Netflix’s The Queen’s Gambit may have popularized chess for modern audiences,
but Nikhil Kamath liked it way before it was cool.
Chess teaches you how to work under a structure, in a system,
but yet try and be creative within that system.
So much so, that he dropped out of high school at 14 to play chess full-time.
I don’t think I was the best student.
That was the starting move that eventually led to his trading start-up for retail investors,
which has been dubbed India’s answer to trading platform Robinhood.
We started, actually, maybe five years before they did.
34-year-old Nikhil is the billionaire co-founder and chief investment officer
of Zerodha, India’s largest trading brokerage.
Today, more than 15% of India’s retail trades are done through its platform
as ordinary investors flocked to stocks during the pandemic.
But the school dropout only discovered his passion for investing after playing
competitive chess at national and international levels for two years.
No one was going to hire me without a college degree,
so I mean I had to do something which didn’t require one.
Inspired by his elder brother, Nithin, he took to trading when he was 17,
teaching himself on the go.
It went well and soon, the pair was investing for family and friends.
Along the way, they felt that the investment process was too complex.
The problem back in the day, I’m talking about
11 or 12 years ago, is cost was very high. Brokerage fees were incredibly high in India.
And for a full-time trader there were many barricades or barriers
one had to cross before he could actually be profitable in any consistent kind of manner.
So the Bangalore-born brothers set to work, using their savings to build a
simple and affordable brokerage platform for everyday investors.
In 2010, Zerodha, a combination of zero and rodha, the Sanskrit word for barriers, was born.
Unlike most startups, the company hasn’t taken on any external investment.
We’ve been different in a way from other companies as in we’ve never taken on
investors or debt or never really raised any capital.
Our ethos from the very beginning was build a better product,
and word of mouth will bring clientele to you.
In the decade since, Zerodha has grown through word of mouth as appetite for investments beyond
gold and property grew in India. But in 2020, all that changed under the pandemic.
At the height of lockdowns, the company doubled its registered users to over 4 million.
The pandemic has been good to us, which is a strange thing to say.
People had a lot more time, people were at home and, unfortunately,
in many cases, they were in a position where an alternate income could have been very useful.
Shailesh Lakhani, managing director at venture capital firm Sequoia India, told me more.
In India in the last year what we saw was that brokerage account openings doubled over 2019. I
think we had 10 million brokerage accounts opened in 2020 versus just under 5 million in 2019.
And I think It’s driven by a few different factors. One, that it’s just become
a lot easier with the financial services infrastructure to open a brokerage account.
Second, mutual funds in the past several years have tended to underperform
the equity indices or their benchmarks.
And as we’ve had rising markets aside from the coronavirus, that fear in March, April, May,
the markets have been pretty easy to make money in for a lot of folks.
In 2020, the average age of a Zerodha investor fell from 32 to 30. That has drawn parallels
with U.S. trading platform Robinhood, which saw a similar surge in millennials during the pandemic.
Nikhil says that could pave the way for a future expansion into the U.S.
Regulation in India around broking is a lot higher than it is in America.
But that being said, the end-user experience, the technology of it all,
is something that we could both compete on.
So we would look at approaching their market at some point and seeing
if there are ways in which our products can integrate with what is available in America.
Even as the financial technology space gets increasingly competitive,
Zerodha has no plans to raise more capital, unlike its competitor Robinhood.
That hasn’t prevented talk of the entrepreneur’s growing fortune, however.
In October 2020, the Kamath brothers joined Forbes India Rich List with a combined
wealth of around $1.6 billion, as 34-year-old Nikhil was named India’s youngest billionaire.
For a while now, I don’t think financial motives have been the
focus. I don’t think it has been the most important thing and that’s set to continue.
But I think more access to capital gives you
the room and the courage to go out there and try new stuff.
And that’s exactly what he did. After struggling to find a cost-effective way to manage their
growing wealth, Nikhil and Nithin once again set out to disrupt the investment industry,
this time for high-net-worth individuals, or people with around $1 million in financial assets.
In 2019, the brothers launched True Beacon as an asset management firm for wealthy clients.
What I realized are there are many inefficiencies in the model.
The fund manager or the fund house and the client are never aligned in a way.
Unlike traditional funds, which charge clients a fee for managing assets,
set up costs and annual fees, True Beacon only charges clients a performance fee on gains made.
Nikhil says that 10% cut drives the firm to achieve better returns.
If the client doesn’t do well for any reason over a five-year period,
we have no revenue as a company.
So we’re really putting our necks out there and saying we will create
something which is different, which is totally client-aligned and very,
very transparent. I guess time will tell as to how that goes.
True Beacon’s India-focused flagship fund aims to outperform the Nifty 50,
the country’s benchmark stock index, by 6-8%.
In its first year, True Beacon claimed that its fund beat the Nifty benchmark by over 26%.
Meanwhile, client volumes grew as much as 20% month-on-month as wealthy international
investors sought refuge in Indian stocks amid rising US-China tensions.
Nikhil is now hoping the company could hit a billion-dollar valuation within the coming years.
It will probably be a few years before word gets around and people actually compare like to like.
But when it does and it scales, I think it will be a company that will
definitely bring in some revenue. We hope it will.
Like Zerodha, that could position True Beacon as one of the many
billion-dollar unicorns in India’s rapidly growing start-up ecosystem.
India is currently home to 21 unicorns with a combined valuation of $73.2 billion.
By 2025, that number is estimated to hit 100.
We see a start-up ecosystem really fundamentally underpinned by a couple of aspects.
One being the number of engineers, the amount of people writing software.
In India, depends on how you count, but it’s among
the highest number of engineers that are writing software anywhere in the world.
Second being an interesting consumer market. India’s probably the largest market
that will grow the fastest over the course of the rest of our lifetimes.
Even though his days as a full-time chess player are over,
Nikhil has applied the lessons he learned from the game to grow his companies.
I think right now I’m kind of like totally occupied. I don’t see
myself having the bandwidth to do something new in the very near future.
So over the next six months or 12 months, I think Zerodha and True Beacon are going to be the focus.