Just a couple of months I did a Q&A with Deepak Shenoy of Moneyoga and their online business model for their financial startup. Deepak was quite gung-ho about his startup and was looking to raise money. But, within a few weeks of publishing the interview I got a note from Deepak that they had to change their business model and are revamping their business plan. I was intrigued because it takes lot of guts and foresight and a great amount of practical wisdom to change course mid-stream for a young startup. Founders get very emotional about their startups and often resist changing course.

One of the reason that prompted the founders of Moneyoga to change their business plan was the abysmal growth of Internet users in India. Last year there were just half a million new subscribers added and the grand total of Internet users in India is 3.5 million. With that kind of growth Deepak and his partner Kaushik did not think their current business model would be able to scale. The second reason was a steep drop in retail stock market investors due to a rapid market decline.

Here is a follow-up Q&A with Deepak, where he explains the reasons they changed their business plan and model.

KB: So, Deepak what has happened since we last spoke a couple of months ago. You have had to make some pretty quick change in your business plan? Could you tell us what happened?

DS: A number of our assumptions got invalidated, so to speak. First, with the massive fall in the stock markets, investor sentiment has hit a new low. Volumes are down over 60% since January and it seems like the participation, in terms of sheer numbers, has dwindled. While we have had this in mind - both of us have, at various points in our personal blogs, mentioned that the fall is imminent and even described howinvestors could have benefited from the fall - Moneyoga’s business model was based on eyeballs and that is no longer going to hold water. So the 40% growth in volumes, demat accounts, Internet trading etc. is simply not going to happen in the next 18 months. Additionally, Internet usage statistics are depressing. We have less than 3.5 million “broadband” connections, and that includes corporate connections, government, cybercafes and literally any connection greater than 256 Kbps. This is up from 3 million last year - the growth just half a million subscribers, a mere 17%, in what is one of India’s greatest years in terms of growth, markets and capital flows tells us that we’re way too early for this market. You can also see how little you can do with web ads in India - you may find ads for watches, but you usually can’t click on that ad and immediately buy the watch. You can’t even buy financial products online without having to go through a paper process. Without this, the transactional efficiency of the web is difficult to realize, and advertisers are loathe to pay higher amounts for a niche portal like ours.

And finally, and significantly, either through our shortcomings or the general sentiment, we have found it difficult to raise capital for the
original idea. It seemed to us that even the companies that had public annual reports were finding it difficult to break even on the web advertisement models, wherever there was a “pure-web” effort (i.e. no offline). We realized we are perhaps a few years too early, and need to get in when the horizontal portals have, at the very least, broken even. But we were soon reaching the point where we would be broke, as we’d funded our move to Mumbai and our family expenses for nearly a year. The model then entirely changed. [further discussed below]

It’s usually heroic to say failure was not an option, but it was an option for us. We could always get ourselves jobs. We’ve focused
right from the beginning on “uncle points” - points where you realize you’re in too deep and you got to do something. But we just weren’t
keen to give this up before we’d tried everything. And we’re happy we did it.

KB: So, what you learned from this experience? For instance, how are youreconfiguring your compass when it comes to the future of your startup?

DS: Now on the other hand, we were still making money investing. In themarkets, regardless of ups and downs, we found that our analysis could detect patterns and provide profitable trading strategies. While we had benefited through personal investments, we hadn’t really got a plan to monetize that skill - and it looked now like the perfect time to do so, when the markets were going down.

We put a plan in place, and decided to write and test algorithms that tracked real time stock market data and automatically gave us buy/sell signals. After a lot of research, “paper trading” systems, running rigorous “back-testing” with historical data, and discarding literally hundreds of systems, we identified three systems we were confident of. We got them running, on our own money, since May 15th, and we’ve gotten about +7% returns in the last two months, despite the market falling 20%. [As of July 18] It’s too early to say this is good or bad, but we arehappy to be where we are despite one system failing miserably (we discarded it after learning the hard way).
Given that our money won’t go too far, the idea isn’t to grow our own capital only.

The overall business model is to use these systems to trade larger amounts of money, whether it’s ours or as a service we provide to people or institutions with larger capital that can be managed. This model itself has a lot more interest in terms of availability of capital and people interested. When we are able to create a “menu” of such services - with parameters like high or low risk, leveraged or unleveraged and the magnitude of historically tested returns - the scope of the model can scale to a very large percentage of investors.

KB: Moving forward what is your game plan? What will be the revenue model now?

DS: This is no longer an eyeball model - in fact we don’t even intend tosell our systems. Systems will fail over time. Our model is based on the idea of algorithmic trading - where you let the algorithm tell you what to buy or sell, when, how much and with what level of risk. And the business will grow as we are able to manage larger and larger capital.

