Nithin Kamath, a boyish, forty-something in t-shirt and jeans, grins sheepishly, on the video call as he describes how he went bust some two decades ago. It was 2001 and having traded futures and options with funds he had borrowed from family and friends, he had burned through all his cash. "It was…quite bad. I was down by around ₹2 lakhs and had to get a job at a call centre in Bengaluru," he says still amused.

Today, he can afford to smile. Kamath and his brother, Nikhil who lived through a similar crash and burn are founders of Zerodha, India's largest online stock brokerage company. With 5.7 million clients (retail), Zerodha accounts for 15% of all retail trading, and last fiscal even generated around ₹2500 crore in revenue and about ₹1000 crore in profit. As first-generation entrepreneurs whose father was a Canara Bank branch manager and mother a music teacher, the Kamaths don’t just embody every Bangalorean entrepreneur’s dream—they’ve gone one step further and set a trend for others to follow.

Young upstarts much like themselves, have come into the fray. Upstox, 5 Paise and Groww are tackling the online brokerage business with savvy and strategy, using content and online marketing to rope in new customers, who abound in plenty. The difference is the newbies are backed by heavy hitters. Investors for Upstox include Tata Group patriarch Ratan Tata and Tiger Global; India Infoline for 5paisa and online investment firm Groww—which is also backed by Tiger Global—is pushing deeper into the asset management space betting on mutual funds and recently acquired Indiabulls Asset Management Company.

Since 2020, the Online brokerage space saw around 11.3 million new Demat accounts being added and while a significant chunk of that was for Zerodha (3.7 million), other players are also growing fast.

Zerodha is aware of that. Today any rival player can say the same things Zerodha does and tout transparency, low cost and platform reliability as features. The other factor is that established legacy players like ICICI Securities, Kotak Securities, Motilal Oswal, and the Dinesh-Thakkar led Angel Broking remain entrenched with deep relationships, strong brand equity and even stronger ongoing efforts to stay relevant and competitive.

So apart from chutzpah, smart young leadership, and a first-mover advantage online in a big way, what makes Zerodha special? “The moat for us is technology,” says Nithin, saying it’s all that he and the management team discuss—day in and day out. While that’s somewhat a given in business today, it’s more intrinsic to trading.

Technology in the online brokerage world alludes to robust architecture, best of breed software, sophistry, speed and user-friendliness. It’s not to be scoffed at, given how some of the market’s largest financial players struggle with it. HDFC Securities, for example, constantly grapples with it, despite it being run by India's best capitalised and best-managed bank. Therefore, technology today is also about content, and affiliate or performance marketing programs. While PE-funded start-ups can burn cash to “buy” consumer loyalty, it’s never cheap to acquire customers. The zero, discount-broking model can’t work forever when it costs anywhere from between ₹900 to ₹1400 to acquire a customer, say analysts who track the sector, and if the game is going to involve “buying market share” then anyone with the funds can crack that model.

There are other hurdles. When capital markets fall, as they are wont to do by say, 20-30% a customer who opened a demat account may simply stop trading instead of rebalancing the portfolio and wait to see value return. Advising clients on how to tackle that is often counter-productive for his revenue but Zerodha sees it as a challenge and as a service to help customers, Nithin says. That’s not just a marketing spiel. Products like Nudge and Varsity (more on that later) do just that.

Where Zerodha’s founders stand tall is in how they understand the levers of the business ground up. Back in the early 2000s when they say they lost most of their cash, he (Nithin) started working at the Manipal Infocom (Dial M) BPO and traded by day. He had a good run, trading for the next five years, while Nikhil who's seven years younger, did the same and the two rode the trading wave along with jobs at call centres.

Then one bright summer day in 2005, Nithin says met an expatriate at Platinum Bodies, a fitness Center in Jayanagar 4th Block. The man had just returned from the U.S. They got talking, Nithin showed him his trading scorecard and in a jiffy, the foreigner had handed him ₹25 lakhs to trade with. "I made money for him, and then more customers started getting on board,” he said.

Between living with girlfriends in apartments and trying their hand at being traders, both brothers figured out that they could potentially disrupt the incumbent business model for stock broking if they slashed their commissions.

Then, Nithin came across NOW, the National Stock Exchange's in-house trading platform, which was free for registered members and along with his brother, he started Zerodha Broking on the basis that this was going to be a game of scale for them with very low or zero fees.

They took free software from the National Stock Exchange and went about meeting their first few thousand clients personally, knowing that financial services were all about credibility, which they were still building.

Their rates were so low it was almost free. If someone charged ₹50,000 for a derivatives trade of ₹1 crore, Zerodha would only charge ₹20. So therefore for the record, Zerodha isn’t entirely free, says Nikhil Kamath who is Co-founder of Zerodha and Chief Investment Officer for True Beacon, adds but states that it’s all about volumes when it comes to driving revenue. “70% of all trading in India is around derivatives as opposed to equities."

