Contents

Table of Contents
The red Bus sale: A cautionary tale..........................................2
Company profile..........................................................................2
Where is started?..........................................................................2
Achievements over the years.......................................................5
Year of changes (2013)................................................................6
Appointment of Mr. Alok Goel................................................6
Acquisition by Ibibio group......................................................6
Employee reaction post acquisition...........................................9
The road downhill........................................................................9
The math behind ESOPs............................................................11
The Dark Side of Mergers & Acquisitions................................14
5 non-obvious Lessons from redBus Acquisition......................15
Real PE factor for any firm is people........................................24

The red Bus sale: A cautionary tale

Company profile
It was founded by three engineers Phanindra Sama, Charan Padmaraju and
Sudhakar Pasupunuri who studied together at the BITS, Pilani, and later worked in
various companies in Bengaluru.
Started modestly in August 2005 with a few seats from one bus operator, red
Bus today is one of the most successful online bus ticket booking agencies. Today,
it has 700 bus operators, 10,000 buses listed on it, works in 15 states and sells
around 5,000 tickets every day. And become, Indias first bus tickets booking site.
Where is started?
Phaindra Sama in one of his interview
None

of us had this entrepreneurial bug earlier. My ambition was to be an

electronics engineer and I was happy working for Texas Instruments in Bengaluru
after passing out from BITS, Pilani.
The seed was sown when I couldn't get a bus ticket to go back to Hyderabad during
the long Diwali weekend in 2005.

As I had no other work, I went to a bus ticket agent and asked how the whole
process worked. I felt there might have been a bus which went vacant and he didn't
know about it.
When he explained how bus ticket booking worked, I figured out that there were
many inefficiencies in the system.
Suppose there are hundreds of buses from 30 operators running from Bengaluru
to Hyderabad, the agents do not have access to all the operators.
When an agent gets a customer, he calls a bus operator to find out whether there
are tickets available. The operator looks at the chart and tells him the number of
vacant seats.
The number of agents a bus operator can have is limited as he needs to identify all
by phone. The agents also have only limited number of operators to work with.
Then, the customers cannot always choose the seats as there is no transparency.
Another problem is, as the fares are not published, there is no fixed fare for the
customer.
But the major problem was booking return tickets. Every time you went home, you
had to call someone and ask them to book the return tickets from there.

At that time, travelling from Bengaluru to Hyderabad was like travelling between
two countries.
Being an engineer, when you see a problem, you start thinking about solutions. I
felt computers could solve these problems easily.
At that time, it was very exciting for us to find a solution for such a problem that
involved thousands of people.
In January, 2006, we ( the seven of us) -- divided the work amongst us and started
working on weekends on the project.
When the prototype was ready, we went to the bus operators and tried selling it to
them, but they were not even willing to take it for free. It was like, we were trying
to disturb the status quo. We didn't know what to do.
That was when we heard of TiE, Bengaluru, and we went to them with the business
plan. They gave us three mentors to advise on what to do. they gave us the idea to
start a business of our own. They gave us assignments every week. It was like
doing a market survey. We were very prompt in doing all the assignments as we
felt when such big businessmen were taking time out to help us, we also would be
meticulous in our work. We collected information such as number of buses, the
number of routes, the average price of a ticket, how people buy tickets, the profile
of customers, how much commission a bus operator pays to an agent, etc.

It may not be comprehensive, but it gave us a general idea of the industry. Even
today, we continue to study the industry and we cannot stop.
By then, only three of us were left to do the work. As a result of working every
weekend and collecting so much information, it became a business for us without
even them telling us. We started in August 2006 with Rs 500,000 which was the
savings of the three of us. One room of the house where we stayed was our office.
In the morning we would keep the other parts closed so that the room looked like
an office.By now, three more people who were young relatives of ours had joined
us to help out.
Achievements over the years
Business magazine Fast Company recently released its 2012 list of the World's 50
most innovative companies. One of the companies to be featured on the list is the
redBus, an online bus ticketing company.
Also they were rewarded by
Business World - Top 3 enterprises in India
Forbes - Top 5 hottest start-ups
All World Network - India's fastest growing company
Star award achiever - Youth Marketing forum

Year of changes (2013)

