Daybreak - Maybe Pharmeasy’s founders weren’t crazy enough

Episode Date: July 18, 2023

Pharmeasy, once the highest-valued Indian healthcare startup, is planning to raise money in a new round of funding at a 90% markdown from its previous valuation.From $5.6 billion to $500 million. All because Pharmeasy had to take another debt to pay off its previous debt. The second time though, interest rates were not zero. What's going on?Tune in.RecommendationByju’s is looking like a hedge fundThe tail of acquisitions wagging India’s funding dogDaybreak is produced from the newsroom of The Ken, India’s first subscriber-only business news platform. Subscribe for more exclusive, deeply-reported, and analytical business stories.

Hi, this is Rohan Dharma Kumar. If you've heard any of the Ken's podcasts, you've probably heard me, my interruptions, my analogies, and my contrarian takes on most topics. And you might rightly be wondering why am I interrupting this episode too. It's for a special announcement. For the last few months, I and Sita Ramon, Ganesh, my colleague and the Ken's deputy editor, have been working on an ambitious new podcast. It's called Intermission.

We want to tell the secret sauce stories of India's greatest companies. Stories of how they were born, how they fought to survive, how they build their organizations and culture, how they manage to innovate and thrive over decades, and most importantly, how they're poised today. To do that, Sita and I have been reading books, poring over reports, going through financial statements, digging up archives, and talking to dozens of people. And if that wasn't enough, we also decided to throw in video into the mix. Yes, you heard that right. Intermission has also had to find its footing in the world of multi-camera shoots in professional studios, laborious editing, and extensive post-production.

Sita and I are still reeling from the intensity of our first studio recording. Intermission launches on March 23rd. To get alert, as soon as we release our first studio recording, we're still. episode, please follow intermission on Spotify and Apple Podcast or subscribe to the Ken's YouTube channel. You can find all of the links at the ken.com slash I am. With that, back to your episode. The year is 2017. SoftBank has just raised the largest tech fund that the world has ever seen. Masa Yoshisone, the man who runs it, had recently committed to investing $4 billion in rework after a 12-minute office tour with its founder Adam Newman.

And now, Newman is in Tokyo in a conversation with Son and Cheng Wei, the CEO of Didi. Didi, the Chinese ride-hailing giant that had just emerged the winner of a long and bloody battle against Uber in China. Softbank had backed away, and Son was quite proud that Didi had won. So after praising Wei to Newman, he turned to him and offered him. him the moral of the story. If there was one lesson that Adam Newman and WeWork had to absorb, it was this one. So Masayoshi Son asked Newman, in a fight, who wins? Is it the smart guy or is it the crazy guy? Newman says, the crazy guy. That's right, says Son. Crazy beats smart. Travis Calnick, the CEO of Uber, was smart. But Wei was crazy and that is why he won. And then

Son looks straight at Newman and tells him what he wanted him to hear. You're not crazy enough. Now, talking about crazy, you must have heard the news earlier this month. Farm Easy once the highest valued Indian healthcare startup is planning to raise money in a new round of funding at a 90% markdown from its previous valuation, from $5.6 billion to $500 million. What could have happened? Welcome to Daybreak, a business podcast from The Ken. I'm your host, Nick Da Sharma, and I Don't Chase the News Cycle. Instead, thrice a week on Mondays, Wednesdays and Fridays, I will come to you with one business story that is worth understanding and worth your time.

Today is Wednesday, the 19th of July. Let's begin by going over the story of Farmeasy. The Ken's Praveen Gopalakrishnan recently wrote about it in his fabulous newsletter, The Nutgraph. And here is how it goes. Farm Easy got into a straightforward e-commerce business, sellers on one side, buyers on the online side. The offline side was fragmented, and the company tried to consolidate it online.

A few years later, Farm Easy figured out that the offline site is fragmented for a reason. That is, the product is a commodity with thin margins, and it is impossible to build a differentiated proposition. think groceries or pharmacy medicine for that matter. So Farm Easy tried to do something very ambitious, a vertical integration. And it sold this story to its investors. What if it captured the entire value chain?

It could use that advantage to push margins. Now, this is usually the right idea, but pharma is a bit more complicated. But Farm Easy went a little crazy, just a little. Instead of building all this out, it went on a shopping spree and started buying out company after company. All in an attempt to complete the jigsaw puzzle that it had sold to its investors. It paid a premium for some of these companies. The most notable of them was ThyroCare, a testing diagnostics company. Usually, companies finance all of this through equity.

Farm Easy chose to fund it using debt. at a time when interest rates were nearly zero. It collaterized this debt with equity in thyroid care. This was a little unusual, but it wasn't crazy. And Farm Easy was expecting to go for an IPO shortly. The plan was to use the proceeds to pay off this debt. But soon the recession hit. And Farm Easy needed to take another debt from Goldman Sachs to pay off the previous debt.

