Razorpay's Silent but Steady Rise to the Unicorn Club – A Lesson for Young Startups Harshil Mathur, co-founder and CEO, Razorpay shares the company's journey from getting rejected by 100 banks to becoming the youngest fintech unicorn

Harshil Mathur along with his friend from IIT Roorkee, Sashank Kumar started Razorpay with a very simple idea - improve payment experience for small and medium businesses and startups. In less than six years, the company has joined the likes of Paytm and Zerodha to become the fifth fintech unicorn—startup with over USD 1 bn valuation—in India.

Has the journey been smooth? Of course not, as co-founder and CEO Mathur would say.

"It took us about a year and rejection from some 100 bankers to get the first approval from a bank on our first prototype," Mathur said during an interaction with Entrepreneur India over a Zoom call. "There were times when we mulled over switching to e-commerce or a similar sector where we could just build an app and launch instead of waiting for somebody to give an approval."

So, what made the 20-something duo keep going?

Harshil Mathur, co-founder and CEO (L) Sashank Kumar, co-founder and CTO (R)

"The problem of a fragmented payments system for small firms and startups was too big to be left unsolved," recalled Mathur.

It is perhaps the result of their steady focus on solving the consumer problem that within one year of getting first approval from HDFC, the company went live with about 400 enterprise clients, got incubated by Y Combinator, followed by Series A funding of USD 9 mn led by Tiger Global Management.

With the latest Series D funding of USD 100 mn that knocked up the company's valuation over USD 1 bn, Razorpay has raised a total USD 206.5 mn so far.

Success Mantra: To Begin With, Small is Big

In the initial years, chasing transaction volumes, big clients or valuations were not Mathur's method to scale Razorpay. He focused on a steady but sustainable growth instead.

For one, the company did not waver its attention from the core problem they set out to address—finding right payment solutions for small firms. So much so that when e-commerce behemoth Flipkart showed interest to strike a deal with the company, Razorpay backed out to focus squarely on young startups.

"The challenge for an early stage startup on-boarding a large client is that it ends up building products just for that one client, which is not scalable in the long run," said Mathur.

The advice to refrain from dealing with a large client right in the beginning came from an investor in the form a hunter's analogy, he added.

"There are three kinds of clients - rabbit, deer and elephant. Rabbits (small clients) are easy to catch, but you need a lot of them. Catching a deer (mid-size clients) takes effort but they are essential to scale. Elephants, the big guys, from a greedy perspective seem lucrative as you catch one elephant and you're set for a year. But, it's take immense effort and energy to catch one and by the time you do, you might already be done. In the early years when you're trying to survive, focus on just rabbits and deers. Chasing an elephant will be a recipe for disaster," he narrated as told by his investor.

Moreover, getting a big client onboard can push the company's numbers to a different scale and it just can't afford to come down from there, Mathur adds. To ensure that the graph doesn't come down, the startup often ends up doing everything that the client asks it to.

"Instead of acquiring new customers and proving your business model, your entire bandwidth would go into serving this one large customer. This is not the right way to build a scalable startup."

While building a scalable startup, there are no shortcuts to success – Harshil Mathur, co-founder and CEO, Razorpay.

Mathur passes this valuable advice to all young B2B startups.

"The idea is to prove a scalable business model first, and grow from there," Mathur said. For 2-3 years, the company only targeted small and mid-size startups, innovated new products and built infrastructure big enough to shift focus to large enterprises.

Today, the Bengaluru-headquartered company boasts of a client list that includes the likes of Facebook, Zerodha, Ola, Hotstar, Airtel, BookMyShow, Swiggy and ICICI Prudential, among others.

Innovation Is the Key

Over the years, the company has abided by consistent innovation and restrategising to become one of the largest players in the payments space and the fastest fintech company to become a unicorn.

For instance, in the last one and a half years, the company has built products targeted at companies which do not have a tech team. "We launched EPoS that lets small businesses download a mobile application and make payments online," Mathur said.

Another major innovation from Razorpay's book is link-based payments through which a merchant can create a link in real-time, send it to the consumer via SMS and get the payment digitally in place of cash on delivery.

All of these features have been getting good traction and growing organically, Mathur said.

