About a month ago, a friend came over to our house. He works for a tech startup in the field of logistics. I gathered some fun facts about his company:

• His company neither owns trucks nor hires drivers.
• They don’t move any cargo, yet customers use their app to move their cargo.
• They have no inventory.
• Yet, they are profitable (on a gross margin basis). How is that?

Let’s talk of Uber for a second. The world’s largest cab aggregator. It owns no cars, hires no drivers and has no inventory. And yet they help provide mobility. People that want a ride use Uber and drivers with a car that can offer a ride use Uber. And both the service provider and the service seeker find each other on the Uber platform. And Uber charges a small commission from both parties for this service. With Uber, there is less inefficiency in the system (seekers and providers can now find each other and find faster and therefore the commodity is less wasted in the system).

So, my friend works for a company that helps small and medium businesses with intra-city logistics need find drivers with small trucks that are willing to transport. For connecting the service provider and service seeker, they charge a small transaction fee. And like Uber, his company is on the whole good for the society because there is less wastage.

So what other similarities exist between Uber and my friend’s company:

1. Operates in a winner take all kind of model. Uber competes with Lyft in the USA and with others in different parts of the world. When one player emerges as the leader, he starts to become much more valuable. Service providers would use a platform that has more seekers and seekers would go where there are more providers.
2. But each new market is a new battle ground. Say Uber is a leader in San Francisco yet it would still start from scratch in New York. Even if it were a leader in all of USA, it would start from scratch in say China. Therefore, winning one market does not offer any help in winning another. So my friend’s company may be a leader in Mumbai, but they would start from scratch every time they enter a new city. Therefore, they would need to win each battleground.
3. Enjoys zero marginal cost/ 100% gross margins. Uber is tech driven. Building the software would be the biggest investment and once built, the platform can be operated entirely by the technology with little manual intervention. Therefore per transaction, there is a near zero cost that Uber incurs and therefore it has nearly 100% gross profits on each transaction. The accounting books would still show that Uber is loss making, because the software building expenses would far outweigh the gross profits. Ditto for my friend’s company.
4. Business can generate float. At some point, my friend’s company may start telling the drivers that – “Look we will pay you 1 day later”. The driver shouldn’t really mind this because he is getting good business through the platform. Say the platform pays Rs 400 Crs to all the drivers in 2020. 1 day’s pay delay would be about Rs 1 Cr. This 1 Cr is like free money to the platform. Because when they need to pay the drivers on Day 1, they would have Day 2’s money to pay it with and they would pay Day 2’s credit with the money from Day 3 and so on. It’s like revolving credit that is free. And as the company grows, that credit would become much larger.
5. Is growing rapidly. My friend’s company is growing at about 70-80% every year for about 9 years now. The organized market is only 10% and they have 70% of the organized market. Therefore, there is enough headroom for growth for many years. But as the business scales, the costs don’t scale- the same software can now serve a larger number of transactions. Therefore at some point, all the gross profits would be much more than all their expenses and they are likely to turn profitable. In fact, this company has a vision to turn profitable in another 3 years and still continue growing at a rapid pace.

My friend’s company is unlisted and I don’t think it would get listed anytime in the near future. But hypothetically, let’s say it is 2023 and this company is listed. Here is what we can tell Mr. Raamdeo Agarwal how this company satisfies his QGLP framework:

• Quality: Market leader. Asset light. ~100% gross margin profitable. Net profitable.
• Growth: 70% year on year. Scalable business model that requires little or no capital.
• Longevity: As economy grows, we will need more logistics (not less). Therefore overall pie is likely to increase and within that the share of this company is likely to increase faster because of winner take all effects. The company removes inefficiency and therefore business is sustainable.
• Price:  Uber trades at Price to Sales ratio of about 5 and Lyft at P/S of 4 as of today. A P/S of say 1 or 2 with net profits and growth would be a bargain.

Most tech driven platforms like Apple (iTunes), Amazon (Amazon marketplace), Facebook, Microsoft (LinkedIn), Google are not listed in India. But in India, there are very few tech driven platforms and even fewer in the listed space that have such wonderful business characteristics. So when we saw one, we were consumed by fear of missing out and we rushed to buy it. Despite that, the company hasn’t disappointed so far in it’s business performance.

If you liked this blog, you may also like two of my recent blogs here and here.

Thanks for reading!

Featured Photo by Matthew T Rader on Unsplash