A Journey into the Fabulous Success of India's Foremost Fintech start-up

Zerodha means 'no impediments.’ The company seeks to remove impediments in the life of an investor. Nithin Kamath, who is driven by passion, is the architect of India's finest trading ecosystem and one of India's best­-known fintech companies.

Zerodha has received many awards; the most recent being the coveted ET Startup of the Year (2020) award. There is an entire focus on meeting customer needs using a very responsive website. Their focus is on market expansion rather than replacing an existing supplier in the market.

Nithin Kamath, Founder & CEO, Zerodha, in conversation with V Shankar, Founder CAMS & Director, ACSYS Investments Pvt Ltd

The approach that you have towards application, funding and infrastructure closely mirrors my own ideas. People think that Zerodha is a broking platform. I know you represent a larger eco-system. Can you walk us through your journey?

We do broking but we are not really a broking platform. All of this was not planned from day one. Things evolved and we adapted quite fast. We learned where the opportunities were. One of the reasons for us to be able to quickly grow was our organizational structure. We are still a bootstrap business. We don't have any external investors. So in all the decisions that we took in the last ten years, we did what was right for the customer and the business as well.

In 2010, when we started Zerodha, I used to trade the markets very actively. My younger brother joined me in 2006. He was a better trader. So we decided that he should continue trading and I should give a shot at broking business. The reason for the idea was also because NSE had launched a free trading platform for brokers, which is called NFC now.

I am sometimes called a technologist but I am more a business guy. Initially, we did not have big ambitions. One lakh customers was the maximum we could think of as our goal. 2010 was probably the worst year for brokerage as an industry historically.

‘If a trading platform is coming up for free, why can’t we go and disrupt the pricing?’ I thought. In India, brokers were still charging a percentage as brokerage fees. It didn't make any sense in an online world to be charging a percentage commission. So we decided to charge a flat fee for trading. When we started in 2010, our ambition was just to have a broking platform on the back of a vendor platform to cater to active traders and F&O (Futures and Options) traders.

I am sometimes called a technologist but I am more a business guy. Initially, we did not have big ambitions. One lakh customers was the maximum we could think of as our goal. 2010 was probably the worst year for brokerage as an industry historically. Around 2012­13, we sensed the potential and decided to build a large business, not just for active traders, F&O traders or intraday traders but also for investors.

Disrupting the Transparency

For the first three years, it was completely a white label platform. We brought in a lot of transparency to the industry. In any banking or broking, the deals are offered based on net worth. We decided not to change our offering for any customer, irrespective of how much revenue it generates or how rich he is. We treated everyone alike.

In the bargain, we could be transparent. We started blogging. I put my head in all the online forums and as a CEO of a broking business, answered questions transparently. In the Indian broking industry, until then, I had never seen something like that. Everything was very opaque in the way the business operated. So what we disrupted when we started was transparency, and not pricing.

The Tech Monster

In 2013, Kailash Nadh joined us and around him our tech journey started. He is a monster and the best technologist I've seen in my life, and it was serendipitous that we came together. He was a cofounder of a startup called ‘Sensible,’ which I was bankrolling but it did not take off well. I convinced him saying that there is a mother of all bull markets waiting to happen in India and told him, “Why don't you come and join? Let's build this together.” Our ideas matched quite a bit. He came on board.

With Kailash, we started building a product. In 2015, we launched the first in­house trading app called Kite, a web and mobile trading and investment platform. The best thing was that Kite launched the API ecosystem, which powers the trading platform before the trading platform itself. We launched the Kite­-Connect API.

We had to keep it simple, minimalistic and good-­looking, but we also had to give all the bells and whistles that active traders required. We went for zero brokerage for equity investing. People generally used Zerodha for active trading and ICICI or HDFC for investing. We wanted to change that image.

So we completely let go off brokerage charges for equity investing because anyway, we were not making too much money from equity investing trade. That worked really well for us. The virality hit for the first time. People came in and liked the new user experience. They started inviting people.

