Nithin Kamath has been running bootstrapped online discount brokerage firm Zerodha for the last six years. Nithin, who has been trading ever since he was a teenager, says that one must understand the nuances of online trading before he decides to startup something in this space.
Things you need to know before launching an online trading firm
Before launching something in this space one should work for one or two years at an investment firm or a brokerage to gain some experience and product knowledge. Irrespective of the size of the company, one must first gain some amount of understanding of the sector as an employee.
The online brokerage space is not only about the technology and the ecommerce knowledge, you have to understand all the regulations surrounding it. We are as regulated as a bank today. A lot of entrepreneurs, who come to me with their ideas today, seem to have a great business plan and passion but are unable to understand the operational hassles related to online trading.
For example, we charge an account opening fee. The reason we charge customers is because if we don’t, we might end up getting a lot of non-serious crowd on our platform. In an ecommerce business it is good to show the number of account holders or users because there is no additional costs to every user you add.
But here I have a huge additional overhead for every user I add. So if I don’t make money out of him there is no point in him being my client. These are things you will understand only when you have some amount of experience in this field.
Nithin is also nurturing young innovators in financial technology market. He has started a fund and incubator called Rainmatter , to mentor the ‘Fintech’ startups in India because according to him even today a broker is not a very cool word in India.
When does a fintech startup attract investors?
Investors will always be drawn to businesses wherein they see emerging trends. In a business model like ours, investors will first foremost want to know if we are abiding by all the rules and regulations.
They want the business to be completely clean because in this space if there are any shortcuts you are taking, it can come back to haunt you after 5 or 6 years. Investors today are also looking at profitability unlike couple of years back when they focussed on growth.
Growth was earlier defined in terms of number of users or accounts, today one defines growth on the basis of profitability. Since this business has a lot of capital at play, investors are also concerned about risk management assessment.
Indian market misses good IPOs
Initial public offerings (IPO) are the best way to get people into the market, until 2006-2007 there were a lot of good IPOs. In the last five years there hasn’t been a phenomenal IPO, like the one of Wipro or an Infosys. Until IPOs give you money it won’t bring people into the market.
I still remember when Reliance Power went public; it brought in 70 to 80 lakh Indians into the market but it flopped so miserably because of promoters got greedy. Most of IPOs in the last four or five years in India were priced at a premium which resulted in the Indigo and Cafe Coffee Day losing money. Back then, Infosys priced their IPO at a discount and helped create wealth.
Zerodha, which has 100,000 + clients across India and contributes a daily turnover of over Rs. 10,000 crore in various exchanges, is planning to expand to foreign exchanges. Nithin hopes that SEBI could make online trading more convenient and hassle free by allowing online registrations, which could invite more people into the market.