Redbus’ Ride to Success and Its Implications

India’s startup ecosystem is celebrating a recent success. Founded in 2006, online bus ticket seller Redbus is making big news due to its acquisition by Naspers for $137 million. We spoke with Redbus’ co-founder and CEO, Phanindra Sama, a couple of years ago about the bootstrapping phase of his venture. Here is a quick recap of Redbus’s successful ride so far.

Redbus’s Offerings
Redbus was founded when Sama missed his vacation because he was unable to get a bus seat reservation on time. The company was launched to develop a platform that would help travel agents and bus companies meet the needs of the Indian traveler to get bus tickets anytime from anywhere. Today, the company’s platform is used to sell tickets on more than 12,000 bus routes across the country.

Besides the Internet, Redbus now sells tickets through phones and through physical stores. It has tied up with more than 700 bus operators and has even ventured into paperless ticketing through the mTicket, the mobile ticket system. Its extensive reach has helped it to sell more than 228,000 seats per day and more than a million tickets a month. With the Indian consumer in mind, Rebus offers several payment methods. Travelers can use credit or debit cards, net banking facilities, and even pay through cash on delivery in major cities.

Redbus’s Financials
Redbus has three key areas of operation. First, its portal, redbus.in, is the consumer-facing travel agency where customers can book a seat for a bus on their own. As their second business line, Redbus sells its software to bus operators on a monthly fee based on the number of buses the operator has. Finally, through its reseller business, Redbus gives access to its system to bus operators and charges a commission for each successful transaction. Overall redbus.in accounts for more than 70% of the company’s revenues.

Online bus ticketing systems are a very new thing for India. According to market reports, of the total bus ticket bookings, only 5.7% were sold online last year. But the market is growing rapidly. Last year, Redbus recorded sales volume of Rs. 600 crore (~$100 million) compared with Rs. 350 crore (~$58 million) in bus ticket sales a year ago. As mentioned, Redbus earns revenues by charging a commission for each successful sale made through its systems. Analysts estimate that it earned revenues of Rs. 55 crore (~$9 million) last year. Income details are unknown, but the company keeps a tight control on finances and is profitable.

Until June 2013, Redbus was venture funded, with $10 million in funds received from Seedfund, Inventus Capital Partners, and Helion Venture Partners. Last month, though, it was acquired by the ibiboGroup, a subsidiary of Naspers, a South African company that has several investments in the Internet and media segment. Despite the acquisition, Redbus will continue to operate independently. The deal is rumored to be valued at $137 million. Initially, Redbus was looking for an IPO by the year 2015.  However, the board decided to opt for the acquisition as the terms of the deal from ibibo were more favorable.

I am impressed by what Redbus has managed to do so far. Not only has the team created a viable business model in a fragmented and chaotic industry in India, but they have also become a rare example of a $100 million-plus valuation for a company in India.

However, as far as I am concerned, the most important accomplishment of RedBus is in revolutionizing the bus travel industry in India. The job isn’t done. They can, and I believe, will, do more. Nonetheless, a major rehaul has already been put in motion, and tremendous tangible value has been created.

Implications

As you know, the venture capital industry in India has had a somewhat frustrating run. With too much money chasing too few deals, and with mostly rather slow-growing businesses, Indian venture capital is struggling to come to terms with the fact that the VC model doesn’t fit India all that well. Redbus, although a successful company in its own right, has taken seven years to build $10 million in revenue. The American version of the VC model expects a $100 million company in that time. And that explains the recent exit. [Helion, the main VC in the company, has had difficulty deploying its capital, and is contemplating returning money to its American limited partners.]

Naspers, the acquirer, is not a purely financial firm. It is looking to build a portfolio in the Indian Internet travel sector, and as such, this is a strategic acquisition for it. Naspers okay with a slower growth rate than what the VCs are looking for. Hence, Sama and his team can continue to build value and organize the still largely unorganized bus ticketing sector.

Value vs. VC

You have heard me worry about the divergence between building value and solving problems vs. fitting into the VC model of hyper high growth and uber TAM. I am personally thrilled to see Redbus find a new owner that allows them to continue building value, notwithstanding the fact that their growth rate doesn’t fit the VC model.

I am also relieved to see that Sama and his team managed to operate the business in a tight, capital-efficient manner, getting to profitability relatively quickly, without having to rely on raising a lot of outside capital to survive. It gave them options.

For Indian entrepreneurs who are playing in the angel/venture ecosystem, you need to keep all these points in mind. Even if you succeed in raising some capital, you have to worry about growth rates. Also, you need to keep an eye on profitability. If the growth rate is super high, you can count on venture capital. If not, better take what you’ve got, build a profitable company, and stop depending on outside capital. If VCs see growth rates slow down, they won’t invest more.

India’s Internet penetration is slow, e-commerce growth rates are slow, logistics and infrastructure are still not reasonable to add velocity to commerce, and the adoption of online credit card payments is also sub-optimal. All this adds sand in the gears as the industry tries to accelerate.

As entrepreneurs, you need to keep a few simple rules in mind: First survive, then get comfortable, then try to get mega rich.

Under no circumstance should you lose sight of the need to survive first and foremost.