Opening the Online Floodgates

The biggest roadblock for us in this whole journey was onboarding a customer. Then Aadhaar happened, followed by demonetisation and online onboarding. Previously, we had 100,000 customers. Once it became online, onboarding became easier. In 2016, when we went live with Aadhaar, our customer base grew and we are at 5.5 million customers today. It has grown 55 folds in the last five years compared to the first few years.

The API ecosystem we built was very valuable for other startups to come and build on top of us. We launched Varsity, which is our education initiative. Varsity is an extensive and in­-depth collection of stock market and financial lessons and is one of the largest financial education resources on the web.

We realised that the capital market ecosystem in India requires a niche user experience and not another buy-­and-­sell trading platform. So we opened up this API ecosystem and invited startups. Firstly, they didn't have to do the job of building the infra. Second, they didn't have to worry about regulations and compliance. Third, they can go very quickly to the market. But the most important part was that we said, “If you build a good product, we will showcase it to your customers.” In the business of money, validation of a product was really tough.

Money has really never been our focus right from the start of this business. If it were, I would have raised money a long time ago. We have been offered ridiculous valuations over the last one year by the biggest VCs and PEs in the world.

The first startup we met was a company called Smallcase who has done really well now. We also realised that there was an investing opportunity. So we started in 2017 ‘Rainmatter’ which is a Fintech fund and incubator. By then, we were profitable and invested between 250,000 to 500,000 dollars.

In our initial years, the regular mutual funds did not fit in well with the theme of our business and it was not going well with our transparency. When the ‘direct mutual funds on exchange platforms’ got introduced, it suited us perfectly. In 2017, we launched ‘Coin’ which is today India’s largest direct mutual fund platform.

The products kept getting better. We now have the third version of Kite platform completely built from ground upwards. In 2020, Covid happened and the business suddenly has grown out of proportion in the last one year.

It has been a fascinating journey. But lest we should give the impression to entrepreneurs that it is all a bit of roses everywhere, we would like to hear about scary situations as well.

There have been many scary situations. I don't think there's anything rosy in business and entrepreneurship. The toughest pieces of my journey were actually pre­-Zerodha when I used to be a trader than post-­Zerodha. I worked in a call centre for three to four years.

You are one of the few large organizations who remain bootstrapped at scale and you made very cogent and strong remarks for being what you are now. But if you decide to list, do you think that migrating from a hope-and-glory sort of valuation to a proper fundamental valuation based on revenues and profits seems like a step down?

Money has really never been our focus right from the start of this business. If it were, I would have raised money a long time ago. We have been offered ridiculous valuations over the last one year by the biggest VCs and PEs in the world. I don't think there's another guy on this planet who would say no to this kind of money.

If we were to list, then the market forces will move our valuations. If we list it, say 15 times our earnings, then they will look at competitors. Robinhood, a large US broker very similar to ours, is valued at $60 bn. So someone will compare our valuation to that of Robinhood and the prices will adjust automatically. The valuations have moved away from profits and price/earnings to just growth potential and whether you are in the top one or two of that particular vertical.

I know Kailash is doing a fantastic job. Your big differentiator is free and open-source software. Have you faced any form of pushback from the regulatory environment for the software that you are using, since you are not using branded software?

Not really. We sit on a bunch of committees with regulators and exchanges. Compared to a black box where you don't know where you can go wrong, ours is something that is being used by so many people and issues are getting reported and resolved then and there. So, there has never been a push back. On the contrary, we have been proactive with and nudging the regulators.

What I find impressive is that the ownership of technology is strategic for you. It comes through in the products that you develop. What is your system for taking user inputs and incorporating them into your projects?

We don't have product managers and all that. I work closely with a team of 15 young boys and girls who understand markets well and constantly get feedback from different places. They come up with a bunch of suggestions. I take it to Kailash and the tech team and work out the roadmap. That is how simple it is.

To give you an example, ‘Coin,’ which is probably the largest direct mutual fund platform in India was built by two people on the Tech team and is being run by a four-member team. It manages our 15,000 crore AUM (Assets under management) today.

In the first few years of our business, we understood the importance of not having technical debts and dependencies on vendor platforms. Almost every single thing in our business is owned by us. We have invested from Rainmatter in a company called ERPNext. The software is fast and it runs all our back­-office platforms.

