SUMMARY
Rejected By Investors, Cloud Startup E2E Networks Took Its Chances And Went For An IPO On NSE Emerge. And What A Debut It Was!
It was a hot summer afternoon on May 7 in Delhi and Tarun Dua, founder, and CEO of E2E Networks, a cloud servicing company, decided he wanted to go for lunch. He asked his chief technological officer (CTO), Mohamed Imran, if he would accompany him, and together they set out for a restaurant in Nehru Place, New Delhi.
One can only guess what was going through Tarun’s mind as he traveled in the metro — his nine-year-old company, which recently listed its IPO on NSE’s Emerge platform, had been subscribed FIVE times!
Tarun recalls the day as being a series of blurs, he remembers having chicken tikka, a dish allowed in his Keto diet which he follows from time to time. After lunch, Tarun and Imran headed back to work. On reaching the office, they discovered that their company’s stock was getting hotter than the blistering heat outside which was touching 40 degree Celsius.
“After we came back, we found it was 15x and in another 5-10 minutes, it was 40x, and in another five minutes, it was 70x! Suddenly, in the final two hours of trading, our stock really blew up,” Tarun tells Inc42.
The joy in his voice is obvious but one gets a sense that it is measured. “We were not expecting that kind of response and, till the last day, we were worried about whether the issue would get filled or if we would find ourselves in a situation where we would have to call up people and ask them to apply,” Tarun laughs.
E2E Networks, which came into being in 2009, is a solid-state drive (SSD) cloud startup which offers private and public CloudOps platforms. In simpler terms, the startup helps companies shift their operations to the cloud and manage them. The cloud startup claims to support more than 2,000 public clouds across the world.
The company’s services are similar to those provided by other cloud giants such as Microsoft’s Azure, Amazon’s AWS, and Google Cloud, but E2E Networks doesn’t necessarily offer all the services that these cloud operators provide.
Instead, the company believes in a multi-cloud approach where cloud services from multiple companies can be found under one umbrella.
The Emergence Of An Early Mover In Cloud Services
In 2009, Internet connectivity in India saw dramatically reduced latency (the delay before a transfer of data begins), something that most compute providers hadn’t really noticed. This, believes Tarun, was the crucial point that led to the inception of E2E Networks.
“We were the early movers and capitalised on this trend by setting up compute infrastructure at local data centers long before the government was promoting this actively. Our presence in this market allowed a lot of startups to compete with the big boys in terms of web performance,” says Tarun.
E2E was able to improve page load times and application response times greatly by hosting in India; it was also able to improve delivery time for web applications by as much as 50%. “Once an online company started using our compute infrastructure, its competitors were soon forced to shift to E2E Networks to match its performance improvements,” smiles Tarun.
The cloud startup grew more than 100% year-on-year for many years. Tarun believes there was a market for the taking but, surprisingly, most investors, other than Blume Ventures, couldn’t see this opportunity.
The cloud startup needed money to expand as it wanted to increase its client base and that was not happening. Initially, the company didn’t make any headway with private equity firms. Blume Ventures was the first one to put in a seed cheque of $51,975 (INR 35 lakhs) in E2E Networks early 2011. After a few years, in 2014, the company carried out a post-seed fundraising, which saw participation from the family and friends, and Blume Ventures, which took the total money raised to around $423,225 (INR 2.85 Cr). So, what was it that made Blume invest in E2E Networks while other investors turned away from it? Inc42 posed this question to Karthik Reddy, co-founder and managing partner at Blume Ventures.
“We saw a passionate founder with very deep knowledge of the domain who was already running a profitable business… I think whenever the startup market is leaning towards a global player — in this case Amazon’s AWS and its equivalents — the VC market becomes wary of creating a competitive player based in India, especially in B2B. It’s always easier for a late-stage investor to pass than to invest,” explains Karthik.
Karthik believes E2E was too small for the larger VC firms to indulge their money in, and some of them didn’t like the lack of perceived differentiation, which, according to him, is anyway difficult to build without at least some capital.
But even after both the rounds of raising money, E2E still needed more needed capital for growth. “We were in talks with Blume Ventures about various possibilities two-three years ago, and the conversation was about how we were late in raising Series A. But we were still looking to do it and gave ourselves six months to a year to meet investors who would be interested,” Tarun says.
The cloud startup eventually realised that the Series A option was not a great fit for a company like E2E Networks. “We can probably have 10-15 unicorns in India and the funds only want to invest in companies that will become unicorns. Many didn’t see our company that way, so they passed. But this also made us realise that the private investment market is fairly small with 15-20 serious players and it is they who keep making news,” Tarun elaborates.
The company then started looking at exploring the public investment market, which Tarun found to be much more organised and rational. At the same time, one didn’t need to check all the boxes in order to be attractive. Tarun finally decided that the best option was to list on the NSE’s stock exchange for SMEs — Emerge — and thus started E2E’s journey towards an IPO.
“It was around September-October that we told Blume Ventures that we needed to go for an IPO. We told them that, in the process, we would convert all their special rights to ordinary rights and go public… Blume was pretty cool about it,” he says.
According to Karthik, it was a joint decision from word go. “Over the last few years, we encouraged Tarun to keep exploring options. For a founder, it would be foolish to not attempt to raise capital that was otherwise not coming in from anywhere. If he had the intent to build scale for the next 5-10 years, it became imperative to raise money and build as soon as he could,” says Karthik.
