticking with CRED forever.

I think CRED team has also realized this and that is why they are now trying to pivot into becoming a fintech by offering services like rent payment and consumer loan. There have already been many rent payment options already existing in the market like Red Giraffe and No Broker, who even offer better deal than CRED in terms of transaction fee. Rent payment on Credit Card is something I would personally not recommend, however if you are a super premium card holder with superior reward program like more than 3% cashback or something similar then paying rent through CC may yet make some economic sense, however there are not many card holders that fall in that segment, and many who do are likely not living in a rented house.

Now on the consumer loan part, as of now as per my knowledge CRED is not an NBFC and offering this in partnership with some other lender. The problem with this option is that entire customer base of CRED is already eligible for a better deal offered by his/her bank. Some people say convenience may drive CRED users opt for the option offered through CRED than their bank, well in that case you do not understand the Indian consumer. First of all Indian consumer, no matter how rich prefers the option that gives him/her better value also CRED themselves don’t believe in that convenience hypothesis, that is why they sell themselves as “most rewarding way to pay your Credit Card bill” instead of “most convenient way to pay your Credit Card bill”.

Please also note that the customer base of CRED is the same customer base that banks also treasure. They typically get a dedicated relationship manager or personal banker. Banks will not let this customer get away, and even if by some odd chance CRED sees some traction in this regards banks may even try to block CRED something like what few banks did when they started seeing wallets as a threat.

So in the current situation they have nothing going for them in terms of a visible business plan hence they are spending all their energy on UI/UX, someone in the boardroom might be like “at least make it look premium so that the customer sticks around”.

Now question is what they could do, the only thing that comes to my mind is they can become a discovery platform for semi-luxury lifestyle goods, however with the economic slowdown caused by this pandemic, this semi-luxury consumption will see a steep downfall. My definition of semi-luxury is luxury items for upper middle class.

Decoding CRED

CRED is one start-up, which has been getting a lot of media attention since it was launched by its charismatic founder, who in his previous avatar founded a very interesting start-up and gave a massive exit to his investors, when that start-up got acquired by Snapdeal. VC world loves a successful exit, for very obvious reasons. What do they love more than that though? They love it even more when the same founder offers them another chance at yet another successful bet. This time the confidence is higher, the dreams are bigger hence the bets are also bigger. Thus starts the journey of CRED.

Now most of us reading this post know about the massive funding round raised before even the launch. They are also aware of subsequent massive funding rounds before the start-up has even made any revenue. However there is one question in everyone’s mind. What exactly is CRED? Some call it a Fintech, while its own founder used to call it a Lifestyle company; some are still clueless. Very recently I read someone calling it an status symbol also. To that I jokingly mentioned that now the investors must be dreaming about it becoming the Louis Vuitton of the digital world and how they are now looking at another spectacular exit. Some may have even started planning, what they would do with this massive windfall.

I, like every other curious minds in start-up and Fintech space, have paid attention to CRED. Despite having no use for the base service it is offering, I yet downloaded the app. I even referred it to my wife to check what exactly is happening with their coin offering. One thing is for sure. The app is good to look at. It is one app, that I check from time to time without ever needing to use it for any purpose. I am someone who likes to keep things clean around myself, meaning when I don’t find the need for an app for a prolonged period of time, I just delete it. This is one app, I still keep. It’s just that good to look at. Design team of CRED, take a bow.

Let me start with a small story. Recently I was invited by my alma mater to mentor their budding entrepreneurs in the campus and I met this team of very bright young men still in their 2nd year of B.Tech. They are working on building something focused on students living in various campuses, so that companies wanting to advertise to that specific group of people can use their app to run campaigns on their platform and they can earn from these advertisers, while offering all the services to their users for free. They had thought of a bunch of services they were planning to offer. These services were all needed by students but not correlated or complimenting to each other in anyway.