For our email, we use Listmonk, an open-source mail manager and send 10 to 20 million emails a month, spending just $20 to do it. If we use Mailchimp, it may cost probably one crore a year for sending emails. We have a 34-member tech team. Not a single person on this team has quit till date.

In the first few years of our business, we understood the importance of not having technical debts and dependencies on vendor platforms. Almost every single thing in our business is owned by us.

Rainmatter seems very interesting. Do you take outside money for funding? A lot of investors will be interested!

(Laughs) No, we don't! Our investments are done for impact and not really for returns. We have extended that to Rainmatter Climate through which we are investing in climate change startups. If we start taking outside money, then we have to worry about ROI and all of that. This is like CSR Part 2 for us.

It is always perceived that broking is a risky business. Every now and then, we hear about somebody going belly-up. Is there risk in the business and how do you manage?

The risk in the broking business is based on how much you give leverage. The more leverage you give to your customer, the higher the risk you are taking. One of the other reasons for Zerodha to start was that SEBI in 2009, following the financial crisis, introduced short margin penalties. Every broker has to collect a certain margin from the customer; if not, there will be a penalty applicable for the next day. It has brought a level playing field.

I have never really understood crypto as an asset class. If the Government had allowed Zerodha to trade in Crypto, we would have done it. However, there has to be some checks and balances.

What about the risk with the platform and infra? Once in a while, we hear that even NSE and HDFC’s networks have broken down.

No tech platform can be up all the time. Most of our customers are 20­ to 35­year­olds and very active on social media. If we are down even for one minute, we trend on Twitter and it becomes chaotic. In terms of technology risks, we are ring­fenced because the customers, during onboarding, sign a document that they are aware of the technology risks.

In the Futures and Options business, in which 95 to 97% of the turnover happens, there is risk. People use leverage here. For example, they pay 1.5 lakh rupees to buy 7 lakh rupees worth of nifty futures or for short override. Tomorrow, if some big world crisis happens, the brokers can have an issue. We need to be prepared for a Black Swan day. We keep a corpus for this. But thankfully, SEBI has been extremely proactive over the last five years and has brought in regulations and reduced the risks in the industry.

I want your views on crypto, blockchain and nonfungible tokens (NFT). Our government has taken radically opposing views on crypto. Is NFT a new investment asset class or a fad that will go away over time?

At Zerodha, we haven't found a use case for Blockchain. We use a little bit of AI during our IPV (In Person Verification) process for image recognition. We have not built it and use ‘Amazon Rekognition API.’

I have never really understood crypto as an asset class. If the Government had allowed Zerodha to trade in Crypto, we would have done it. However, there has to be some checks and balances. It can't be allowed the way it is right now, which is just a Ponzi scheme. The question is, how do you regulate it and who will do that? Regarding the non­fungible token, which is like a digital piece of art, I can't make any sense of it. Maybe I belong to the old school.

What is your view on the valuation of listed stocks? The listed company valuations are mirroring private equity valuations.

My personal view is that we should not be looking at stock market going up but at the value of money going down really fast, artificially making everything else seem like they are going up. Palm oil and many edible oil prices have gone up nearly 100% in the last one year. Crypto assets are going up. Real estate in Florida is at an all­-time high.

There are some basic risk management rules that an investor has to follow like—don’t go against the trend, don’t put all your eggs in one basket, if you are going against the trend, do it small… and things like that.

What about Zerodha’s way forward? Do you have plans of entering into manufacturing, AMC, payment space and so on?

Not really. Capital Market is our core, where we want to go as deep as possible. The odds of succeeding in your core competency are higher. Lending could be a natural extension for us but I don’t enjoy it. I am rather an anti­-capitalist in that way and feel that people should not borrow to buy things that they don’t need.

I feel that we have to help people to become better with their money. This is an area we are looking at. We have thought of a platform called ‘Nudge’ on top of the user experience layer of Kite’s web and mobile app. There are some basic risk management rules that an investor has to follow like —don’t go against the trend, don’t put all your eggs in one basket, if you are going against the trend, do it small… and things like that.

