“While the SoftBank investment gives them (Flipkart) the money to continue the battle in India, I hope they use it better than they have done so far. The key thing is to use the money to create reasons why a customer should shop at Flipkart instead of Amazon which, so far, they have failed at completely despite raising billions of dollars. Otherwise, they will be back to square one when this money runs out.” These sentiments were expressed by K Vaitheeswaran on the sidelines of SoftBank’s investment in the ecommerce player earlier this week.
Vaitheeswaran, who founded Indiaplaza (first ecommerce platform of India and authored the book Failing to Succeed on it), further added, “They are not going to beat Amazon by raising more money but by delivering customers a superior shopping experience. And that is not a function of billions of dollars.” Earlier last week, SoftBank founder Masayoshi Son had stated that the Tokyo-headquartered conglomerate is currently “engaged” with homegrown ecommerce firm Flipkart. The comment came in the aftermath of the falling out of the merger deal between Flipkart and Snapdeal.
And, within a week, SoftBank demonstrated its seriousness towards the engagement by investing in Flipkart. As per a company statement, the round is a mix of primary and secondary capital from the SoftBank Vision Fund. The exact details on the amount of investment by SoftBank remain undisclosed as of now. However, as claimed by the company, Flipkart will have in excess of $4 Bn of cash reserves on its balance sheet, post the investment. This puts the deal amount somewhere between $2-$5 Bn.
The investment is an extension of the earlier $1.4 Bn round from Tencent, eBay and Microsoft. The investment in April 2017 was done at a post-transaction valuation of $11.6 Bn. The deal will give Flipkart’s largest backer, New York-based investment firm Tiger Global Management, a partial exit.
As reported earlier, the $93 Bn tech-focussed Vision Fund is now the primary investment vehicle for SoftBank’s investments in India. Interestingly, in January this year, as per an official statement, the fund was not planning to put any fresh money in ecommerce or India’s consumer technology sector. It only had plans to continue to back its existing portfolio. But, it looks like the failed Snapdeal-Flipkart merger deal has forced SoftBank to reconsider its plans.
Now that its existing portfolio company Snapdeal is on its way to a 2.0 avatar, SoftBank has chosen to focus on sealing its dominance in the Indian ecommerce sector instead by backing the number one player, Flipkart.
At the time of the falling out between Snapdeal and Flipkart, Softbank CEO Masayoshi Son had said that he “respected the decision of Snapdeal founders” to move forward as a standalone entity. But he had also given an indication to continue working on its plans to invest in ecommerce firm Flipkart. So, while SoftBank will most likely hold onto its stake in Snapdeal with no exit in sight, in which it has pumped in over $900 Mn till date, further investment in Kunal Bahl’s Snapdeal 2.0 seems unlikely.
The game is clearly now between two players – Flipkart and Amazon. But can Flipkart’s race to the top be achieved with big money alone? As pointed by Vaitheeswaran, how will Flipkart create value among ecommerce consumers to shop with it and not Amazon? Also, looking at the aggressive role played by SoftBank in the Snapdeal episode, which has even made Ola cautious about SoftBank’s stake in the company, how does Flipkart plan to safeguard itself from this master strategist?
Flipkart Gets Enough Arsenal To Take On Amazon, Snapdeal Gets Sidelined
With an excess of $4 Bn of cash on its balance-sheet, it seems like an early Diwali for Flipkart this year. There is no doubt that this solid boost to its balance sheet will help accelerate investment in driving continued market leadership.
And why so? Because it has enough arsenal for battling Amazon’s India unit, which CEO Jeff Bezos has committed to continuing to fund even after the initial commitment of $5 Bn. Amazon’s total capital infusion in India, as of July 2017, stands at $2.1 Bn. Meanwhile, Snapdeal is currently not a threat as it is trying to find its bearings in its second avatar. More so, with this investment, it gets further sidelined by SoftBank.
Son said in a statement, “India is a land of vast opportunity. We want to support innovative companies that are clear winners in India because they are best positioned to leverage technology and help people lead better lives. As the pioneers in Indian ecommerce, Flipkart is doing that every day.”
Similar thoughts are echoed by technology entrepreneur Vivek Wadhwa. While speaking to Inc42, Wadhwa said,
“It is clear that SoftBank is seeing the potential of the Indian market. By 2022, there will be about 1 Bn smartphones in use, making India the second-largest technology market in the world. An entire digital infrastructure needs to be built there and will provide tremendous returns for SoftBank and others.”
Wadhwa is bang-on about the opportunity in India. India has a thriving Internet population market which is close to hitting 500 Mn smartphone users by 2020. As per the latest Mary Meeker 2017 Global Internet Trends report, overall, India stands second in terms of Internet penetration with 355 Mn Internet users in 2016, while China takes the top position with 700 Mn users.