Now you might ask - if the computers do all the work, why should anyone pay you? The point is - the algorithms have to be tweaked
regularly, the systems tracked to see if we are getting appropriate returns for the risk, and as systems degrade or fail someone needs to
replace them with freshly researched systems. That’s our job. What we’re saying is - We’re good at this, we will demonstrate our
discipline and we will scale over time. Yes, we still need some investment to help with the infrastructure and the new model, but that seems to be a lesser challenge than mumbling about how we could beat a well funded competitor.

KB: Are you still bullish about your startup and being able to make a success of it?

DS: Oh, very much. This is the future - more than 30% of transactions in US exchanges are entirely driven by algorithms, and I believe less than 1% are so in India. Given that SEBI has just allowed institutions to run automated trading, our model can scale tremendously going forward.

KB: How are you validating your market research? Who do you turn to for expert advice that you trust?

DS: Our market research comes from reliable online sources - from NSE reports, SEBI statistics etc. We don’t pay for research - I would be foolish to say I wouldn’t ever pay but we must conserve capital at this time. Expert advise: We’ve talked to a number of people and they have provided honest and generous feedback. But all decisions are ultimately ours - we don’t have anyone to blame but us for our failures.

KB: One of the things that took you all by surprise is the number of broadband users in India. Why is that? Was it not a well-know fact?
DS: It was supposed to grow at this rapid and scorching pace, leaving the dial-ups eating dust. As I see it the broadband engine has been stuck in first gear - it makes a lot of noise, but it isn’t moving very fast. One expected that the gear would change and things would move - what has transpired is that we will run out of money before that.

KB: As a financial savvy guy with a strong tech background how did you miss out on some of these fundamental market changes that are taking place around the world? Do you get a sense that in some ways the Indian financial markets are portrayed as an invincible force by the Indian media and analysts?

DS: Not really. The media has to make a noise because that is what makes them money. If you went on a media channel and said - forget
everything, buy an index fund and don’t come back for five more years - that would ensure you never came on that media platform again. Media is about action - and it will always be. We can’t blame the media for misleading us - aren’t we mature enough to question what someone else is telling us to do with our money? Most of us will take umbrage if some stranger on TV came and told us to only buy pink cars, and wear yellow clothes. Yet, we seem to be perfectly okay with letting strangers tell us where to invest our money, without questioning it?There’s a disconcerting incongruence in there somewhere.

As a business, both Kaushik and I have been aware that a crash is coming along. It wasn’t apparent when, but even in our meetings with
VCs we mentioned that our platform was useless in a runaway bull market, but we don’t expect that to last too long. I have mentioned in
my personal blog that the “blow up” was imminent and how I even benefited from that view . Don’t want to say “I told you so” or anything like that - but our business model would have been waste paper if the bull run had not ended when it did.

KB: You were looking to raise money in the past few months. What has been that experience like? What are some of the questions that VCs and other investors are asking when go to raise money?

DS: VCs want to know if your business can scale like crazy. They know the Internet statistics. They know the user numbers, and they have heard projections from all ends of the spectrum. The stupidest thing you can do, we realized, was to ever try to impress them by your projections. What they want to know is if you have a hugely scalable business in the time horizon they are investing, if you’ve actually done something more than talk, if you have a few good men or women, and if they can get along well with you. Or so it seemed to us - and some regretfully passed, and others told us we were just not their type. Some VCs or advisors may even pair you - they may tell you they’re investing with someone else in the same space and perhaps you should join hands. [We were (and still are) arrogant enough to believe it’s our way or thehighway.]

We hold the VCs we talked to in high esteem, and are grateful for their support - even though some chose not to invest, they did give us
excellent, valuable advice. Some have even applauded us for our changein plans; and the support is deeply appreciated.

KB: Finally, at a global level there is quite a bit of turmoil in the global financial market. Do you think India and the Indian investors are prepared for a roller coaster ride?

DS: Nobody is ever prepared. Even when I said the markets are likely to crash I didn’t expect a nearly 40% crash in six months. It caught everyone unawares, and that’s the behavior of markets. The point is not to predict; it’s to react. You cannot control what will happen; you can only control your reaction when it happens.

Unfortunately we tend to panic as a group. Our markets have had age-old sayings - the equity markets will always turn around, that
real estate prices can never go DOWN, that we are “decoupled” from the U.S. credit crisis, that our banking system is much more robust, that inflation is no big deal. Slowly and steadily, each of these phrases is getting question marks suffixed. Tomorrow there will be more
questions, and very few answers. But I like to say - there is always money to be made from the markets. Greed, Fear, Panic or Listlessness, every emotion can have a positive rupee value associated with it.

KB: Any final thoughts or suggestions?

DS: Just one: Never get married to your business model. For us it was easy - our spouses would have shot us. Like a good friend says - “It’s okay to be wrong, it’s a sin to STAY wrong”. Once you have figured out you reached your Uncle point, do something.
[Notes: “Uncle Point” was coined by Ed Seykota, a famous trader, about how much risk you can withstand. I have adopted the term where it suits our discussion]

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