Following these rules, your odds of winning go up exponentially. When YES Bank debacle happened, the most held stocks on Zerodha were in YES Bank by passive investors. We have realised that we have a short time window to teach the customer, that is—a few seconds before he/she clicks the buy button. We will be asking a few questions on how they decided to buy the stock—based on gut feeling or someone’s advice. Then the company’s P&L will be flashed to help them take an informed decision. Last year, we cautioned against penny stocks buying through penny stock nudge, to alert customers if they are unaware that they are investing in a penny stock. We want to value our customers more important than the revenue we generate from the business.

How do you engage your time? Has it changed qualitatively in the last few years?

One of the best things I did was to stay away from the Tech team. Until 2015, I used to sit with them. Now, my focus is taking our company forward. I spend an hour or two each day talking to customers and answering their queries and understanding them. I clear all my emails and keep my inbox clean.

Other than business, what are your facets?

I am a big sports buff, having played different sports through my life. I have played a lot of basketball. I have done long cycling rides. I love music and play a bit of guitar. My son plays drums and we play together. My mom is a Carnatic musician. Over the last one year, I am practising western guitar. �

Q&A Session with the Audience

How do manage to retain your Techteam?

Not just the Tech team but nearly a 100 of core team are with us from start. It is because of the freedom they have in the job. Everyone in the Tech team owns a product. They think they are ethical hackers than software developers. As there are no external investors, there are no pressures and revenue targets. We have never poached from others. As a strategy, we have always hired freshers and helped them grow. So they feel like family members.

What are the fintech opportunities available for youngsters and young MBAs?

The Advisory ecosystem has not grown in our country and there is lot of opportunity which will open up over the next 5 to 10years. The quality of people who advise is not high and often there is conflict of interest. In the US, Advisory role is highly valued. We will also get to that point.

Recently we came across leverage trading in the US leading to a bubble burst. Can this happen in India?

I think you are referring to the Gamestop fiasco. The way a company stock can be shorted as it happened in Gamestop is ridiculous. SEBI has done a fantabulous job in safeguarding retail investor interests. Nothing that happened in Gamestop can happen in India. But trading in Futures and Options is a risk. My advice to people who trade in F&O is to trade with money they can afford to lose.

How is your competition scenario?

In the last one year, because of the valuation of Robinhood going up from $5Bn to $60Bn, a lot of VCs are funding our competitions. Our business is about products. Whoever has a better product will win the game. More money does not guarantee that you can build a better product. We have a 2-to-3-year distance with respect to our competition.

How local is your platform? Why are you not opening up to international investment and not offering US stocks to Indian investors?

I stayed for some time in the US and tried to take our user experience and replicate it there. It did not work out. Because in the underlying elements—technology, exchanges, depository, clearing—everything is different. So we decided to stick with India. It has to be another Zerodha built from scratch for overseas markets. We have not dealt with US stocks because the cost of remittances is too high. If this cost comes down, we will do that.

What is your take on Dogecoin?

It seems to be like the mother of all speculative assets (laughs). When it crashes like the dotcom bubble, a lot of retail investors will lose their money.

With SEBI coming up with lower leverage regulations, will your revenue be affected?

Yes. But, with lesser leverage, customers will be able to remain invested for a longer period of time and that will help us and the entire ecosystem.

Compared to US markets, why is Zerodha’s transaction cost higher?

Our systems are much better than Western systems. There are statutory levies like stamp duty. In the US, the broking firms may charge less but the way they operate is often unethical. Many firms sell the orders to higher frequency trading firms and make money. In India, if you place an order on Zerodha, it has to go directly to the Stock Exchange. So the comparison is not an apple to apple.

Could you have raised external capital and raised 5 million customers much faster?

We started off very raw without any plan. By 2012‐13, we started making money and VCs were showing interest. At that time, we did not need the money. We have grown without spending any money in marketing and advertising.

What do you recommend—products and customers first and then creating a demand for products vs. acquiring customers at high cost and then developing products and platforms?

It is a no‐brainer. It is always products and customers first.