I asked the team,”who is your customer?” They answered,”students.” I told them,”well, your customer is who pays you. While students are your users, your customers are the advertisers.” Then I tried to explain it to them using obvious examples of Google and Facebook and how the service they offer to their users is a mean to acquire user base, because their service is not their product. Their user base is their product. Then they find creative ways to sell this product (user base) to their customers, who are the advertisers.

I told the team that their thought process is in the right direction, however they should not focus on building ten services from the beginning. They should pick one to begin with, that they find most appealing and engaging to their potential user base and use that service to acquire as many users as possible. They may end up building all those service in the long run, but they should find an organic path towards it.

At this point in the discussion I invoked CRED. I told them while Facebook, Google and many more have built useful services to acquire user base for selling them ads, Kunal Shah is one brilliant mind. He noticed that in today’s market scenario the easiest way to acquire customers is offering them rewards. So instead of putting too much efforts in creating a service offering, he just picked up the common attribute of his target customer base (credit card) and offer them rewards for the very reason of possessing a credit card.

Under normal situation, one would spend resources building a service, then spend further in marketing and customer acquisition. This entire exercise will require a lot of money. Why not use that very same money to offer rewards to people and acquire them. Sounds simple? Well; it is. Now you can acquire the customer with this strategy, how you keep them engaged? Two ways, make the reward recurring (earn points on paying your monthly bill) and introduce gamification (lottery).

How do you make money now? The big question. Now that CRED has acquired a large number of customers who like to spend on lifestyle expenses (credit card users), next step is to connect Lifestyle brands to these customers. Imagine I run a premium coffee chain, opening a new outlet in Powai. What is the best way to market it? Whatever your answer is, unless it is CRED, it’s wrong answer. All you do is create a campaign for users living/working in Powai and surrounding area (200 Rs discount on your first visit up on burning 50,000 CRED points). Maybe you are launching a new premium FMCG brand. Create a campaign on CRED (spin the wheel to get 10-70% discount on your first purchase).

Why all the earning and burning points then? Well as I said Kunal is one of the smartest brains we have around. His offerings are designed based on users’ psychological needs not your mundane obvious things like paying your bills and all (this is probably the reason some people have called it a status symbol). All this earning and burning completes the loop and you are the hamster keeping the loop moving. It also makes this customer acquisition loop an opt-in. CRED is not into the business of selling your data. You will have to opt-in for the offer.

Just in case you have still not understood, how the money will be made; let me state it clearly. Each brand spends on customer acquisition, today they may be utilizing all the money they would be getting from brands for creating the offers, but they can always increase their margin. If the coffee chain offers you 200 Rs per customer acquired, you can make the offer 100 Rs discount instead of 200 Rs. Or spin the wheel. It may even go Google Pay’s “better luck next time” direction if there is too much pressure to generate revenue. Right now it looks like they have enough cash to keep on burning.

Some people may have question on why then they recently started rent payment and lending offerings. COVID is expected to hit the non-essential lifestyle expenses the hardest. With this situation, people will be less interested in visiting a new coffee chain or trying out new expensive face cream. That means the whole “Lifestyle company” business will slow down. These two recent offerings are attempts at offering something that is related to essential needs to its customer base.

He has not done this for the first time. Even Freecharge was same thing, targeting a completely different customer base though. You can say CRED is affluent person’s Freecharge. I think Freecharge had potential. When Snapdeal acquired it, the deal made some sense to me but when Axis Bank acquired it from Snapdeal, I knew it was a mistake and I also knew Axis Bank did not have any clue what Freecharge was all about (Axis Bank thought it was a Fintech, probably). This made me conclude that a Kunal Shah business can only be run by a Kunal Shah and there are not many Kunal Shah out there. He has an amazing understanding of how human psychology works and he uses this knowledge beautifully when creating his offering. So as long as Kunal is at the helm of CRED, it has the potential to grow into something unique and extraordinary and if he decides to sell it; there is a big chance it will also end up like Freecharge i.e. people in-charge of it having no clue what to do with it.