Appointment of Mr. Alok Goel

In October 2012 redBus appointed Mr Alok Goel as Chief Product Officer

Mr. Alok Was before working with Google as Product Management

having

responsibility Responsible for monetization of Google's Display Ad Network

(a.k.a. AdSense for Content). Bleeding edge innovations around new Ad Targeting
solutions, Interest Based Advertising, Advertiser auto-optimization products. 12
pending Patents in Ads around interest based advertising, contextual ads.
AdSense. At the time of relocating to India, he had another offer from e-commerce
retailer, Flipkart, but chose to go ahead with redBus insteadat a significantly
lower salary. He took the pay cut because of the ESOPs. Plus he was given to
believe by Sama and the board that here was a company that could make him a
millionaire, whenever it went public or sold out.
Acquisition by Ibibio group

Ibibo Group, a subsidiary of South African mass media company Naspers Ltd, has
acquired Pilani Soft Labs Pvt. Ltd for $ 135.ibibo largely focuses on air tickets and
hotel bookings. The acquisition of ,redBus gives the company access to customers
who do not travel by air, said Ashish Kashyap, chief executive of Ibibo group.
RedBus will be run independently and operate as a separate business. Its founders

and management team will continue with the firm. Founded by Phanindra Sama,
Sudhakar Pasupunuri and Charan Padmaraju in 2006, redBus has grown to be the
countrys largest bus ticketing service, selling tickets worth more than Rs.600 crore
on over 10,000 bus routes in fiscal 2012. Its revenue that year was Rs.350 crore.
Mumbai-based investment bank Avendus Capital was the adviser on the
transaction. Investors in redBusSeedfund, Inventus Capital Partners and Helion
Venture Partnershold a little over 50% in the company, and have committed to
invest Rs.43 crore. RedBus has only utilized Rs.8 crore of this corpus till date, said
Pilani Soft Labs chief executive officer Sama. On the basis of the amount that
went into the company and the returns offered now, redBus is giving the highest
returns ever offered through an M&A (merger and acquisition) transaction in the
consumer Internet space, he said. Though other online travel agencies such as
MakeMyTrip.com and Yatra.com also sell bus tickets, redBus dominates the
business. Rival websites sell a fraction of the tickets redBus does. Investment
bankers say the acquisition is an affirmation of the growing acceptance of Indian
consumer Internet companies globally. This transaction shows that Indian Internet
companies can attract buyers from overseas, said Deepak Srinath, director,
Allegro Capital Advisors, an investment bank. According to Srinath, what is
encouraging is the interest of a company like Naspers in Indian firms. Naspers is
known to pick up market leaders in emerging markets. They invested in Chinese

Internet firm Tencent Inc. in 2001 and it has grown into a multi-billion dollar firm
today, he said. In February, redBus launched a mobile application for Android and
Windows phones, under the guidance of chief products officer Alok Goel, who
joined the company in November from Google Inc., where he was heading search
and mobile products. The ibibo groups existing travel assets include Goibibo.com,
a travel aggregator, and TravelBoutiqueOnline, a business-to-business travel
service. We were working with redBus and were witness(ing) traction growth on a
daily basis, Kashyap said. We realized that if we wanted to scale with a
multiplier effect in the bus ticket space, M&A was the way out... We could build
something like this on our own but redBus has a network effect due to its
relationship with bus owners and operators and breaking that is difficult, he
added. The success of redBus helped precipitate a shift in Indian start-up investors
aims, from concept modelsimporting a winning US modelto start-ups that
are uniquely local, said Parag Dhol, a partner with Inventus Capital. South Africas
Naspers has a track record of establishing, acquiring and growing businesses in
emerging markets.

Employee react ion post acquisition

Alok Goel, the companys chief operating officer (COO), had put in his papers. So
had Satish Gidugu, the companys chief technology officer. Goel wasnt the only
one who had resigned; three mid-level managers had, too. At the companys
headquarters in Bangalore, the scene was one of total chaos, of anxiety and anger
towards Sama, and Ibibo taking over. they left wondering if Sama had really
done it. Did he consciously deprive them of their stock options so that he could
pocket all the money? Did he, on purpose, draft the employment contracts of senior
executives like Goel and Gidugu in such a way that they wouldnt see a dime?
Why did the agreement not have an accelerated vesting clause? An accelerated
vesting clause provides for employees to receive some or all of the unvested shares
at the time of an acquisition or an initial public offering (IPO). An ESOP is a
benefit plan intended to encourage employees to acquire shares or ownership in the
company.

