Before this year is through, two imminent deals will determine how the fortunes of India’s venture capital (VC) industry play out in the upcoming year. Japan’s SoftBank Group Corp. holds the strings to both deals. The first is a secondary transaction that will see SoftBank buy shares in Bengaluru-based e-commerce company Flipkart from its largest investor Tiger Global Management, among others. The second deal is still a work-in-progress all the way on the other side of the world. A consortium of investors led by SoftBank has made an offer to buy a stake in San Francisco-based ride hailing company Uber Technologies Inc. In India, Uber competes with Ola, owned by Bengaluru-based ANI Technologies Pvt. Ltd, which counts SoftBank as its largest investor.
Let’s first talk about Flipkart. In August this year, SoftBank’s $93 billion Vision Fund, instituted to pick up meaningful stakes in tech firms across the world, struck a deal to buy a reported 20% stake in Flipkart. SoftBank is expected to fork out up to $2.6 billion to close the deal. An estimated $1.4 billion of that is being injected directly into Flipkart. The remainder, anywhere between $1.2 billion and $1.4 billion, will be used to buy shares from some of Flipkart’s early investors and existing and former employees. The secondary sale of shares, being managed by Goldman Sachs, is currently under process. On 30 November, Mint reported that SoftBank has offered to buy shares from investors and existing and former employees of Flipkart at $85-89 a share. The price range offered puts the firm’s valuation at $9-10 billion, a knockdown from the $11.6 billion post-money valuation it fetched when it raised capital from SoftBank in August.
Even at the lower valuation, the share sale spells a big payday for venture capital firms Accel India (the local franchise of Palo Alto, California- based Accel), IDG Ventures India and Kalaari Capital. Bengaluru-based Accel was the first institutional investor in Flipkart, starting off with a $1 million seed investment shortly after the company was founded back in 2007. The exact stake it currently holds isn’t known. Both Kalaari and IDG landed small stakes in Flipkart by virtue of the acquisition of their portfolio company Myntra by Flipkart in early 2014. IDG sold a portion of its 1% stake in early 2015 for a reported Rs940 crore (about $150 million at foreign exchange rates at the time) and currently holds a reported 0.9% stake. Kalaari’s stake in Flipkart is not known. The returns they reap from Flipkart will help extend their runway as investors, especially crucial now given the two-year downturn currently in session in the local venture capital market. Both firms are currently in the market to raise new funds.
The big exit that everyone, especially local venture capitalists, is keeping tabs on though involves Tiger Global. The New York-based hedge fund, which invests in unlisted firms from separate VC funds, has been a prolific investor in India’s start-up market for nearly a decade. Flipkart is its biggest bet in terms of capital invested—estimated at nearly $1 billion. It’s exact stake in the company isn’t known but multiple unconfirmed media reports estimate it at about 30%. Mint reported on 30 November, citing unnamed officials, that the hedge fund expects to sell shares worth $700 million through the sale of shares to SoftBank. However, a Reuters report on the same day said, also citing unnamed officials, that the hedge fund is expected to sell shares worth $450 million. Either way, it would be the largest cash payout to a single investor in this market. The gains in terms of IRR (internal rate of return) for Tiger Global are less clear at this juncture. Reports suggest that Tiger will be left with a reported 20% stake in Flipkart, on par with SoftBank. At Flipkart’s current valuation, it still holds a significant upside for its remaining investment. A successful exit from Flipkart for its largest investor would bolster confidence in the Indian venture capital market’s ability to deliver above par returns. Returns, rather the lack of them, has been a sticking point with limited partners (investors in venture capital funds) in the face of the billions of dollars that have been sunk into start-ups here over the past decade. The challenge though will be to keep Flipkart’s valuation at a level that remains profitable for its investors. The company has already seen its valuation slide very quickly from a peak of over $15 billion and it faces the very formidable challenge of holding its own against Seattle-based Amazon, which has lately been making fast work of gobbling up market share in the country’s e-commerce sector.
Over at Ola, the prospect of its largest investor, SoftBank, backing its fiercest competitor here has loomed large for nearly six months. As per the terms of a formal bid submitted late last month, the SoftBank-led investor consortium hopes to corner a nearly 14% stake in Uber. Apart from SoftBank, the consortium includes San Francisco-based investment firm Dragoneer Investment Group, private equity firm TPG, China’s Tencent Holdings and Menlo Park-based venture capital firm Sequoia Capital. The outcome of the bid is expected to be known in a couple of days.
SoftBank entered Ola back in 2014, leading a $210 million investment round into the company. Since then, it has scaled up its investment in the company over multiple funding rounds. The most recent was in October this year when it joined a consortium of investors, including Tencent Holdings, to pump $1.1 billion into the company. SoftBank reportedly owns more than a 30% stake in Ola. While the Japanese conglomerate clearly remains interested in Ola, the outcome of the Uber bid holds the key to how it may choose to manage the investment. Talk of a merger with Uber is already doing the rounds. SoftBank founder and CEO Masayoshi Son has made it amply clear in the past at various public forums that his larger vision is to create a global network of ride-hailing companies and consolidation within that network will always be a consideration. If a merger is on the cards, it could complicate matters for some of the early investors in Ola. In the event of a merger with Uber, it is unlikely that any of those early investors will receive stakes in the merged entity. Among the group of early investors, notable are Tiger Global, Mumbai-based Sequoia Capital India, the local arm of California-based VC firm Sequoia Capital, and Mumbai-based Matrix Partners India, the local franchise of US-based venture capital firm Matrix Partners. Media reports suggest that Tiger Global is already in talks with SoftBank to sell a part of its reported 15% stake in Ola to the latter. Incidentally, last month, Lee Fixel, who leads Tiger Global’s VC investments, resigned from the Ola board. It’s also probably no coincidence that Sequoia is part of the SoftBank-led consortium that’s currently making a bid for a stake in Uber.
SoftBank will most likely make cash payout offers to these investors in lieu of their stakes in the event of a merger, much like it did when it sought to merge Snapdeal with Flipkart earlier this year. How generous it is with those cash payouts will determine whether or not the early bets have been worth the money and the wait. Both SoftBank and the VC firms involved would be keen to not repeat the well-documented disaster that the proposed Snapdeal-Flipkart merger became after months of negotiations.
Both Ola and Flipkart are among India’s celebrated technology unicorns—start-ups valued privately by investors at $1 billion or more—and therefore in some ways calling cards for local venture capitalists invested in them. How the impending deals involving these two companies unfold over the next few days will to a great extent set the tone for the venture capital market next year.