has been spun off from ecommerce marketplace Flipkart and has received $700 million in fresh funding from Walmart. In the process, Flipkart has divested 13% stake in the Bengaluru-based company to parent Walmart and a few of its other shareholders, more than four years after acquiring the young startup.
Sameer Nigam, cofounder and CEO of PhonePe explained to
ET’s Ashwin Manikandan and Samidha Sharma what the new structure means for the company, the regulatory and competitive landscape in the sector, its IPO plan and big bets going forward. Edited excerpts:
You have long been in talks to raise external capital at a valuation much greater than $5.5 billion. Why didn’t these deals fructify into new investors coming on board?
It is true that we did engage with several external investors. The discussion with Flipkart and its board was around how to price a company that is just five years old, and in a market growing so fast. Our investors are well capitalized. There was no price at which they would rather be a seller than a buyer of a PhonePe stock. That’s a matter of immense pride for our team. That’s why the process itself (of raising external capital) was not making sense earlier. Just the way we merged with Flipkart pre-launch and it was a subject of controversy then but helped us keep focus, similarly now we hope to scale with the new capital.
What is the new ownership structure like?
Flipkart continues to be the single largest shareholder with 87%. While Walmart has a majority stake in Flipkart, they are also the single largest direct investor with about 10% stake. The rest 3% is held between minority shareholders of Flipkart… The new structure is very attractive for Esops meant for our employees.
What does that mean for employees and the management?
I am not in a position to comment on the specifics as the paperwork is not done yet, but every full-time employee of PhonePe will get Esops. Earlier, only a few select engineering and management teams were eligible for stock options. Now, the whole team from sales offline, online, operations, customer service teams will be offered stock options.
Will the move help you rival big tech companies in the digital payments market in India?
There are two to three factors. While we are one of the largest payment platforms in India, we are competing against the largest global players. We need capital for that, but $700 million is an attractive war chest to have. Every year since the last three years one of the five Big Tech firms (Google, Amazon, Facebook) has come in and this year will be no different. The board recognizes that.
What is the outlook for PhonePe given the hyper competitive nature of your industry?
With the current base and momentum, there is a real chance to create value and become profitable. We also want to attract and retain the best talent. These three things work in tandem. For profitability, we need capital; and capital helps us unlock value for shareholders and that’s how the best talent can be retained. During Covid-19, as the earth is becoming flat, we are also looking to work with the best talent in the world.
Are you open to external funding?
Now that the cap table has opened up, there is no diktat that we must raise only internally. However, there is no discussion at this point. I hope we become a profitable entity before we run through this money.
How to do plan to grow the business and become profitable?
We are looking at three core areas. One is payments, notwithstanding UPI and zero MDR. We have wallets, recharges and other distribution models where we are seeing value, and moreover, the appetite for digital payment is only increasing. We have also entered the insurance and mutual fund space.
Over the next four-five years, we will be launching small-ticket, high-frequency products such as SIPs, mutual funds, sachet insurance. Financial service is a big bet for us. Thirdly, over next four to five years, we want to reach the remotest parts of India and play a role in helping small businesses grow. This, today, is still in the exploratory phase and we want to see how the value will unlock.
But you will not enter lending?
Not anytime soon. We do not yet have the DNA for collection. We are better suited for product and distribution, so rather think about alternative credit platforms, distribution platforms and co-underwriting. I’d rather crack insurance before lending.
What about your IPO plan?
The primary capital and the new ownership pattern have opened up the option for an IPO. Discussions around when it will happen will be made by the board at the right time. For now, we have capital and a long-term investor in Walmart.
What are your views on the evolving regulatory landscape for digital payments?
When you’re in an industry like payments and financial services, it’s always bound to be heavily regulated. It’s not just about a tweet that goes wrong. Today, we are saying because of outages, RBI has come down on HDFC Bank – which is a behemoth. If regulators are saying there is a need for better uptime and security, then we all need to be in tandem… It’s important for consumer confidence. That’s the reason why this sector is heavily regulated. India is the hotbed for digital payment innovation, unlike any other market.
What about the 30% cap on UPI markets share? Do you see it impacting growth?
Right now, between us, Google and Paytm, it is 40-40-10 kind of share. But this is bound to change with both Amazon and WhatsApp becoming more aggressive in 2021. Today, 15% Indians are using digital payments. The market will grow further, and moreover, 30% share is not small for a market of over a billion people.
Do these regulations affect investor sentiment?
At a valuation of $5.5 billion, we have just scratched the surface. Earlier, the talks were around how PhonePe will survive in the face of competition. Today, we are among the biggest on the UPI platform in the country even amid talks of UPI market share cap and WhatsApp’s entry.
We have plans and we need to behave the same way because competition will come in. I genuinely believe that digital payments will become (a part of) households, just like telecom. Every family will have at least a member transacting digitally, and we want a piece of that pie. I can’t worry about regulations and market cap for five years from now.
What about your possible entry into commerce?
Stores and switches are more enabling, and we are in the business of building platforms and not marketplaces. PhonePe Switch has 300 partners, and we are still figuring out why some of them have not taken off. We are trying to figure out what customers want in terms of discovery and engagement.
I’m more intrigued about how to enable discovery than commerce. Shopkeepers know how to run their shops and there are enough people doing that business, we want to see how we can enable that demand and supply dynamics. I will never become an insurance manufacturer, but we will try and meet consumer demand.