PS: Last night I heard the episode of Cyrus Says podcast with Kunal Shah, that more or less confirmed what I have written above. He also mentioned about a Mall that opened in Mumbai many years ago, which allowed entry only to people possessing mobile phones, cars or credit cards. So maybe he is trying to create that mall digitally. He has got the customers in the Mall already, he is waiting for brands to open their stores in this Mall and pay him rent for using his digital real estate.

PS 2: While I agree with most of the point he made there is slight deviation on what he mentioned about India being a low trust society. It may be true for cities, for whom most of the techies are building offerings, but I when we move beyond cities to smaller towns and villages, India is an extremely high trust society. I may be wrong, but being born in a small village and growing up in smaller towns my experience has been such.

Why this is the best time for early stage investors?

Few years back I had no idea about how investing works. In 2012, when I was first toying with the idea of becoming an entrepreneur I did not even have a clue how venture investing works. Then I got a chance to run an accelerator for early stage Fintech start-ups for some time with investment ticket size between 100k to 250K USD. I was closely involved with the entire process right from application, selection, investing to advising and helping them on various aspects of their business. While that entire stint was good fun, it also gave me a chance to interact with many start-ups from across the globe and opened my perspective towards appreciating and entrepreneur’s world and his/her perspective. If I was still doing early stage investing, how would I approach the current situation or should I use the word opportunity.

In my opinion this is the best time for early stage investors from deal making point of view for the simple fact that the nature is helping their selection process. The start-ups that are being built right now are primarily the ones where founders believe in their idea and execution ability beyond any reasonable doubt. Founders who were getting into business with the belief on their fund raising ability would be thinking of backing out now. That’s one big plus for any early stage investing.

Second big plus is that these start-ups are starting from rock bottom, if you and they believe that can make it in this situation, there is a huge possibility that things will only get better going ahead. If one can make it work given the current constraints and planning keeping the new world order and new learning in mind, it will be better for them to sail through than someone else who started earlier in earlier world order and now finding themselves back on the drawing board trying to figure out how to re-calibrate their products and processes. Some of the things which looked like a good thing to do 4 months back may feel like a huge inefficiency in the system. Very simple example would be if someone spent in an office lease may find out that it would be more efficient to work with only 30% office capacity.

Third point in favor of my argument is the ability to structure the deal in your favour with valuation expectations of founders readjusted to the new world order. There will be lesser haggling on valuation and you may be able to hold same equity for lesser investment. So even though your ability to raise fresh fund will be impacted to some extent due to global recession caused by this crisis, you should still be able to hold same kind of portfolio by finding a more favourable deal structure. If buying at low is true for public market, same should be true for private market to a large extent.

Fourth and the most important point is that the cost of labour has gone down significantly. Most organizations have reduced salaries of their staff. Typical salary-cut is in start-up world is in the range of 30-50% that means availability of good resources at lower cost has improved. If staff cost was a significant part of your burn, imagine it going down by almost 30% without you doing anything on your part. Since keeping the cost structure lean is one key criteria for any early stage start-up, current situation provides every early stage start-up a great opportunity to do so. With burn getting significantly lower with lower costs, a start-up maybe happy raising lesser than their original plan and try to run it in much more cost effective manner.

A seed stage investor works on the principle of taking higher risk in order to reap higher rewards that simply means the if they invest in twenty start-ups, the expect one of them to become a unicorn and three a semicorn so that even if all others fail their net return is significantly on the higher side. So their worry is not about making an investment that might fail, their bigger worry is missing out on one that might succeed. The opportunity presented by this downturn is that they may not be able to make twenty investments now but only ten however the possibility of those ten succeeding now would be much higher and return much more rewarding.

There may be an impact on the start-ups ability to generate revenue but for an early stage start-up immediate revenue is never a key criteria, by the time they reach a stage in their plan where they should start generating revenue markets would have recovered and customer’s ability to consume would have been restored. So to conclude, this is the best time for early stage investors to make deals and given a choice they should not miss this opportunity. Don’t wait it out. Get busy with Zoom calls scouting the deals. In that stage even due diligence can be performed remotely. Do the deals. All the best.