*Unicorn on a bike: how Rapido fought Ola and Uber to win big in small rides – The Economic Times

Clipped from: https://economictimes.indiatimes.com/prime/technology-and-startups/unicorn-on-a-bike-how-rapido-fought-ola-and-uber-to-win-big-in-small-rides/primearticleshow/92963964.cms

SynopsisThe latest Swiggy-led funding round put Rapido’s valuation around USD830 million. This is impressive for a startup that survived on just USD2 million in the first three years and rode out high mortality in the bike-taxi segment. Now the challenge is in proving small is big. In other words, to show that small-ticket rides can create a formidable mobility business.

“One thing we are good at is not dying.” Rapido’s co-founder and CEO Aravind Sanka can afford a self-deprecating one-liner to describe the company’s seven-year ride. Having survived near-death scenarios a number of times, it is now at the threshold of becoming a unicorn, with nearly USD200 million in the bank and USD830 million valuation.

Rapido is the only bike-taxi startup to make it this far. From 2015 to 2017, some three dozen startups mushroomed in this segment. Bootstrapped or modestly seed-funded, they dotted several Indian cities. Within the first year of their launch, the high mortality in the sector was quite evident, with most of them vanishing from the scene. A handful of them, who slogged for another year or so, ran out of fuel before they could manage a decent Series A round of funding.

Besides the funding slowdown then, the bike-taxi segment was impacted by two challenges. First, they ran into trouble with transport regulatory authorities in several states. The legality of a bike taxi service came under question. The second challenge was the elephant in the room — investors were sceptical about mounting a capital war against the duopoly of Ola and Uber. Both the mobility market leaders entered the bike-taxi segment in right earnest. With capital, scale of operation, and manpower on their side, Ola and Uber added a bike-taxi button on their apps in several cities. That was enough to scare off several early-stage venture-capital investors. Remember, Ola was valued USD4.5 billion in 2015. Uber, at USD60 billion, was the world’s highest-valued startup and at its aggressive best.

Then how did Rapido overcome these twin challenges — big rivals and regulatory ambiguity — to become the last man standing as the only standalone two-wheeler ride-sharing startup?

Cracking the Ola-Uber duopoly
Any startup, especially the ones launched by unheralded founders, would face a funding challenge until they demonstrate some early signs of promise. That will be more acute in segments where big leaders have already been established. As mentioned earlier, app-based mobility service didn’t have room for a third player. TaxiForSure had to reluctantly fold into Ola in 2015.

Rapido founders knew there was no point in spending the small seed money they had raised on increasing visibility or acquiring users. They would not simply be able to match Uber or Ola. Until mid-2018, Rapido’s singular focus was on staying alive. According to Sanka, that determination came from the experience of shuttering their first business. Sanka and his partners, Pavan Guntupalli and SR Rishikesh, originally started a last-mile minitruck aggregation under the brand ‘theKarrier’. They ran it for a year and felt its scope was limited. “We decided whatever we do next we should make it big,” he said.

In hindsight, two things worked well for Rapido.

#1. In Uber and Ola’s core business of cab hailing, the average ticket size of a ride would be INR400. In India, with an average per capita income of about USD1,220 (INR91,481 on a constant currency basis), only a miniscule minority can afford cab rides. That is one reason why daily rides plateaued around 3.65 million and stared at saturation levels well before the pandemic broke out. This means, the on-demand short-ride option that appeals to masses would be at a far lower price point of below INR50.

#2. Ola and Uber, with a multimodal approach, have limitations in doubling down on bike taxis. If one reason is low attention span, the other is their focus on gross transaction value (GTV), which propels valuation. The bigger the ticket size, the faster the GTV grows. They tend to prioritise cabs over bikes as the key growth driver.

Therefore, for the likes of Rapido, it made sense to wait out till they found an opening to carve a space in the mobility service landscape. “The first three years were about survival and figuring out a business model,” says Sanka. That is evident in Rapido’s fundraising journey. The first three years until mid-2018, it survived on mere USD2 million seed funding. It used USD1 million in the first two years and then raised an additional USD1 million. Rather than launch the app city by city, Rapido was making its model foolproof by operating only in Bengaluru and Hyderabad.

Getting riders, users, investors
Bike taxis were a new concept — there were no bikes, riders, or passengers. Rapido had to develop a bike-taxi culture. An initial challenge was to make passengers feel comfortable to sit behind a stranger. Sanka says Rapido was the first to implement ride insurance ahead of others in India to allay the safety concerns of the passengers.

In May 2018 Rapido clocked around 9,000 daily rides in four cities — Hyderabad, Bengaluru, Gurugram, and Mysore. A month later, the Series A funding of around USD7 million hit the bank. VCs such as Nexus Venture Partners put in more money in the next one year. Having fine-tuned its playbook in four cities with limited seed funding which trickled in tranches, the Series A round set the stage to steadily scale the operation. By June 2019, daily rides grew 30x to 300,000, according to Sanka. The money helped to expand to around 50 cities in a year. “We held on to our belief that because this is an affordable ride that offers convenience, the opportunity should be much larger.”

Rapido Snapshot@2x

Ride-sharing platforms should ensure not just demand, but supply, too. All bike-taxi services, big and small alike, were constrained by limited supply of riders. Almost all of them tried to address this the same way Ola and Uber built their cab fleets — encouraging riders with incentives and financing schemes to buy new bikes. Rapido soon realised this was a cash-guzzling and unsustainable method of scaling, with limited scope of success.

