Punch is a mobile-first stock broking app which is focused on enabling options trading for retail traders, especially part-timers with day jobs. They’ve pioneered a single-screen trading experience to trade from mobile.
Our investment thesis in Punch hinges on three key attractions:
1. Attractive market
Large brokerage fee pool: Punch, at present, operates in the retail options brokerage market in India. It is our estimate that during the period of the fund’s investment horizon, i.e. by 2031, the market would be in excess of $5B in brokerage fees and still growing fast (doubling every 3-4 years). This is only retail and options. Over time, Punch has the optionality to enter adjacencies which will further increase the market size they can address.
High profitability: Discount brokerage business model is extremely profitable with prominent discount brokers seeing in excess of 40% PAT margins. Discount brokers make a fixed fee income of INR 20 per trade, and given the high trade frequency of the segment Punch plans to address, this should yield a high LTV even if an average trader’s life is less than a year.
GTM window: This market has characteristics of what we internally call a treadmill market with constant influx and outflux of retail traders. This provides an opportunity to a new broker to acquire new traders and not be only reliant on replacement sales with existing traders.
Favourable regulatory structure: Regulatory framework around open interest (OI) limits in this segment prevents concentration by incumbent brokers, and is favourable for new brokers. In fact, in our trader diligence we heard of traders switching their broker as their old broker began to hit the OI limits. After all, having certainty on the trade going through is paramount to the trader.
2. Unmet need gap
This is a question we got from almost all of our internal team members during the decision process i.e. “Why does the world need another stock broker? Aren’t there enough already? What is the customer’s need gap that is still unfulfilled and why is it still unfulfilled in spite of many players in the market?”
Our trader diligence was fascinating. Prima facie, none of the traders we spoke to acknowledged they had a problem. To them, it’s how the world worked. Only when we probed them deeper did we get some hold of their problem, or their latent needs. Problems were as follows:
Difficulty in switching between apps on mobile: Before deciding on a specific trade, traders consume information across their brokerage app, analysis apps and the underlying chart (typically provided by a third party like a TradingView or ChartIQ), and often these are different apps on the mobile device. In real time, it’s uneasy to switch between these multiple apps to arrive at the trade.
Lose visibility of the chart during trade execution on mobile: Given the small screen, it doesn’t provide an opportunity to see the chart while executing the trade. This leaves the trader with high anxiety not knowing if the underlying price has moved. Do note that options is high leverage trade and few points can make all the difference in a trader’s P&L.
Tedious multi-step workflow for trade execution often mirroring the desktop UI/UX: This amplifies the anxiety (mentioned above) for the trader. Traders are constantly worried about not making mistakes, and given the high leverage, worry if their income will get wiped out. Most stock brokers are desktop-first, and ended up porting the desktop UI/UX to mobile (with some changes) as opposed to reimagining from the ground up.
For all of the above reasons, traders carry the belief system that mobile-only trading is not feasible. There is a need for at least two devices, ideally in the comfort of their homes. And for part time retail traders with day jobs, this becomes very restrictive given the market hours are during the day time.
Our prognosis is that the above is a symptom of lack of an adequate product to support the mobile-only trading experience. And there is a need to reimagine the product for mobile-only. And that sits at the heart of our investment thesis.
3. Founder-market fit
(L-R) Punch Co-founders Ajit Dandekar, Hiral Jain, Amit Dhakad, Arshad Fahoum.
There is a high founder-market fit in Amit and Hiral who’ve previously built a highly loved product for this audience and deeply understand their needs. The first product, i.e. MarketPulse, a trade analysis product is used by over 600K traders on a monthly basis, all of whom have been acquired organically. They’ve never spent a dime on marketing. Instead, just built a great product which marketed itself. The team has now embarked on their second product, i.e. Punch, a stock broking app for the same audience.
With their domain experience, trader empathy, product-first DNA, and passion for this segment we believe there is a strong founder-market fit in Amit and Hiral. Visit their website at www.punch.trade and download the app from Play Store.