In 2010, Zerodha & Upstox set out to DISRUPT the stockbroking industry! Fast forward to 2021, - Zerodha: INR 1122 Cr profits, - Upstox: INR 72 Cr loss! Here’s how Zerodha, a bootstrapped startup, beat VC-backed Upstox, to become the largest stock broker in India 

Structure: 1) Similarities between Zerodha & Upstox! 2) Comparing their numbers 3) Where is all of Upstox's money going? 4) Zerodha vs Upstox: Whose strategy wins?! Thread continues below Read the full article on buildd — buildd.co/marketing/zero…

1/ Similarities between Zerodha & Upstox It's surprising how similar Zerodha's and Upstox's origin stories are, given they are each other's strongest competitors. Both these companies were born during the aftermath of the financial crisis of 2008. (contd.)

Zerodha founder Nithin Kamath and Upstox founder Ravi Kumar, both started trading when they were 16 years old. Nithin, with his brother Nikhil, founded Zerodha in 2010. While Ravi, along with his brother Raghu & friend Shrini, launched Upstox in 2009! (contd.)

The brother pairs had the same goal: 1. democratize the industry 2. digitize & simplify the space 3. increase transparency In 2015, Zerodha introduced the flat brokerage fee model. Earlier traders were charged a percentage of their trade value as brokerage fees. (contd.)

But, under Zerodha's model, they'd be charged: - Rs 20 per trade - ZERO on equity investments This was pivotal in disrupting the industry & making Zerodha a viral product. Upstox followed suit and these two emerged at the top! (contd.)

In contrast to these similarities, their funding backgrounds are completely different Zerodha was completely bootstrapped from ZERO to 1B! Upstox, on the other hand, was always a VC darling. Out of a total of $81M invested in stock broking firms, $29M was pumped into Upstox!

2/ Comparing their numbers Zerodha & Upstox have cracked the discount model and raced past the traditional brokers. Today, they have a market share of Zerodha ➝ 17% Upstox ➝ 14% Even though these 2 startups are so similar, their financial numbers are very different! (contd)

Revenue (FY21) Zerodha ➝ INR 2729 Cr Upstox ➝ INR 386 Cr Profit & Loss (FY21) Zerodha ➝ (+) INR 1122 Cr Profits Upstox ➝ (-) INR 72 Cr Loss Total users Zerodha ➝ 9 million Upstox ➝ 10 million Total active users Zerodha ➝ 6.2 million Upstox ➝ 5 million (contd.)

So, while Upstox has quickly surpassed Zerodha in terms of the number of users, Zerodha's revenue is still SEVEN times that of Upstox. On top of that, while Zerodha's profits reached INR 1000+ crores, Upstox losses doubled in FY21!

3/ Where does Upstox's money go? Now to figure out why these 2 startups went in different directions, we'll need to break down Upstox's expenses. ➝ Upstox spent a whopping INR 145 Cr on IPL ads ➝ ~65% of Upstox's users join through referrals! So, let's analyze this spending.

A) IPL Ads spend calculation 1) Upstox spent Rs 145 Cr on a 3-year IPL deal. So, in 2022, their IPL ad spend => Rs 145 Cr/3 = Rs 48.3 Cr 2) In 2022, total IPL viewership => 20 crores 3) Upstox's target users are ages 18 to 35. That's 35% of the IPL viewership. (contd.)

4) Target Users => 35% of 20 Cr = 7 crore viewers 5) TV ads conversion rate is ~0.7%. That's 0.7% of 7 crore viewers = 4.9 lakh users 6) Revenue = 4.9 lakh x Rs 199 (fee to open a Demat account) = 9.75 Cr 7) Net Loss = INR 38.55 Cr! That's INR 787 burned to get ONE user!

B) Referrals & Free Stocks Upstox pays the referrer Rs 1200. That's a net loss of Rs 1000. Upstox would also drop free stocks into individual users Demat accounts to get them trading! These very aggressive marketing spends won Upstox its 10M users while burning a ton of cash.

4/ Zerodha vs Upstox: Whose strategy wins?! Upstox's Strategy Now burning cash is one reason for Upstox's massive losses. But, there is more to this story. These stockbroking firms make money through their brokerage fees model. (contd.)

So, user acquisition would do the trick if they followed a subscription model. Meaning Upstox pays once to acquire the user and users pay a regular fee to Upstox. But instead, Upstox earns money when a trade is made. So, the goal is to make users trade more. (contd.)

Now, here's where Upstox's strategy is flawed. You see there are 3 groups of traders 1. Group A ⇒ Equity investors = 1% of total trade volume 2. Group B ⇒ Intraday traders = 9% of total trade volume 3. Group C ⇒ F/O traders = 90% of total trade volume (contd.)

70% of Upstox's users are first-time investors. So, Upstox is basically spending crores to get people in Group A that only make 1% of all transactions. While VCs love to see the users grow, the bottom line remains that these users don't greatly contribute to revenue. (contd)

Zerodha's strategy Zerodha stands firm on its low expense, ZERO marketing spend policy. They also very early realised that while they want to acquire Group A and Group B traders. They ultimately wanted to buildd the BEST platform for serious F/O traders ie. Group C. (contd.)

When other stock broking firms emerged following the same "Zerodha model", they had to stand out. So, they focused on building the best trading platform for these serious traders. And, all their free & organic marketing efforts were aimed to get these users. (contd.)

So, while you won't see Zerodha's ad on your TV, the serious trading communities are in Zerodha's pocket. This strategic move to focus on Group C users helped Zerodha multiply its profits year over year. Now, of course, there is more nuance to this topic. (contd.)

Upstox's ultimate goal through its ad campaign was to get young users to trade. And, they surely accomplished that. Eventually, they want to expand to become a wealth management platform and diversify their products. (contd.)

But given the competitive fintech market that's going to be tough. And, with dwindling active traders, it'll be interesting to see if Zerodha users plateau or fall. But, we've got our eye on this dynamic & we'll be ready to report any new developments. So stay tuned!

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