It’s also worth noting that while their retail trading rates were free for equities, they did charge a flat ₹20 fee for derivatives trading which accounts for the majority of trading volumes in India as opposed to a percentage like other platforms did.

It was a small office in Banneerghata Road in 2010 that Zerodha started life in. Before Zerodha, brothers ran a Reliance Money franchisee firm called Kamath Associates because "It sounded credible which is important in financial services," Nithin says.

Presently, as then, Zerodha’s top management is structured thus: Nikhil is the trader, Nithin the business manager and Kailash Nadh the technocrat (more on him later).

Was there a reason for that division of responsibility? “We are both quite stoic although I show more reactions; he (Nikhil) is the better trader. Anything other than people skills, he’s better than me at it,” Nithin jibes, as elder brothers do.

Ten years later the brothers, along with chief technology officer Nadh, continue to run a financial services group whose performance has led to the Kamaths’ being feted as the youngest billionaires in India. Yet, Zerodha has none of the wild swashbuckling stories and overselling that made Wall Street brokers the stuff of folklore. No boiler-room mindset that drives their customer acquisitions strategy. No wild bonuses or over the top compensation for its high performers.

If there is an unusual streak it’s the willingness to discuss their business in public and reach out to their stakeholders often and directly to make clarifications. Think of Zerodha in some ways as the Tesla of the stock brokerage world. It looks to simplify what has earlier been a complex and technical service industry but also upends how it interacts with its community.

“The real problem to solve is not being a mother broker—but to build a niche user experience to expand the market—which we think needs another trading platform with a thematic investment platform to buy and sell ideas,” Nithin says. He is referring to Smallcase—which is a start-up funded by their incubator Rainmatter and where the idea is to help custom design investment ideas. For example, if the monsoons were upcoming it would hold design investments based on that theme.

In a nation with socialist overtones where stock-broking is seen akin to gambling, it’s smart thinking to be seen as a fintech player.

Much of that handiwork is credited to Nadh, a PhD in Artificial Intelligence who bumped into Nithin in the early days when he had moved from Kerala to Bangalore because of “better Internet", he says. He hit it off with them and has been part of the journey since.

Nithin and the team built Zerodha’s business by being social. He ran large Yahoo communities and online forums under pseudonyms, with Orkut communities with the mission of creating a buzz and sharing knowledge. He even posed as a customer help expert using the name “Sachin.” Customers on chat forums still ask where Sachin is, he shares.

Fortune favoured the brave

But even as the young entrepreneurs were building the company, landscape shifts were working in their favour. SEBI and associated agencies in the financial world had realized the importance of stock market dematerialization which essentially pushed physical tracking into the digital domain around 1996, says Kajal Gandhi, senior analyst at ICICI Securities.

It made tracking and investing in IPOs and the retail stock market easier and simpler. Then the online trading boom was also accompanied by a flurry of IPOs in the last two decades with big-ticket listings that included Indigo Airlines, Coal India, and others. The year 2007 itself saw over 100 IPOs come to market, says Gandhi.

Then she adds, in recent times “SEBI has laid down rules where net worth limits were raised for brokers, and stringent norms were put on margin trading facility provided to clients, resulting in smaller players getting weeded out. That led to the consolidation within the sector, with market share moving to larger players.”

Other factors, willy-nilly also supported the rise of Zerodha.

Demonetization in 2016 pushed trading and investing faster online than ever before as did the rise of WiFi and free internet by the likes of Reliance Jio the same year. All that pushed trading onto the mobile platform, Shah said.

The low-key Nadh is described by the founders thus “he is as core to the business as us, it’s just that he doesn’t care too much for the limelight,” Nikhil says.

Nadh for his part tells Fortune India, that his priority is focused on “having the creative freedom needed to create the kind of technology needed for Zerodha and ensuring its highly scalable.” In the last 12 months, for example, Zerodha added millions of users to its platform but without having to double IT expenses or scramble to upgrade software.

Nudge, as exhibit number one, is a recently launched feature that actually serves as an intuitive intelligence adviser that tells clients whether it’s risky or not to be pursuing trades with a ‘nudge’.

Trading is linked to disposition bias Nithin says it’s ridiculous how humans can act herd-like. “Nudge, for example, scares the heck scare you when you when you buy a volatile penny stock and every time it does that it is a deterrent so it causes revenue loss to Zerodha but it is good for customers,” Nithin says.

Then Kite, which is Zerodha’s present flagship trading platform, was created with a similar focus Nithin recalls. Until 2015, Zerodha’s bread-and-butter in revenue was from the active trading community but the Kamaths felt it was shallow in terms of traction and sophistication.

In December, Nadh and Nithin were sitting at an airport in Cochin en route to a Malayali investor conference and were discussing how they needed to grow the business faster. The feedback they were getting was that if one wanted to trade and speculate go to Zerodha but if one wanted to invest then ICICI’s trading platform was the choice, Nithin shares. So they rebuilt and launched their platform called Kite and by January it went viral.

