How an unlikely David felled a Goliath in the cloud telephony wars

In a world where fund raising is often conflated with winning, the story of Ozonetel and Knowlarity tells us why this isn't necessarily the case

The Pledge

Mild-mannered.

This is the word most people would use to describe Chintalapati S Murthy, aka CSN, the founder and chief executive of Ozonetel, a cloud telephony startup in Hyderabad. But even as mild-mannered and composed CSN was, he couldn’t help but feel butterflies in his stomach on that day.

November 3, 2011

A day that would change it all for CSN and Ozonetel.

After weeks of parleys, venture capitalists (VCs) from the most prestigious firm in India were landing in Hyderabad for, what CSN believed to be, the final set of discussions towards closing a Series A investment in the company. (Series A is typically a company’s first significant round of venture capital funding.)

CSN Murthy, CEO of Ozonetel

Everything seemed to be lining up well.

The founding team consisted of veterans in telephony, hardware and embedded systems. They were going after a large emerging market of telephony services for local businesses–an opportunity that had arisen from the unshackling of telecom in India after decades of stringent government control. Ozonetel was founded in 2007 and had since built a small but meaningful business with all key metrics trending upwards.

 The confabulations with the VCs seemed friendly and transparent; CSN felt the fluttering in his stomach subside. The VCs seemed impressed with Ozonetel’s numbers and the discussions ended with a handshake and a pledge to follow up shortly.

CSN couldn’t resist feeling a sense of exhilaration.

Was this the break that they had been looking for?

The Turn

January 19, 2012

It had been more than two months since the VC’s visit.

Often, CSN had tried to get in touch with them. But on all these occasions he got the same response: “We are working on next steps and will follow up soon.”

CSN wondered if it was time to ping them again. Then he picked up the newspaper and read the headline in the startup section.

“Cloud telephony company, Knowlarity raises Rs 34 crore from India’s leading VC”

A shiver went up CSN’s spine. The VC, he was banking on, had just invested in a competitor.

His worst unspoken fear had just come true. Not only would it be difficult to battle a well-funded competitor, it would be doubly difficult to him to raise money as the punters seemed to have already picked the winning horse.

Was the end nigh?

The Prestige

March 31, 2015

In the months that followed, Knowlarity raised another huge funding round–bringing the total money raised to Rs 150 crore.

In this period, Ozonetel raised zero funding.

Knowlarity, which was founded in 2009, expanded its team to 517 people.

Ozonetel had grown to a team size of 40, not significantly different from where they were two years back.

It wouldn’t be amiss to believe that as a straight-up contest, Knowlarity would have obliterated Ozonetel.

Right?

Wrong.

For the financial year ending March 2015, these were the figures of the two companies:

For its Indian entity, Knowlarity had an operating income of Rs 22 crore.

Ozonetel?

Rs 20 crore.

Almost at par with Knowlarity.

Provisioning for the different way in which revenue was recognized by the two companies, Ozonetel probably had a higher apples-to-apples number.

But there was one significant difference.

To get to this revenue, Knowlarity lost Rs 17.5 crore for the fiscal. If other non-operating incomes were factored in, the company would have lost more than Rs. 30 crore for the year.

On the other hand, Ozonetel showed a profit of Rs 88 lakh–small but meaningful.

You might say that revenue and profits are fine but surely the difference between the two would have been in terms of growth. After all, the main imperative for raising VC money is to grow faster.

The year-on-year growth figures:

Knowlarity: 77% (from Rs 12.5 crore to Rs 22 crore)

Ozonetel: 277% (from Rs 5.3 crore to Rs 20 crore)

Amazingly, Ozonetel far out-performed Knowlarity.

So how did a David fell a Goliath–how did a bootstrapped company get the better of its well-funded competitor?

To find out the answer, read the rest of this story here (free sign-up) - https://the-ken.com/how-an-unlikely-david-felled-a-goliath-in-the-cloud-telephony-wars/