As an early stage VC, Blume Ventures can only make money if the founder does and Karthik strongly believes that rights are of little consequence when a company goes public and increased accountability comes into play. This, in any case, is the benchmark for any company.
One of the other reasons behind this decision was that the cloud startup needed some “discoverable” valuation to give old-time employees’ trust in the company’s ESOPs.
What Helped E2E Networks Become EBITDA-Positive?
One thing that catches your attention when you visit the company’s website is the claim that it’s been EBITDA-positive since inception. How can a startup achieve that?
Tarun says it was because of bootstrapping and their differentiated business model. Though E2E’s business wasn’t seemingly differentiated enough to attract investors, it was in fact differentiated in a subtle way.
But first came the bootstrapping. “We were never able to raise big bucks from private players and thus going under the red (line) was not an option,” says Tarun.
In the initial days, the company had to operate without an office for close to a year, with Tarun and Imran working out of each other’s houses. “We wanted to save every dollar, and every dollar saved was used for the growth of the company. Everything needed to have a measurable ROI. We did a cost-benefit analysis every time we brought in a new team member… frugal was the way,” he adds.
The cloud startup moved to a “legit” office only when Tarun’s father retired and wanted to shift into their Faridabad home where Tarun was staying on the ground floor and working out of the first floor. “We wouldn’t have moved otherwise,” says Tarun.
The other important factor that helped E2E become EBITDA positive was its differentiated business model. It offers only 10% of the cloud infrastructure services that typically constitute a company’s 80% cloud bill. And they offer these serviced at 30% of the cost. He says about 90% of the customers need these services. Let’s break this down:
What E2E Networks offers is infrastructure-as-a-service (Iaas), which lies at the bottom of the hierarchy of cloud services, with Platform-as-a-Service (Paas) and Software-as-a-Service (Saas) above it.
The company’s target customer base is the growing number of small and medium businesses (SMBs) that need to take their operations to the cloud. Its goal is to provide a service wherein customers don’t have to worry about security protocols, performance issues, and fault management. Plus, it provides all of this at a very reasonable cost — a critical factor as these are basic but essential functions for an enterprise moving to the cloud. This business model helped E2E gain a large number of SMB customers.
“India is a very different country in the sense that the request is ‘do it for me’. People don’t want a massive learning curve, so when someone is looking for a public cloud platform, they’re looking for a partner who has knowledge of all the cloud-native ways of doing things. Today, most cloud operators have to pay their partners to provide migration services to clients. We frontend the entire solution… and we do not get paid by any of our public cloud partners, which helps build trust as well,” Tarun says.
NSE Emerge: A Hope For The Underdogs Of The Startup Industry
The startup world, investors, ecommerce, and everyone else sat up and took notice when Flipkart was acquired by Walmart, and it is a story that continues to make headlines. Flipkart’s battle with Amazon and its eventual acquisition by Walmart is being seen as a success story by some, a certain kind of a triumph of the underdog over a global ecommerce giant.
At a closer look, E2E fits the criteria of a classic underdog story equally, if not more. It’s the story of a company bootstrapped for a couple of years that didn’t fit the bill for many investors, and found it difficult to raise funds, but made it big in the end. The E2E story, at the face of it at least, inspires some cheer in the startup world, which seems more glum than usual these days.
Inc42 DataLabs in its Annual Tech Startup Funding Report 2017, found that Indian tech startups raised about $13.5 Bn in funding across 885 deals in 2017, three times of what it was in 2016. But the catch was that the number of deals reduced by 7.14%. Besides, around 12 startups raised the bulk of the amount — $8.84 Bn — through 19 deals, leaving almost 98% startups with only 30% of the total funding amount.
It isn’t easy for startups to raise money and examples such as E2E have brought the increased spotlight on the NSE’s Emerge platform, where more than 150 firms raised (INR 2,221 Cr) via IPOs earlier this month. This holds true not just for startups but for funds as well, given that Blume successfully sold 74,2569 shares on Emerge with an ROI of over 50%.
IPO Done, What Are E2E’s Future Plans?
Tarun insists that nothing has changed since his company made headlines with its rockstar IPO debut. He makes it a point to tell his team the same, asking them to not work with an eye on the stock price as it doesn’t make a difference to the everyday business.
“What will make a difference, though, is what we do in the long term. Nothing that can happen in a single day can affect the operations and ambitions of the company. All these numbers are great from the perspective of an outsider, and that’s (the IPO success) a great thing to achieve, but planning and executing for the long term is what counts,” he adds.
“We sign up around 25-30 customers every month on our online platform and are growing our customer base by a couple of percentage points every month,” Tarun says.
E2E plans to double its current workforce from 80 to 160 this year. Tarun is currently focused on expanding further in India, but he hints at global ambitions which could touch the shores of Southeast Asia, Australia, and the Middle East. However, he tells us that it’s too early to talk about overseas expansion as of now and there is no timeline he has in mind for it.
The cloud business has everything going for it today and fast execution is what makes all the difference. Nearly 60% of IT organisations in India were expected to have moved their systems management to the cloud in 2017 and more are predicted to follow in the coming days. The worldwide public cloud services market is projected to grow to $186.4 Bn. In India, it is forecast to grow at 37.5% in 2018 to a total of $2.5 Bn.
Looks like E2E Networks couldn’t have wished for a better time to have such a fantastic IPO. But as Tarun says, what now really matters is how the company executes its plans going forward.