The road downhill

Two weeks before the transaction was publicly announced, Sama broke the news to
his top management executives. They were shocked. redBus had been in the
market only to raise funds and some of these executives, including Goel, had made
presentations to potential investors. The thought that redBus would be sold hadnt
even occurred to them. People were not happy. More so when they were told that

they wouldnt be making money from the deal. A lawyers opinion was called for,
but they were told that the proposed sale wouldnt trigger accelerated vesting of
their ESOPs. Now, they were really miffed.

It would be fair to say that Ibibos Kashyap and Sama had anticipated this,
somewhat. Kashyap, particularly, was keen on retaining the senior management.
But giving them cash was not an option. They could take it and leave. Instead, he
offered salary hikes of at least 50-60%, stock rewards in Naspers and retention
bonuses. The retention bonuses were equal to the value of the ESOP agreements,
only that the payment would not be made as and when the options vested, but at
the end of the financial year in which they vested.

And then there was Goels promotion. Ibibo told Sama that they were looking for a
new COO. Since Sama would have to exit the company at some point within the
next two years, a COO should come in early and pick up the ropes. Sama thought it
would be a good idea to promote Goel. Sure Goel lacked the experience, having
worked at the company for only eight months, but he deserved the chance. The
team from Ibibo was not very sure, but Sama persisted. Goel himself was up for
the assignment when Sama reached out to him with a revised offer. Sama spent the
next few weeks trying to push Goels case.

Promoting a person less than a year old in the company would involve a change in
reporting structure and could rile a few who had spent more time at the company.
As expected, some employees protested. Sama figured a way around this problem
would be to meet all the people individually and try and convince them. But that
would need more time. Goel was getting impatient. Another week passed. A day
before leaving for London, Sama announced Goels promotion, which had been
effected weeks earlier, in an email. Less than eight weeks into the position of COO,
Goel resigned. And then, along with Gidugu, he got chatty with a lot of people to
share why he had done it. From there, it was all downhill.

The math behind ESOPs

A company typically reserves anything between 1-15% of its equity for ESOPs. It
varies from company to company, says Mohini Varshneya, assistant vicepresident at Corporate Professionals, a Delhi-based legal and financial advisory
firm. So, for public companies, it can be as low as 1%, but in start-ups, it is
usually higher because you want more people to have ownership in the company.

When redBus was founded in 2005, Sama had allocated 10% of its equity for
ESOPs. And the ground rule for ESOPs is risk. So higher the risk, higher the equity

offered. This means that people who come on board early get more. Those who
join later, get less. Between the time redBus was founded, in 2005, and its
acquisition in 2013, the company had already issued 6% of its ESOP pool. To put
this in perspective, imagine a situation where you are eight years old in the
company and 6% is already gone. You are left with 4% and you dont know how
long the companys life cycle is. Lets for a moment assume 30 years. To put it
simply, thats 4% for 22 years.

For an eight-year-old start-up, to have consumed 6% of its ESOP pool is fair,

says Varshneya. She adds that in nine out of 10 cases, companies give ESOPs to
people who are directly linked to the organizations growth. Inevitably these are
people at the top, she says. The lower you go down the corporate ladder, the more
it is about cash in hand and not ESOPs.

In 2013, redBus employed about 600 people. Of this, 250 were call centre
executives. Another 100 were employees in the field dealing with bus operators.
About 150 people were in product, technology and marketing. Of these 150 people,
22 had ESOPs. Thats roughly 15%. Some companies give ESOPs to more
employees and some to fewer. Again, theres nothing unusual about the number.
Understanding by example mentioned below

Assumption: Total equity allotted to ESOPs scheme is 1,50,000/- grants

Every year total of 10,000 grants are allotted
Hence till 2013, total of 90,000/- grants are allotted (6% of total)
Year 1

Year

Year 3

Year 4

Year 5

Year of

2
10%

20%

30%

40%

2006
2007
2008
2009
2010
2011
2012
2013
2014

2007
2008
2009
2010
2011
2012
2013
2014
2015

2008
2009
2010
2011
2012
2013
2014
2015
2016

2009
2010
2011
2012
2013
2014
2015
2016
2017

Grant
2005
2006
2007
2008
2009
2010
2011
2012
2013
TOTAL

Allotted

Vested

ESOP

ESOP
till 2013

10,000
10,000
10,000
10,000
10,000
10,000
10,000
10,000
10,000
90,000

The Dark Side of Mergers & Acquisitions

When companies get acquired, founders and early employees make money. At least
thats how it is made out to be. There are many happy outcomes to an acquisition.
Some instability and chaos is part of almost every merger & acquisition. As the
ecommerce industry consolidates & smaller deals pick up, if you are a startup
employee, it wont be a bad idea to be ready for it.

