How Paytm won Buffett's love on V-Day

BENGALURU: It was in the first week of February that Vijay Shekhar Sharma, who was at Paytm’s technology development office in Toronto, got a call from Mark Schwartz, Goldman Sachs Asia chairman and an independent director on his company’s board. Schwartz told him he had just met Todd Combs, one of the top investment managers at Warren Buffett’s Berkshire Hathaway, and that Combs was keen to know more about Paytm. “Are you in this part of the world anytime soon?” Schwartz asked Sharma. The Paytm CEO did not skip a beat. A meeting was fixed in Omaha on Valentine’s Day, February 14.Sharma brought along Schwartz and another board member, SAIF Partners’ Ravi Adusumalli. Adusumalli’s firm has been an investor in Paytm for over a decade, from when it was a mobile valued-added services company. Sharma describes Adusumalli as “as much a cofounder” of Paytm as him. Schwartz, who is also vice chairman of Goldman Sachs, was critical in building the trust between Paytm and Berkshire.The meeting lasted about two hours. The four discussed what was happening in India, how payment networks across the world work, how mobile was winning in China and India, and how mobile-led payment networks will become bigger than traditional networks. But no presentation was made and no laptop was opened during the conversation.“We also told him that we are an old company, and how we transitioned from a telecom operator-led company to a consumer-focused company,” 40-year-old Sharma told ET about the meeting. Paytm-owner One97 Communications was founded in 2000. “We also told him about how the (core) team has remained the same… Our company has always believed that it is people whom you trust and who are hardworking who pull off things, not the domain experts.”Combs asked Sharma to send all the annual reports of One97 Communications, which launched Paytm in 2010, to him. A few weeks later, in March, Combs called back.This time, he had specific questions about the landscape, competitors, risks and challenges, and even profitability. This was followed by another call, after which the investment size and valuation were finalised. Paytm’s numbers must have been compelling: For the next 12 months, the company’s target is to double its gross transaction value to $100 billion on an annualised basis. It is also looking to double its merchant base to 16 million.A DIFFERENT KIND OF BETThe deal has caught many by surprise, as until a few years ago Berkshire had stayed away from technology companies. This changed with its huge bet on Apple, a highly profitable and listed company. While Berkshire did try to invest in Uber earlier this year, it has stayed away from private technology companies or Unicorns, which typically spend investor capital to gain market share at the cost of profitability.Many feel Berkshire’s Paytm investment is a different kind of a bet. “This is not a bet on cash flows but on growth. Money transfer is a critical network business and as India grows, Paytm will grow faster than the market,” said Anand Lunia, managing partner at venture capital firm India Quotient. Berkshire is familiar with this model as it is a shareholder in payment companies like American Express, Mastercard, and Visa besides banks like Wells Fargo, Bank of America and Goldman Sachs.“This investment validates the fact that India is a great market and discounting and losses as a strategy are ok in the early life of a company.”After sealing the deal terms, Sharma started informing other key shareholders, first updating Joseph Tsai of Alibaba and then Eric Jing of Ant Financial, both of whom collectively hold over 40% in One97 Communications. SoftBank’s Masayoshi Son heard about the deal first from Buffett himself at the exclusive Sun Valley conference in the US in July. “Masa was smiling when I met him,” recalled Sharma.As ET reported on Monday, Berkshire is picking up a 3-4% stake in Paytm for ?2,000-2,500 crore at a valuation of $10 billion. Sharma declined to share specifics of the transaction.“It brings to our capitalisation table the best breed of investors in the world, while at the same we also have a very small set of shareholders. This allows us to run a company tightly towards the mission… there is no IPO pressure,” he said.NO TOKEN INVESTMENTCombs, who was instrumental in putting together a healthcare joint venture between Berkshire, Amazon and JP Morgan, will join the eight-member Paytm board, replacing Amit Singhal. An MBA from Columbia Business School, Comb has been with Berkshire since 2010 and is also a director in JP Morgan and Duracell.Venture capital investors said Combs joining Paytm’s board underlines that this is not a token investment for Berkshire and that it will want a bigger piece as Paytm does better.Berkshire’s entry makes it clear that Paytm is looking to chart a longterm path as an independent company and is not seeking an acquisition exit, while also making sure it is not dependent on one investor, said a venture capital investor.“This changes the nature of the company. Regulatory concerns will go away because as a financial institution there is no better shareholder than Warren Buffett. The narrative of (Paytm being a) Chinese company will go away as these are American board members,” said this investor, requesting anonymity.The Reserve Bank of India recently asked Paytm Payments Bank to stop adding new customers due to issues with its e-KYC process. The company is also looking for a third CEO for its payments bank, after Shinjini Kumar quit last year and Renu Satti was moved to another unit in Paytm last month.While Paytm continues to be the market leader in the payments space, it faces competition from well-funded rivals including Flipkart-owned Phonepe, Amazon Pay, and Google Pay.This is expected to get exacerbated with the entry of Reliance Jio and WhatsApp Pay. Sharma has been vocal against WhatsApp Pay, saying it has got favourable treatment.“His biggest problem was WhatsApp. Unless they get a truly get a CEO who can make a difference I feel that this whole battle will be won by Paytm,” said the founder of a company in the payments space who did not want to be named. “Some of the newer services (Sharma) has launched, like Paytm Money, have started seeing results.”Vijay Shekhar Sharma, meanwhile, has another goal in mind: To put together a board meeting that includes Alibaba’s Jack Ma, SoftBank’s Son and, of course, Buffett, whom he is yet to meet.

from The Economic Times https://ift.tt/2NvoXRl