The company claims to have recorded 500 per cent growth in calendar year 2019. Razorpay Software, under which the company's payments business falls, more than doubled its revenue in FY 2018 at INR 197 crore compared to the year before, as per the company's filings available on Registrar of Companies website. Further, it reduced its net losses to about INR 3.26 crore in FY18 from over INR 12.70 in FY17.

The payments business is expected to break-even next year, Mathur said.

Covid-19 has further catapulted the company's growth. "We saw the Covid-19 pandemic as an opportunity as the digital transformation that would have happened over the next 2-3 years was going to happen over the next six months," Mathur said. "We had a broad arsenal at our disposal that enabled us to make the opportunistic bets."

Not Just Survived but Thrived During the Covid-19 Pandemic

Despite an initial dip of about 30 per cent in April, Razorpay claims to have clocked an overall 300 per cent growth in the last six months.

That's spectacular progress for a B2B startup at a time when most businesses reeled under the economic impact of the Covid-19 pandemic.

Ask Mathur and he says the company's quick re-prioritisation of its sales efforts as per the changed market demand helped it get new customers.

"Our growth depends on the businesses that we serve—if they grow, we grow," he explained. "So, we shifted focus to industries that involved minimum physical contact and were expected to grow due to the Covid-19 induced lockdown."

E-commerce, gaming, B2B startups helping businesses digitize and online education were some of the sectors Razorpay narrowed its focus on for customer acquisition. Also, the company sniffed huge business opportunity in small enterprises, such as grocery shops, schools and offline sellers that had never used online payments, wanting to digitize transactions.

"This not only helped us get a large number of subscribers but also grow alongside these sectors after the lockdown restrictions started lifting up," said Mathur.

Razorpay powers payments for about 5 million businesses, as compared to 1 million last year and processes USD 25 billion in transaction volume, five times compared to last year.

The company also hired about 300 people during the lockdown, when most companies were downsizing to save costs. It plans to hire about 500 more by the end of this financial year.

Beyond Payments: the Way Ahead

Razorpay wants to become a full stack financial company for businesses.

As part of the plan, the company has forayed into lending and neo-banking services with Razorpay Capital and RazorpayX, respectively.

RazorpayX, the neo-banking platform for small and medium businesses (SMEs), has on-boarded about 10,000 businesses since its launch in 2019. The company has collaborated with banks and offers services like debit cards, cheque books, vendor payment services, transaction statements etc, through its app to enrich digital banking experience of its clients.

More importantly, the company provides software solutions on top these services, such as a payroll platform that allows firms to pay employee's salaries, professional tax etc and vendor management platform to make payments to vendors and pay TDS.

The company is working on adding tax and wealth management features on its neo-banking platform in the coming months.

"The idea is to provide businesses a single platform to manage all their money flows," Mathur said.

Payments and neo-banking are our core business. Lending is an additional feature we've built on top - Harshil Mathur

Through Razorpay Capital, the company gives businesses that use Razorpay access to credit by tying up with lenders.

Mathur insists that through Razorpay Capital, they are building a different kind of lending platform.

"We look at 3-4 months of cash flow and daily transaction volume of the business who transact through our platform to gauge its ability to repay," he said. "Second, as these companies use our payment gateway, we automatically deduct the due amount on a daily basis. This ensures minimum defaults on repayment as we don't wait for the borrower to come to us and make the payment."

Third, the loan approval flow is opposite to most traditional lending channels. A borrower can't apply for a loan; instead Razorpay examines its client's transaction history, shortlists businesses that fit their lending criterion and push a loan to them. "We have a conversion rate of about 70 per cent on our pre-approved loans," Mathur said.

For these reasons, the company plans to stick to lending only to its client businesses.

"This model works better for us as the NPA risk is very low. It's us choosing the merchant with our own proprietary data set and pre-approved loans," he said.

In the coming months, the company has extensive plans to further build these two products and will use the recently raised capital towards it. By FY21, the company expects RazorpayX and Razorpay Capital to contribute to 35 per cent of its revenue, with a 100 per cent increase in the company's count of partner businesses, as per an official statement from Razorpay.

"The unicorn milestone is an important pit stop to refuel ourselves, but there is a long journey ahead of us," Mathur said.