10,000
10,000
10,000
10,000
6,000
3,000
1,000

50,000

In large firms, HR readiness for M&A is taken quite seriously they tell me. Pre &
post acquisition surveys, communication processes and months of planning &
integration makes it smoother, although there is always some attrition.
But for startups, none of this exists. At an organisational level, there is very little
readiness. Of course, in many cases, the founders are considerate enough but many
mergers these days are shotgun weddings. Time is often a luxury no one can afford.
Founders themselves are helpless in many cases.
This acquisition was one of the best things that happened last year. However,
after redBus was acquired for Rs 800 cr by South African media conglomerate
Naspers some senior employees quit because their shares hadnt vested and there
wasnt an accelerated vesting option.
In many cases, the effect of an M&A on employees depends on the way a deal is
structured. Sometimes, the deal specifies that the employees stay back for a period
or forgo their earnings from the deal. For lower level employees, this hardly
matters.
Sometimes, there isnt much you can do. You could try and negotiate better terms
with the management. Or your founder.

To be fair, the positive outcome of the acquisition for employees is that all redBus
employees got a higher salary as Naspers levelled their pay with company
standards.
5 non-obvious Lessons from redBus Acquisition
The acquisition of Redbus was formally announced last week it was a
blockbuster deal by any metric and predictably sparked off reams of print singing
hosannas to the founders (undoubtedly richly-deserved) and existentialist questions
on what this means for the Indian startup ecosystem.
While all of this was great, a slightly-deeper dive into the deal contours reveal
some fascinating facets. I reckon that it might be useful to parse through these and
present them as a series of non-obvious lessons for other Indian entrepreneurs.

Lesson 1: Hire a lawyer during your fundraise

redBus had raised $ 8 million dollars over three rounds of funding. While this is a
fair amount of money especially so in the Indian context, it is by no means a large
sum and is a fraction of the amounts raised by other Indian startups. Yet, the stake
of the founders was very small at the time of the acquisition less than 15% by
some accounts.

While it might be fair to surmise that they diluted a lot of their stake by
underselling the valuation at the time of the funding rounds, the real reason is
elsewhere.
The real reason why the founders ended up with as low a stake as they did can be
traced to the fact that their first round of funding had a full ratchet anti-dilution
clause (*source). Anti-dilution is a fairly standard investment term which
essentially safeguards the investor if a subsequent round is done at a lower
valuation.
The standard way in which this clause is enforced is by following a mechanism
called weighted-average method this is a generally accepted way that is
equitable to both the investor and the entrepreneur. However, the Redbus investor
agreement had a full ratchet mechanism which is a death spiral to the
entrepreneur.
I am not going to go into the minutiae of these clausebut this avatar of the clause is
widely regarded as something that no entrepreneur should accept as this article
explains as it has a severe dilution impact on the entrepreneurs stake if a
subsequent funding round happens at a lower valuation (which is exactly what
happened when Redbus raised their second round).

I am not going to speculate on whether the Redbus founders understood and

appreciated the nuances of this clause when they signed the original agreement but
one thing is for sure they didnt use a lawyer for their transaction. The Redbus
founder actually went on record to explain how they did this deal without a lawyer.
As entrepreneurs, while it is nice to trust investors and work with them on good
faith, it is suicidal to do so without having a lawyer in your own corner to
safeguard your interests. Any half-decent lawyer would have pointed out the
obvious pitfall in accepting a clause like this.

Lesson 2: Understand your investors imperatives

One question that has popped up regularly as a reaction to the acquisition is why
now why did Redbus choose to sell out now when there was presumably an
opportunity to build a much more valuable and meaningful company in the future.
Now, while there might be many reasons why the stakeholders decided that now
was the opportune time for an exit, it would be an exercise in speculation to figure
out the actual reasonsbut we do have one clue.

