As an investor in India’s start-up community, SoftBank Group Corp.’s track record so far has been less than sterling. Even after putting close to $4 billion to work very quickly in a handful of prime assets, the Japanese Internet and media conglomerate continues to struggle to find a foothold in one of the world’s fastest growing start-up ecosystems. At the moment, it is trying to make the best of a bad situation through a series of consolidation moves within its portfolio that it hopes will reverse its fortunes. But will SoftBank get it right this time?
The question becomes important in the context of the monster $100 billion SoftBank Vision Fund that recently raised commitments worth $93 billion from a slew of global investors such as Apple Inc., the Public Investment Fund of the Kingdom of Saudi Arabia, Foxconn Technology Group, Qualcomm Inc. and Sharp Corp. SoftBank’s own commitment to the fund is about $28 billion. The Vision Fund plans to write out cheques worth $100 million, at the minimum, for stakes in public and private sector companies across technology verticals such as the Internet of Things, artificial intelligence, mobile applications, telecoms, cloud technologies and software, consumer Internet and, financial technology.
SoftBank, which currently invests in India from its balance sheet, hasn’t yet articulated how the Vision Fund will play in India. It is very likely though that the Indian market will see investments both from the fund and SoftBank’s own resources. A couple of days before the closing of commitments for the Vision Fund was announced, Delhi-based digital payments company Paytm (One97 Communications Pvt. Ltd) raised a massive $1.4 billion from SoftBank. Mint reported that the deal values Paytm at about $7 billion and gives SoftBank a nearly 20% stake in the company.
It isn’t clear yet whether the Paytm investment is from the Vision Fund or from SoftBank’s balance sheet or from both. But the scale of the investment is in line with the big-ticket bets the Japanese company has come to be associated with through its recent investment run in India. That run got under way sometime in late 2014 soon after Nikesh Arora, a former Google executive, took charge as vice-president at SoftBank. Between October 2014 and November 2015, it pumped nearly $2 billion into five start-ups—cab hailing service Ola, e-commerce marketplace Snapdeal, property search platform Housing.com, budget stays aggregator OYO Rooms and grocery e-tailer Grofers. Prior to this, it had invested in advertising network InMobi back in 2011.
The message sent out by that blistering investment run was clear—capital was no constraint. Neither were valuations. All those investments were made at peak valuations. If anything, SoftBank’s eagerness to muscle its way into prime start-up assets only served to further drive up valuations that were already beginning to look unsustainable by the middle of 2015.
By that time, the Japanese company’s credibility as an investor had already taken a knock on account of a crisis that had spun out of control at Mumbai-based Housing.com(Locon Solutions Pvt. Ltd). The crisis erupted just months after SoftBank led a $90 million funding round in the barely two-year-old start-up. There was talk of mishandling of funds and for months the company’s investors, led by SoftBank, sparred, often in the public arena, with Housing.com co-founder and CEO Rahul Yadav. The crisis eventually ended with Yadav being sacked from his own company by the investors. Housing.com never recovered and was merged with Gurgaon-based rival PropTiger.com in an all-stock transaction in January this year. While SoftBank can’t be blamed for Housing.com’s failings as a business, the incident nonetheless cast doubts on the Japanese company’s ability to manage young, high-growth start-ups.
Unfortunately for SoftBank, Housing.com was only the beginning of its problems in India’s volatile start-up market. At the moment, it is struggling to make good an estimated $900 million investment in Snapdeal (Jasper Infotech Pvt. Ltd), its second largest bet in India. That isn’t going too well either. For the last four months it has been embroiled in another nasty standoff, this time with Snapdeal’s early investors, chiefly Mumbai-based venture capital firm Nexus Venture Partners. With Snapdeal unable to perform and attract fresh capital, SoftBank has taken it upon itself to try and merge the company with its larger, Bengaluru-based rival Flipkart in an all-stock deal that values the former at about $1 billion, a fraction of its peak valuation. Nexus has been unhappy with the terms of the proposed distress sale. For SoftBank, the sale would give it a sizable stake in Flipkart, which is valued at a little over $11 billion, and another chance to still play a meaningful role in India’s burgeoning e-commerce market.
Its investment in Bengaluru-based Ola (ANI Technologies Pvt. Ltd), which it entered in October 2014 by leading a $210 million funding round, isn’t in the pink of health either. In November last year, the company saw its valuation drop to a reported $3 billion from close to $5 billion when it raised $250 million from SoftBank as part of a larger funding round that is yet to close. The company has been unable to attract fresh investors even as it battles San-Francisco based Uber on its home turf. Last month, in its earnings report for the fiscal year ended 31 March, SoftBank said it had written down the value of its investments in Snapdeal and Ola by $1.4 billion. Meanwhile, probably concerned by developments at Snapdeal, Ola recently made changes to its shareholder terms with the objective of restricting the rights of its largest investor, chiefly SoftBank. The changes, Mint reported last month, primarily pertain to restricting the ability of investors to increase their stakes in the company.
Out of its two remaining investments, Gurgaon-based Grofers (Grofers India Pvt. Ltd), which SoftBank entered in late 2015 by leading a $120 million funding round, is said to be in talks for a merger with larger Bengaluru-based rival BigBasket. Like the proposed Flipkart-Snapdeal merger, this one would give SoftBank a stake in BigBasket, currently the largest home-grown firm in the online grocery market. Finally, OYO Rooms (Oravel Stays Pvt. Ltd), which got SoftBank on board as an investor in August 2015 as part of a $100 million funding round, has reportedly been in talks to raise anywhere between $300 million and $500 million since early this year. Some media reports suggest SoftBank may make the investment from the Vision Fund.
While it has clearly stumbled in India’s start-up market, its recent moves indicate that SoftBank remains extremely interested in gaining more than a foothold in the country. The Vision Fund, combined with its own substantial proprietary resources, easily make it the most deep-pocketed investor currently prowling the market. Given its past track record, having more money at its disposal may not necessarily be a good thing for a market that has clearly let too much money go to its head. It would serve everybody well if SoftBank chooses restraint over exuberance when it is ready to play the next round in India.