Like for branches, of a bank because the real moat used to be the physical presence for brokers as well, going digital meant first building the underlying infrastructure that was called Kite Connect and was a set of APIs (application programming interfaces). Kite Mobile was the app, and the two platforms were faster and intuitive to use according to Zerodha.

The point of it all? “This is a product war, it’s no more a broking war and it’s all about the customer,” Nithin says.

To that extent, all of Zerodha’s properties are pivotal and eventually designed to drive traction and footfalls. Coin (a Zerodha app that allows for Mutual fund investment), Varsity (a portal with free modules on markets, trading and information) and Rainmatter, a fintech accelerator and incubator that serves as a steady pipeline of ideas for the group and so far has invested in around a dozen firms with investments range $100,000 and $1 million. Varsity is interactive and is essentially an Investopedia-style open-source educational portal but differs from it in that it has a structured approach based on practical application, Rangappa says.

Technology aside, Nadh also has a view on what Zerodha stands for, and that is “to democratize trading for the everyday retail trader and investor along with content geared to educate those who need it.”

What does he make then of True Beacon, the alternate investment fund /hedge fund that Nikhil has been running for the last few years since their proprietary fund was wound down. A point of detail: In recent times, Nikhil increasingly is more involved with True Beacon while Nithin runs Zerodha. Nadh says “Catering to super-rich people (True Beacon’s minimum investment size start at $2 million) and making more money for them is very different from what we are doing,” but he’s okay with the different ideas and objectives that the group’s founders have.

The riposte from Nikhil to that is “For all the other work we are doing we can’t do it in isolation, we need a network of influential people who can also align with some of our deeper objectives.”

He’s referring to a host of other businesses that he is also looking at tapping and which include mutual funds, asset management and more. True Beacon One, which was launched in September 2019, Nikhil says, it delivered a return of close to 50% in the calendar year 2020, beating the Nifty50 by over 30%.

Nikhil adds that it’s ridiculous how market valuations have become and advises caution to retail investors, and recommends a more active hedging strategy. “It’s just up every day, can't go on forever.”

Culturally, Zerodha is an anomaly for an early-stage company. It is not chasing valuations, it raises no external funds, and wants no investors to get on board. Nikhil says that it would interfere with speed and agility. It is run by young first-generation entrepreneurs who have managed to stay the course without getting into a tangle, sticking to their core business, and with the management team remaining integrated.

That’s not all. There are no monthly financial projections and targets that managers sit around and strive to achieve. The conversation is almost always around product and services, and how to heighten user experience, Nadh affirms, saying that his team of around 30 engineers is one of the smallest amongst its peer group.

As Nikhil affirms “we play a lot of TT and basketball daily and don’t speak too much about work and we have rooms right next to each other in the office. We never had big strategy meetings. No five-year plans. Not even a 6-month plan. The logic is to be nimble and change as competitive landscapes demand and keep a keen ear out for all happening.” he says.

Of course, strategy conversations do happen but mostly on google chats amongst top management, shares Karthik Rangappa, vice president of education services at Zerodha who’s been an early fixture at the firm.

The Killer Advantage

How do they stay ahead of the pack? Nikhil says that “The focus is on being a broker and creating value. Our competitors try to be everything to everyone. Over the last 11 years, we built a lot of credibility and are very transparent but the real problem was the pricing of others and hidden opacity.” That’s what worked for Zerodha - transparency and all the people we serviced became salesmen for us."

Many new-age companies go big on HR benchmarks and hiring practices, with rigorous interviews and blue-chip head hunters. Zerodha’s founders hired their first 150 employees themselves, and seem almost averse to hiring from the best schools. Instead, they give preference to hunger and raw intelligence as opposed to Ivy league degrees and pedigreed corporate track records. “The guy who went to Harvard isn’t as hungry as the guy who didn’t,” Nikhil says. Instead, the founders created a “Z Team” that consists of employees who are the smartest and carved into an internal think tank that the founders liaise with frequently.

Is there a difference in how the Kamath brothers see the business grow?

While Nikhil acknowledges that his brother is his best friend and partner and always part of the journey, he is aware that the True Beacon hedge fund he started and which is run as an Alternate Investment Fund for the super wealth ($2 million minimum ticket size) is an antithesis to Zerodha.

But the additional revenue and investment businesses that include mutual funds, high net worth asset management (True Beacon) and more would also mean that the Zerodha Group could catapult into the next level of growth if it went public for example. So why is it resisting that obvious next milestone? Nithin says that the lack of predictability in his business is what makes going public a challenge. “People ask me how I would do in three years and I say first show me what the NIFTY 50 will look in three years?” He’s also clear that they won’t do loans against property or look to get a banking license. “That’s a very different game.”

The truth is that most of all, what Zerodha’s founders have is the absence of the baggage of success and entitlement and the advantage of not worrying about losing everything which they’ve already done many times over.

After all, there’s nothing less than zero.

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