Except now, interest rates were not zero. And neither Farm Easy nor ThyroCare were generating enough cash flow to pay off the debt. So then Farm Easy tried to raise funding, but it did not find any takers. Things got pretty bad. It looked like Farm Easy is in danger of losing Thyro Care to Goldman Sachs. So some investors stepped in to infuse funds to pay off the debt and get a ton of shares in return, effectively taking control of the company. That is basically how it has all played out so far. But did you notice something?

There are some similarities between Farm Easy and Bayju's. Coming up next. The parallels between Farm Easy and Thairu Kare and Bayju's and Akash are quite interesting. Praveen has written about it at length. I'll add all the relevant links to the show notes. In both cases, The companies, Farm Easy and Bayju's, bought a thriving offline business at nearly the same time and went through hell trying to pay for it.

Bayju's, of course, did a complex series of transactions which involved its founder, Baiju Ravindran, taking loans to increase his own shareholding in the company, which is probably what is keeping it alive so far. But Farm Easy's founders played it a bit more safe and, well, here they are. Of course, two years ago, it did seem like the smart thing to do. But even then, there were questions, and the Ken had written about them in great detail. And what we had gathered from the structuring of the deal was this. We were in a funding environment that was capital rich, but caution poor.

Now, in 2023, startups are being forced to make difficult decisions, like having to sell their core adjacent businesses to keep their core business alive. And we've already seen this play out with companies like Unacademy and Swiggy. But what happens when the core adjacent business makes more sense than the core business? If it has been acquired at a great cost, companies and its investors will go to great lengths to protect it. And if this means icing out other investors and making the founders into glorified, employees, well, then so be it. There are now reports that the Manipal Group's family office is planning to invest

$120 million or $1,000 crore rupees into Farm Easy. There are two private equity funds, Temasek and TPG Capital, which control Manipal health and Farm Easy as well. And it looks like they are the existing investors who will add funds from their side as well. Now, Manipal health is quite an interesting entity, because in many ways, it kind of mirrors the situation that Farm Easy has found itself in. A couple of months ago, Tamasek bought over a majority stake from Ranjan Pai who runs Manipal. Just like how Farm Easy bought Thairokaii from its promoter Arokia Swami Velumani. Farm Easy's plan was to create a jigsaw of companies inorganically,

including a diagnostics company and then paying a premium for them with the intention of going for an IPO. Clearly, that hasn't quite worked out. What is happening right now, of course, is bad news for Farm Easy. But Praveen says that from a corporate structure and incentives point of view, this whole thing is actually quite fascinating. Stay tuned to find out why. Praveen believes that any sort of extreme is a good opportunity to say, see the underlying forces that are at play much, much more plainly.

For example, when everyone was getting drunk on dollars in 2020 and 2021, some natural limits about India became quite apparent, like the shallowness of the consumer market or the number of engineers. And now that the tide has turned again in the opposite direction, other things are becoming more clear, especially the incentives created by venture capital or venture, VC firms for startups and their consequences. Because you see, like Praveen says, in good times, everyone writes long Twitter threads and shows up on podcasts claiming to be founder-friendly.

But now, we're seeing that VCs extract value from startups, leaving practically nothing for anyone else. And the incentives do not match up anymore, not even for founders. But the Farm Easy story tells us something really important, and it is this. If you're an ambitious startup relying on venture funding in India, there are two ways to stay alive. You can either be boring or you can be crazy. Being dull too has its own advantages, under certain conditions of course. Companies like Swiggy, Ptm, Flipkart, phone pay, Razor Pay and Misho are boring. Simple business models, straightforward corporate structures, clear market leadership. Most of them are aren't profitable, but that is fine.

Boring companies need to continue to remain boring, and over time, they will get to the other side. But if that is not your thing, there is another way. Swing the opposite direction and become completely crazy. And by that, Praveen says that he does not mean a little quirky. He means go completely nuts and do the things that will end up as B-school case studies. By-Jews rewrote the rules of corporate governance in ways that made business journalists ask, wait, can you even do that?

Ola practically built a more valuable company on the fly with a vastly different shareholding structure and Oyo pulled off a magic trick for the ages. All of them are doing perfectly fine for now. Unfortunately, Farmeasy fell through the middle. There is an uncanny valley between extremely ordinary and being completely crazy. And that is a gap that did them in. Maybe if Farmyzies' founders had pledged their shares and taken steep loans to acquire more shares, or refuse to file their earnings,

or simply replace their VP product with a strip of Paris at them all, they would probably be doing fine now. Like Praveen says, if you want to succeed in India, especially in this environment when venture capitalists are not your friends, you either need to be dull or you need to be audacious. There are no half measures. Daybreak is produced from the newsroom of the Ken,

India's first subscriber-focused business news platform. What you're listening to is just a small sample of our subscriber-only offerings. A full subscription unlocks daily long-form feature stories, newsletters, subscriber-only apps and podcast extras. Head to the Ken.com and click on the red subscribe button on the top of of the website. I am Snigda Sharma, your host, and today's episode was edited by my colleague Rajiv Sien.