Redbus raised their first round in circa 2006 which means that their first set of
investors have been with the company for seven years or thereabouts. Seven years
is the average lifespan of most early stage funds by the end of this period, the
fund managers are typically required to provide a return to their investors (LP or
Limited Partners in venture capital parlance) and while some funds do let winning
horses ride further in the expectation that a significant payoff will come their way
at some point of time in the future, as these are unrealized gains, it is a far
cleaner option to simply exit the portfolio and provide a cash return to the LPs.
While there is no way to know if this was the primary driver for accepting the
Ibibo offer, there is every chance that the timing helped line up the stars, in which
case the Redbus founders might have been prompted to take the offer to provide a
realized return for their early investors.
As entrepreneurs, what we need to keep in mind is that investors are bound by a
timeline too and we need to keep these imperatives in mind when we take the
decisions that we do
Lesson 3: India/Bharat is a tough market. Understand your markets natural
limits.
While providing a timely return to investors might be one reason why Redbus
cashed out, there could potentially be one another.

There is a largely-held belief that India is still in the nascent stages of market
penetration for e-commerce and specifically for bus travel too, there is a lot of
headroom to grow (online is only around 5% of total transactions) but there are
two points which seem to imply that perhaps at least some of this bullishness is
unwarranted:
Slowdown in growth: Redbus had revenues of Rs. 12 crores ($2 million) in FY11
this grew to Rs. 32 crores ($5.4 million) in FY12 implying 171% growth YoY. In
FY13, the revenue grew to Rs. 55 crores ($9.2 million) implying a growth of just
68% a sharp fall from the comparable figure in the previous year. While one
might justifiably argue that attempting to extrapolate a pattern from three data
points is statistically risky, there is no denying the fact that in percentage terms,
Redbus show a sharp decrease in revenue growth for FY 2013 compared to the
previous year, arguably much more than what could be reasoned away due to the
smaller base in the previous year.
Push, not pull: One of the points that has been bandied about a lot about the growth
of Redbus is around how the company has not spent a dime on marketing and the
growth has been entirely organic, driven by word of mouth boosted by achieving
deeper engagement with existing customers. However, in the recent past, Redbus
has started spending money on marketing and specifically on advertising on mass

media vehicles including TV ads. This implies that Redbus felt that organic growth
was no longer sufficient on its own and the numbers had to be bolstered by push
marketing.
Both of these points, individually and together, tell us is that customer acquisition
was not just slowing, it was becoming increasingly harder and more expensive.
While it might be nice to talk about the enormous size and potential of the Indian
market, it is probably not a stretch to conclude that penetrating this market is by no
means, an easy task and there is a good chance that the immediately addressable
market is a sliver of the total market. Also, as echoed by the state of telcos in India
today, it might not be too difficult to achieve early success in a category-defining
market in India but it is quite difficult to keep this going on an ongoing basis over a
period of time.
The other part of this is that as far as profitability goes, Redbus has just about
gotten started they had a bottomline of $100,000 in FY12 and less than $2
million in FY13. For a company that has 26 offices, over 500 employees and
millions of dollars of funding, these results are certainly not anything to write
home about especially so as it has been the market leader and has been in
operations for over seven years. While they could have presumably sacrificed

profitability in favor of growth, these numbers are still underwhelming. Again, this
could point to the fact that India is a tough market in more ways than one.
For us entrepreneurs, it is a clarion call to assess/reassess if it makes sense to
attempt an India-only play and if one continues to do, attempt to understand what
the markets natural limits are and ensure that our per-unit economics make sense
within that canva
Lesson 4: Fundraising in India is hard, very hard
By all accounts, Redbus is a marquee Indian startup the founders have done
wonderfully well to establish a meaningful business and a well-known brand and
the company has been lauded by everyone from the Indian and international press
to MIT (which recognized Redbus as one of the most innovative companies in the
world). Despite this, it boggles the mind that the company started its fundraising
efforts for its Series D in November of last year and wasnt able to actually close
that round in the subsequent eight months.
One would have guessed that it would have been fairly trivial for a company of this
stature to raise a new round if it so desired. The fact that it didnt actually close a
round in eight months from the time they started looking for it can give us an idea
of how hard it is to raise funds in India.

