Daybreak - What happened to Pharmeasy?

Episode Date: March 29, 2024

Earlier this week, the Competition Commission of India (CCI) cleared Manipal group chief Ranjan Pai's investment in online pharmacy PharmEasy. So far Pharmeasy, once the highest-valued Indian healthcare startup, has raised Rs 3,500 crore through a rights issue. But it raised this money at a 90 per cent discount to its peak valuation. From $5.6 billion to $500 million!All because it had to take another debt to pay off its previous debt. The second time though, interest rates were not zero.What’s happened?Tune in.Daybreak 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 Raman 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 an alert as soon as we release our first episode, please follow Intermission on Spotify and Apple Podcasts 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.

Masayoshi Son, the man who runs it, had recently committed to investing four. billion dollars in WeWork 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 Wei and Son was quite proud that Didi had won. So after praising Wei to Newman, he turned to him and offered him the moral of the story. If there was one lesson that Adam Newman and WeWork had to absorb, it was this one. So Masayushi 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 Kalyke, the CEO of Uber, was smart. But Wei was crazy. that is why he won. And then, Son looks straight at Newman and tells him what he wanted to hear. You're not crazy enough. But let me tell you what is crazy. This news from a few days ago. The Competition Commission of India or the CCI has cleared Manipal Group Chief Ranjan Pai's investment in online pharmacy Farm Easy. Wait, but that's not the crazy part. So far, Farm Easy has raised 3,500 crore rupees through a rights issue. Sorry, that's not the crazy part either.

Okay, here is what is crazy. Farm Easy raised this money at a 90% discount to its peak valuation. 90%. From more than $5 billion to $500 million. What happened? Welcome to Daybreak, a business podcast from the Ken. I'm your host, Nagda 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 Friday, the 29th of March. Let us begin by going over the story of Farm Easy. My colleague Praveen Gopalakrishnan wrote about it in his newsletter, The Nutgraph. You see, 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. Then, a few years later, Farm Easy figured out that the offline side is fragmented for a reason,

which is the product is a commodity with thin margins and it is impossible to build a differentiated proposition. Think of groceries or pharmacy medicine. So Farmeasy tried something ambitious and it sold this story to its investors. The idea was, what if it captured the entire value chain? It could use that advantage to push margins. Now, this is usually the right idea, but Farmer is a bit more complicated. So Farm Easy went a little crazy, just a little. Instead of building all of this out, it went on a shopping spree and started buying out

company after company, all in an attempt to complete the jigsaw puzzle it had sold to its investors. It paid a premium for some of these companies. The most notable of them was ThiroCare, a testing diagnostics company. Now, usually companies finance all of this through equity. But Farm Easy chose to fund it using debt at a time when interest rates were near zero. It collateralized this debt with equity in ThairoCare. This was a little unusual, but it wasn't crazy. And Farm Easy was hoping to go for an IPO shortly after that.

The plan was to use the proceeds of the IPO to pay off this debt. Soon, 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 Thiercare were generating enough cash flow to pay off the debt. So Farm Easy tried to raise funding and it didn't. not find any takers. Things got pretty bad and it looked like Farm Easy was in danger of losing thyroid care to Goldman Sachs. So some investors stepped into infuse funds to pay off the debt and

get a ton of shares in return, effectively taking control of the company. And that is basically how it all played out. But did you notice something? There are some similarities between Farm Easy and Buy Juice. next. There are parallels between Farmezi and ThyroCare and Bayju's and Akash. In both cases, the companies bought a thriving offline business at nearly the same time and it went through hell to pay for it. Bayju's of course did a complex series of transactions which involved its founder Bayju Ravindran taking loans to increase his shareholding in the company. Farm Easy's founders played it a bit more safe and well, here they are.

But of course, four years ago, it did seem like the smart thing to do. But even then, there were questions. The Ken had written about it in detail. And what we had gathered from the structuring of the deal was this. We were in a funding environment that was capital rich and caution poor. But in 2023, startups were 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 itself? If it has been acquired at a great cost, companies and its investors will go to great lengths to protect it. And if it means icing out the other investors and making the founders into glorified employees, well, then so be it. Now, Manipal's Ranjan Pai has emerged as one of the biggest investors in Farm Easy with an estimated stake of more than 12%. He will be getting three seats on the board. But here is the interesting part. There are two private equity funds, Demasek and TPG Capital, which control Manipal health.

and Farm Easy. Manipal Health is an interesting entity because in many ways, it mirrors the situation that Farm Easy found itself in. About a year ago, Temasek bought over a majority stake from Ranjanpai. Just like how Farm Easy bought HyroCare from its promoter, Arokia Swami Velamini. Farm Easy's plan was to create a jigsaw of companies inorganically, including a diagnostics company and pay a premium for them with the intention of going for an IPO. Clearly, that did not quite work out. But from a corporate structure and incentives point of view, this whole thing is actually quite fascinating.

Stay tuned. Praveen believes that any sort of extreme is a good opportunity to 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 clearer, especially the incentives created by venture capital firms for startups and their consequences. Because you see, 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 don't match up anymore, not even for founders. But the Farm Easy story tells us something that is 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 is also an advantage under certain conditions.

Companies like Swiggy, Ptam, Flipkart, Phone Pay, Reza Pay and Mishu are boring. Simple business models. Straightforward corporate structures, clear market leadership. Most of them are not profitable, but that is fine. Boring companies need to continue to remain boring and over time, they will get to the other side. And if that is not your thing, there is another way. Swing the opposite direction and become completely crazy.

And I don't mean a little quirky. No, I mean go completely nuts and do the things that will end up as a B-school case study. For example, Ola practically built a more valuable company on the fly with a hugely different shareholding structure. And Oyo pulled off a magic trick of the ages. and all of them are doing all right for now. Unfortunately, Farm Easy fell through the middle. There is an uncanny valley between being extremely ordinary and being completely crazy.

And that is the gap that did them in. Maybe if Farmyzzi's founders had pledged their shares and taken steep loans to acquire more shares or simply replace their VP product with a strip of paracetamol, they would probably be doing fine today. If you want to succeed in India, especially in this environment when venture capitalists aren't 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 again.com and click on the red subscribe button on the top of the website. I am Snigda Sharma, your host and today's episode was edited by my colleague Rajiv Sien.