According to a source, insights from an early investor, the family office of Pawan Munjal of Hero Group, helped. There are 220 million bike owners in India and 20% of them are unemployed, part-time workers, or students. The average bike utilisation in a day is just about 18%. The rear seats of 80% of bikes on the road are vacant. The bikes are a heavily underutilised asset in a capital-deficient economy. Therefore, it made immense sense to use them rather than create a brand-new fleet.

The optionality and part-time nature of gig work are often only on paper. For most of the cab drivers on Ola and Uber, it is a full-time engagement. Rapido proposed to riders it as a part-time work to earn extra income. Sanka claims the majority of its riders, whom Rapido calls ‘captains’, work only during peak hours. This writer took a bike ride with a Rapido captain Mohammed Nasim Akhtar, who works in Airtel’s broadband sales and service in south Bengaluru. When he is free, he becomes active on Rapido, does about 10 rides in five hours and makes about INR500 daily.

Foxy taxi
Rapido’s choice of using the existing supply of bikes was not without problems. Regulators did not permit bike taxis in several states, and it became all the more complicated when white number plate private bikes were deployed to ferry people. That is one reason why Ola, Uber, and others initially opted for creating new fleets of yellow number plate taxi bikes. The lack of clarity over permissions resulted in bikes being confiscated in several places.

According to a founder of a now-defunct rival bike-taxi startup, Rapido made some smart moves. It operated mostly under the radar. There were no Rapido-branded t-shirts, helmets, or bikes. “Transport authorities who went after bike taxis mostly targeted Ola and Uber for their high visibility. Many of them did not know Rapido existed,” he says. According to him, Sanka’s experience of working with Flipkart may have helped in scaling operations and digital marketing. “They reached the target customers without spending much.”

A Rapido investor concurred with the former bike taxi founder’s opinion. Rapido managed to stay out of regulators’ glare in the initial years. Kunal Khattar, founder of mobility-focused fund AdvantEdge, is a Rapido board member. “The board advised them: Do not come in the crosshairs of regulators,” he says.

Private vehicles being used for profits is explicitly illegal. But Rapido found a way out while onboarding many individual bike owners as captains on its platform. The rules do not ban vehicle pooling on a cost sharing basis. That became quite useful for Rapido. It positioned its ride-sharing service as bike pooling. While that gave the company some manoeuvrability, Rapido and its investors approached officials in the Ministry of Road Transport and Highways to press for legalising the use of private bikes for taxi service.

Eventually, a committee constituted by the ministry was convinced about the need of bike taxis and the benefit of deploying underutilised private vehicles for this service. It recommended the states to promote bike taxis.

“This [bike taxis} will offer an economical and convenient last-mile connectivity solution to the citizens. It is highly recommended that existing private bikes may be allowed for such transportation in order to facilitate utilisation of idle assets and state governments may also consider online options to allow private bikes to convert to taxis,” said the ministry’s committee constituted to propose taxi-policy guidelines to promote urban mobility in December 2016.

Given Union and state governments make legislations on road transport, state and local authorities have a choice in following or keeping aside these guidelines. Private bikes used for ride sharing are still being impounded in many places. But the central government’s position is certainly a shot in the arm for bike taxis. The regulatory heat has dissipated over the years and Rapido’s daily rides have kept rising. While the Series A funding came after three years of hustle, the subsequent rounds happened at quicker intervals.

It raised nearly USD300 million in four years since mid-2018. WestBridge picked a quarter of Rapido by leading a USD55 million Series B round in August 2019. Swiggy led a USD180 million round earlier this year and picked a 15% strategic stake.

Showing muscle
By the time the pandemic broke out, Rapido had established its leadership in the bike-taxi segment. When the lockdown restrictions set in, it branched out into food delivery. Sanka says daily transactions have grown to over 800,000 now, with rides accounting for 92% and deliveries the balance 8%. The equity partnership with Swiggy gives both parties skin in the game. Rapido riders deliver a lot of Swiggy’s food orders.

In the meantime, Uber and Ola have been showing some fatigue and distraction. Having raised fresh capital, seven-year-old Rapido finds it is the right time to enter a new mobility category: three-wheelers. Some estimates suggest it has already cornered a fifth of the market in this category. In pockets of Bengaluru, for instance, Rapido is emerging as the first choice for many commuters due to faster availability of three-wheelers on its app. Govind Raju, a three-wheeler driver in Bengaluru, says he uses all three — Ola, Uber, and Rapido — apps, and they all provide similar numbers of rides.

Rapido’s growth is impressive, with gross booking run rate growing six times and monthly rides nearly four times a year. Monthly rides are at 26 million and the gross booking volume annual run rate was a little over USD314 million in June.

But that shows Rapido’s challenge, too.

Given the small-ticket transactions, despite the growth in booking volume, its top line was modest at INR88 crore in FY21, the latest financials in public. The booking volume has to grow manifold for Rapido to emerge as a sizable operation from a revenue point of view.

An interesting trend line is the increase in margin. Rapido increased revenues by 55% while bringing down losses by a third to INR166 crore. For every rupee it earned, Rapido spent INR5.2 in FY20. That ratio improved to 2.7 in FY21.

The big challenge ahead of Rapido is to demonstrate another round of hockey-stick growth to achieve a formidable size and profits. App-based ride-hailing is facing investor scepticism across the world and how Rapido demonstrates financial viability will be keenly watched. The money in the bank alone will not help. Sanka and his partners know it from their fight against moneyed rivals.

(Graphics by Sadhana Saxena)

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