Zerodha And The Business Of Trading: A Success Story

Nithin Kamath, Founder, and CEO, Zerodha, speaks to Urvi Shrivastav, Editorial BW Businessworld about Zerodha’s journey thus far. We also learn about the latest products the platform is working on and the motivation behind them, in addition to talking about the stock market and the recent IPO frenzy.

Urvi Shrivastav: Why is the Zerodha bootstrapped and never took investors on board?

Nithin Kamath: We started Zerodha in 2010 and it was not really an option, and we were forced to the bootstrap of sorts. 2010 was probably the worst time for stockbrokers historically after the financial crisis and money were not really available. Indian Venture Capitalist ecosystem came into play only in 2012-13. By the time VCs approached us the business was already in the green and we were profitable. Right from day one as a business, we have not spent time acquiring customers. Today the biggest cost for most start-ups is mainly the acquisition of customers. Since we did not spend money acquiring customers, we never required large amounts of capital. Our real cost in the business is the cost of the people and our infrastructure. Our technology team has done an amazing job, so our infrastructure costs are also quite low. We are completely in-house and there is no vendor dependency. Money brings an obligation to the table and not something I personally enjoy. Zerodha is able to produce amazing products because we keep customers first in mind, which is difficult if you have an obligation to grow revenues and generate profits. The fact that we are bootstrapped helps us stay apart from the competition.  

Urvi Shrivastav: Is bootstrapping the way to success?

Nithin Kamath: Let me put a disclaimer, I don’t think every business can be bootstrapped. There is no cut, copy, paste model. Just because we did not raise money does not mean a guy who is building an e-commerce platform can do the same. Certain businesses need capital to grow, and certain businesses do not need capital to grow. We are lucky we are one of those businesses that do not need a lot of capital. You have to look at these things in context, as every business is different.

Urvi Shrivastav: How did the idea of discount brokerage come about and how did you see its potential in the Indian market?

Nithin Kamath: When we started Zerodha, the idea was to create something else. I was always an active day trader, and a future and options trader. We wanted to build a trading platform for a group of highly active traders. In our best-case estimate, we thought we will reach about 10,000 customers, and we never thought we will be at six million customers ever. In hindsight, it seems like a really great story but at that stage, we did not anticipate this. We were looking at Zerodha as a boutique business of sorts. We started flat fee brokerage in 2010, there was nothing unique about it. In the US, flat-fee brokerage was prevalent from the early 90s. We were first to question why there is no flat fee brokerage in India?  In the business of trading, the cost of execution of trade does not go up with the size of the trade. Irrespective of whether one buys for a lakh or ten lakh rupees, I as a broker am not putting in more effort. That was the genesis of flat fee brokerage.

Urvi Shrivastav: Zerodha already had ‘Kite’ initiative in place then why did you create a ‘Rainmatter’ initiative given that they are both focused on start-ups?

Nithin Kamath: Out of the 6 million customers, most of the customers are less than 35 years of age, and this audience cares more about the product. Like my father does not care much what a trading app looks like, he still picks up the phone to place a buy or sell order. If youngsters have an interest in buying or selling stocks, Kite is one of the best products in the country if you know what to buy or sell. But if one does not know what to buy or sell which is majority of the audience, there can be an issue. In 2015, we asked ourselves, do we want to build these products ourselves or do we want partner start-ups and help them grow with us. We took the collaboration route because we thought it was a lot more powerful. We consequently offered Kite Connect APIs which allowed start-ups to build on top of us. By 2015 we realised we were a big fish in a small pond, and we need to expand the markets and all the start-ups were building something niche.   Today, the ‘Rainmatter’ initiative has a lot of start-ups, with 12 of them directly working on the capital market space.

Urvi Shrivastav: Why has Zerodha never invested in marketing?

Nithin Kamath: The whole business of trading is a very word of mouth kind of business. I started trading because my friend introduced me to trading. If you look at 100 people around you, 95 will say they traded or invested because their friend or family traded and referred the product to them. In any business you want your customers to be your marketing force. The second thing is, SEBI the regulator do not allow any greed to be sold, we cannot advertise by saying you can make so much money in the next one year. The problem is, every broker who puts an ad says he has the best platform at the lowest cost so there is no differentiator in advertisements. Today business is not just about profit but growth. If you grow people will come to you. We are looking at doing this for a long period of time, and we want to be sustainable in the market. We want to be focusing on profitability over vanity.

Urvi Shrivastav: How has investment changed over the years?

Nithin Kamath: I think today people get impacted by social media influencers a lot more than earlier. There is someone listening to some Youtube video and getting influenced which could be for good or bad. That is another reason markets expand because these influencers make it seem very easy to raise money in the market. Apart from that, before 206-27 opening a Demat account was a tedious process requiring a 40-page document. Today it is online and digital, so opening a trading account is fairly simple. For us, as a business, this has been one of the biggest tipping points in our journey. India still does not have communities on say Reddit talking on markets. There is a small community on Twitter that talks about markets.

Urvi Shrivastav: What will be the state of India's markets five years down the line and what will be Zerodha's role in it?

Nithin Kamath: It is very difficult to predict. If the market closes today at 3:30 pm today, I would not know the answer. My guess is that more and more people are coming into the stock market, as returns from other asset classes are reducing, like money in the bank, return from real estate, and gold. All of them have plateaued. However the stock market is not an easy place to make money as people are realizing, it is one of the toughest places to make easy money. I think there will be a transition to the advisory first market. We will probably have a bear market before a bull market, and the bear market will teach people why they need a financial doctor.