Even though the company apparently got eight termsheets for this planned round,
the fact that they chose to take the Ibibo offer instead of any of these options
implies that the offers werent particularly attractive by themselves
and empirically so, relative to the Ibibo offer.
The lesson is simple if you get a chance to take money and if the terms are
broadly equitable, take it, even if you feel that other things like valuation are suboptimal! Also, keep in mind that if you are in the market to raise funds, it is a long
and time-consuming process, so dont get into it in an unprepared or half-hearted
manner and dont leave it for too late.
Lesson 5: If you are an investor, requiring traction to invest in a company
carries the risk that you are already too late
While the early investors of Redbus were undoubtedly the big winners in the exit,
probably recouping their entire fund corpus in this single deal, for the investors in
the subsequent rounds, the returns werent quite as impactful.
Admittedly, this is at least partially a function of deal mechanics over multiple
rounds but what is interesting is that the firms that did invest in the later rounds are
not significantly different from the one that invested in the early rounds. All these

firms are ostensibly early-stage firms that make seed stage bets in promising
companies.
The difference, I guess, is that the first investor backed the company when it was
still a fledgling entity on the promise and potential that it showed whereas the
subsequent investors came in only after the company had already demonstrated
traction and executed their plans. So perhaps, there is a lesson in this for Indian
investors too bigger returns mandate bigger risks if all the ducks have already
been lined up, you are already too late.

Real PE factor for any firm is people

While investment bankers have inducted 'PE' factor - the price-earnings ratio,

which helps determine the valuation of an enterprise - into contemporary

management lexicon, the real PE factor in the value journey of any enterprise from
a leadership perspective continues to be its 'people' factor.

'People' is the only PE factor capable of creating value for itself and unleashing
value from the other factors.

Unleashing the 'low cost: high value' potential of the people factor in these volatile
and challenging market conditions calls for special attention.

Future-smart CEOs- the corporate skippers and proactive leaders who plan and
insulate their enterprise against unpredictable future volatility - will have to evolve
and take personal responsibility for their workforce strategies. They will need to
develop a navigational map that will help them traverse a unique 'value-to-value'
journey.

The HR department-led general people programmes barely succeed in exploiting

more than the surface capabilities of these high-potential resources. Unless the
CEO leads from the front and sponsors generating value from people resources,
chances are that the enterprise will under-utilise these precious resources.

The 'value-to-value' journey encompasses four critical value domains, and is linked
to the CEO's performance contract: create occasions to offer unique value
propositions, nurture critical values to evolve a genuine and flexible culture,
energise the system to deliver value to customers and engage the system with
relevant drivers to enhance its 'enterprise value'.

Every organisation needs to have eight capabilities to thrive: a competitive

landscape analysis and market intelligence, demand creation, demand fulfillment,
going to market, supply chain, an order-to-remittances cycle, new product
innovation and talent engagement and development.

Future-smart strategic leaders build their organisation structures around these.

They do not go the classical way of building their structures around power centres
in their enterprise.

A firm's reputation is embedded in its capabilities, not in its structure. The value
propositions that make a difference and attract talent to join and stay need to be
developed around experiences and opportunities built around these capabilities and
knowledge. Hence, key success factor No. 1 for the future-smart leader is offering
unique value propositions and a market-competitive total rewards package to 'get'
the best talent. However, the greater challenge is to ensure final delivery of this
promise.

Key success factor No. 2 is to build a flexible culture with non-negotiable ethical
values within the enterprise to maximise business opportunities. Future-smart
leaders will never shift their eyes from markets, customer insights and customer

realities as defined by market conditions. The entire system needs to harmonise to

deliver 'value-for-money' to customers.

Key success factor No. 3 would be to build a delivery system within the enterprise
that gives customers their desired value for money with an 'aha'. The purpose of
business is value creation.

Key success factor No. 4 is to ensure that focus on short-term profits does not
make the enterprise lose long-term focus on its value creation, and that the people
resources are fully engaged in this.

The volatile markets have covertly indicated their preference. Enterprises that have
their profit earning ratios backed by competent PEople and strong people
engagement succeed in sustaining and realising their long-term projected
valuations. Others perish and peter out into obscurity.