Do Indian start-ups need protection from foreign competition?


I use an Ola cab almost everyday. It is reliable, reasonably cost effective and in the wake of the government’s recent demonetisation drive, a lifesaver because of an efficient e-wallet built into its mobile app. I also like the fact that this online cab hailing service is made available to me by a home-grown company that was a tiny start-up not too long ago.

Ola is able to deliver all these things because about four and a half years ago, Tiger Global Management, a hedge fund based in New York, bet $5 million on its founders Bhavish Aggarwal’s and Ankit Bhati’s bid to disrupt the largely unorganized domestic taxi market. Tiger’s bet fired up the imagination of other investors. Since then, more than a dozen other foreign investors, including venture capital firms, hedge funds and strategic investors, have pumped about $1.2 billion into the Bengaluru-based company.

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The narrative is somewhat similar for e-commerce company Flipkart, also initially backed by Tiger Global. In the decade since its inception, it has raised nearly $3 billion, almost all of it from foreign investors. So have several other consumer Internet startups in India that have ridden an unprecedented wave of foreign capital over the past few years to create a whole new generation of businesses. Their growth has encouraged a host of foreign consumer Internet players to set up shop here, thereby growing the market and broadening the array of services available to consumers.

It is ironical, therefore, even ludicrous, that lately Aggarwal and Flipkart founder Sachin Bansal have been at the forefront of a clarion call to protect Indian start-ups from foreign competition and more strangely, foreign capital. The latest salvo was fired this week. Speaking at Carnegie India’s Global Tech Summit in Bengaluru, Bansal called for government intervention in protecting Indian start-ups from foreign competition.

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“What we need to do is what at some level China did. They told the world that we need your capital but we don’t need your companies,” Bansal said. His peer Aggarwal thinks that the consumer Internet market is currently “being distorted by (foreign) capital.” This isn’t the first time Ola has spoken out against foreign capital. Last month, the company’s chief operating officer Pranay Jivrajka told wire service PTI that, “There is an urgent need for adequate regulation to curb predatory pricing and capital dumping in the ecosystem…”

The grumbling has its roots in the recent misfortunes that have visited both these companies. The last time that the two celebrated unicorns, the term used by venture capitalists for startups privately valued at a billion dollars or more, raised any capital was more than 12 months ago—a rare occurrence in their short histories. In addition, both have had trouble on the valuation front.

When Flipkart last raised funds in July 2015, it was reportedly valued at a shade over $15 billion. Since December last year, however, it has been plagued by a series of valuation markdowns by foreign mutual funds that hold minority stakes in the company. The latest came in November when a mutual fund managed by Morgan Stanley marked down the value of its shares by 38% to $52.13 a share from the June quarter, the fourth time it has done so over nine months.

Ola’s valuation, reported at $5 billion when it last raised capital in November last year, has also recently taken a knock. In November, Mint reported that Softbank, one of Ola’s primary investors, had written down as much as 58.1 billion yen ($555 million) in two of its largest investments here—e-commerce marketplace Snapdeal and Ola. The same month, Bloomberg reported that the company may have to accept a 40% cut in valuation when it raises funds next.

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It’s no secret that these misfortunes are related to a great extent to the grief that these two companies have suffered lately at the hands of San Francisco based Uber and Amazon, the iconic e-commerce company from Seattle. Ola and Flipkart are locked in a fierce battle for dominance in the Indian market with Uber and Amazon respectively. It doesn’t help that Uber and Amazon have significantly deeper pockets than their Indian rivals and are beginning to cause serious damage to their market shares. Amazon’s rapid progress here in particular has prompted investors to turn cautious on writing out large cheques to homegrown e-commerce companies, at least at prevailing valuations. That, in turn has impacted both valuations and access to capital in the consumer Internet sector.

In raising the call for closing borders on foreign competition and capital, Aggarwal and Bansal are obviously doing consumers a disservice. They probably don’t care. But, a greater disservice is to the start-up ecosystem that they hail from and claim to be speaking for. India wouldn’t have the vibrant start-up ecosystem it has today if it was not for the foreign money that started to come in 10 years ago through venture capital. Even today, more than 80% of India’s venture capital industry is financed by overseas investors and this money flows into young start-ups that are just beginning to find their place in the world.

Flipkart and Ola have both been big beneficiaries of this capital inflow and grown into admirable companies. It is only fair that they allow others to do the same.