Last week, The Times of India reported that South African Internet and media conglomerate Naspers, through its arm MIH, may be in advanced stages of acquiring a controlling stake in redBus at a valuation of $100 million. Following the report, speculation on the deal quickly went into overdrive. At the close of last week, NextBigWhat was reporting, quoting sources, that the deal was signed and sealed.
Phanindra Sama, founder and CEO of Pilani Soft Labs, the Bangalore-based company that owns redBus, has been unavailable for comment so far. We’ll update you on the deal, if any, as and when news comes in.
A startup in transition
When we last spoke to Sama, he had just gotten back from the company’s quarterly offsite. As usual, operational and growth targets had been set for the upcoming quarter. This practice, said Sama, was among several others that the company had adopted or was putting in place to transition redBus from its startup origins to a corporate structure.
Metrics were bring set in place across the organization to measure performance and reviews were being undertaken on a weekly and monthly basis.The organization structure itself had undergone some changes, moving from a functional structure to a matrix structure. For instance, instead of having department or call center heads reporting into the Bangalore headquarters, the company now has zonal and location heads to ease coordination and functioning. Importantly, the company had just inducted Sierra Atlantic founder Raju Reddy (who had recently sold the company to Hitachi Consulting) as a non-executive director.
The obvious question to ask Sama at the time was whether redBus was being readied for an IPO.
There were already murmurs within the venture capital community that Seedfund, the first investor in redBus and a significant shareholder, was priming for an exit. The Mumbai-based venture capital investor had entered the company in 2008 with a $1 million investment and had additionally invested in subsequent rounds with Helion Venture Partners and Inventus Capital Partners. Reddy’s induction, with the specific mandate to advise Sama on managing his time and priorities in scaling up the organization, was undoubtedly advised by the investors, with an eye on exits.
Sama didn’t give me a direct answer to the IPO question. “Can it go public? We don’t know. But from a financial perspective yes, it may qualify to go public,” he said instead. The response though did imply that redBus was also in a position to become an attractive acquisition target. And, clearly, whether at the founders’ initiative or the investors’, it was preparing itself internally for both outcomes.
Where redBus stands today
Sama, a former Texas Instruments executive, founded Pilani Labs in 2006 with BITS Pilani mates Sudhakar Pasupunuri and Charan Padmaraju. The redBus service is available on more than 10,000 bus routes, aggregating more than 1,000 bus operators, and it has offices in 26 cities. Consumers can book tickets online, on mobile, via telephone (served by its five call centers) or at offline outlets. The company earns a commission on every ticket sold. It also makes money from selling Boss and Seat Seller, cloud-based software products developed in-house, on a license-fee basis to bus operators and travel agents.
The Times of India report puts its current net revenues at $10 million and adds that the company is in line to post a maiden net profit this fiscal.
In his interview to us last August, Sama had said that the company had set itself a longer term target of achieving $1 billion in GMV (gross merchandize value) in the next 4-5 years. That kind of scale-up would require some substantial capital. The company, according to a Business Standard report in February, has been in the market to raise $20 million from private equity investors.
It has raised three rounds of funding so far — $1 million from Seedfund in 2008, an undisclosed Series B round led by Inventus Capital in 2009 and a $6.5 million Series C round led by Helion Venture Partners in 2011.
Is an acquisition the best option for redBus at this stage?
If Naspers does pick up a controlling stake, at a $100 million valuation, redBus’ founders and investors will script one of India’s rare mega-successful venture capital-backed startup stories in this market. This is good for the venture capital industry which has found exits, especially top dollar exits, elusive in India. The few exits here have averaged multiples at 4-5X and found it tough to breach even the 10X mark (10 times the original investment).
Yet, if an acquisition is indeed on the cards, it would be a shame. Out of the several thousand technology startups that the Indian market in general, and Bangalore in particular, have thrown up in the last 7-8 years, redBus is widely considered one those rare ideas with the potential to make it all the way — to a spectacular public market listing.
The idea is unique, the addressable market is very large (only about 4 per cent of all bus seats are sold through redBus), the revenues channels are in place and delivering, the overall operation is cost-efficient, and the founders have wise heads on their shoulders. There are challenges to scaling — margins are not as attractive as the airline ticketing space for instance (which is also under pressure) — and bus ticketing is still a fairly unorganized market which calls for substantial investments in developing and capturing the market. Still, given that redBus has come this far and built a reasonably scalable business without raising much external capital — relative to the ecommerce sector, for instance — it probably needs just that last big capital push to take it to the next level.
A public listing may yet be a possibility under Naspers if the South African company does not, as speculated, merge redBus with its Indian online travel site Goibibo. Naspers’ primary operating vehicle in India is MIH India Global Internet. Its India journey started with the launch of social networking platform ibibo. The ibibo Group now consists of six Internet businesses — travel site Goibibo, ibibo Games, mobile browser iBrowser, e-marketplace Tradus, online payment gateway PayU (launched last year) and auto classifieds site Gaadi.
Incidentally, MIH is also the entity that which participated in the $150 million Series D funding round of Bangalore-based ecommerce company Flipkart last August. The Times of India report says that MIH invested a little over $90 million in Flipkart, making it the second largest shareholder in the company after hedge fund Tiger Global. Read more about Naspers and MIH’s Indian investments and acquisitions.