In line with these figures, is the growth of the Indian ecommerce market which is aiming to touch $220 Bn by 2025. So, while SoftBank missed out on getting a bigger piece of this opportunity and Flipkart through the Flipkart-Snapdeal merger, it has managed to get a foot in the door with the funding.
Angel investor Ajeet Khurana states that, while the news is exciting in itself, its implication is bigger. He says, “A few years ago, the Indian ecommerce/online marketplace scene had five-six players. Everyone knew that in the end there would be one dominant player and one strong second-place holder left. Amazon’s growing dominance and SoftBank’s investment in Flipkart, clearly signal who those two players are. The rest are history, or soon will be. This is a milestone in the maturity graph of Indian ecommerce and, hence, is good news for the industry.”
The same is felt by many other investors in the Indian startup ecosystem.
Niren Shah, Managing Director, Norwest Venture Partners India feels SoftBank’s Vision Fund is a huge positive for the Indian internet ecosystem. He says, “The size of the deal demonstrates SoftBank’s belief in the long-term potential of the Indian market. We expect that they will continue to invest in many more scaled companies.”
Arjun Malhotra, Founding Partner, Investopad also concurs that it reaffirms the opportunity SoftBank sees in India. He says, “They really understand the landscape from the inside, given their learnings from Snapdeal. And I think the purchase of secondaries shows how serious they are about getting behind the right ecommerce player in India. It says a lot about the conviction they have in Flipkart’s execution abilities.”
Also, he adds that there’s also a tacit acknowledgment that ecommerce may not be a winner take all market in India. Differentiation is starting to bear out in strategies for Amazon, Snapdeal and Flipkart. For instance, the last couple of quarters have really shown how Flipkart is starting to play the local advantage.
“Flipkart understands that if you want to buy something in India, you’re not buying from a faceless entity. Their local level tie ups, especially for things like servicing electronics at a local market level, are starting to pay huge dividends – and their strength seems to be in high-value purchase categories like electronics and fashion,” he says.
Arjun is not far off the mark. Case in point is the launch of the Flipkart Made-for-India brand, Billion, which was announced in July 2017. The new private label brand, Billion is developed specifically to cater to the unique needs of Indian customers. Consequently, as part of the initiative, the ecommerce giant has teamed up with a number of domestic manufacturers.
Then again it’s no secret that Flipkart’s fashion game is much stronger as compared to Amazon given that it has strong fashion players like Myntra and Jabong in its kitty. And one should remember here that, both fashion as well as electronics, are high margin items for Flipkart.
Backing Unicorns: How SoftBank Is Banking On The India Growth Story
SoftBank has proved time and again that it is sold on the India growth story. From cab aggregators to ecommerce players, hotel aggregators to digital payments, mobile advertising to hyperlocal commerce, you name it and SoftBank is there.
For instance, prior to the Flipkart deal, the bulk of SoftBank’s capital — about $1.3 Bn capital in India— was invested in just two companies, Ola ($210 Mn) and Snapdeal ($627 Mn). It has also paid $200 Mn for a 35% stake in InMobi, an Indian mobile-advertising network. Incidentally, this means that SoftBank has a stake in 4 of India’s 10 unicorns.
Furthermore, it also recently pumped in $1.4 Bn in digital payments and commerce firm Paytm at a valuation of over $7 Bn. Here, it needs to be noted that the digital payments industry in India is projected to reach $500 Bn by 2020, contributing 15% to India’s GDP, as a per a recent report by Google and Boston Consulting Group.
Karthik Reddy, Managing Partner Blume Ventures feels that SoftBank has always been clear in its vision to own the #1 player in each market if it could. He says, “With the Vision Fund, its ability to do this in every meaningful sector or significant geographic market in the world has become a relatively unique and real option for them. So, Flipkart and Ola are examples of this strategy playing out in India.”
SoftBank’s other big India investments include $90 Mn in Housing (later acquired by PropTiger) in December 2014 and $100 Mn in OYO in August 2015 and another $100 Mn in OYO, in participation with Greenoaks, Sequoia and Lightspeed. In November 2015, it led a $120 Mn Series-C funding in Grofers. SoftBank also has a JV with the Bharti Group, Bharti SoftBank, investments of which include mobile application Hike Messenger.
As per an official statement, currently, SoftBank has an India portfolio spanning ecommerce, ride sharing, digital payments, hospitality, clean energy and telecommunications, which is valued at over $6 Bn.
Sudhir Sethi, Founder, IDG Ventures India stated,
“SoftBank investing in India is about the increased attraction of India and strength of local players like Flipkart emerging as winners against global players like Amazon. India will see more local entrepreneur-led leaders in the commerce market.”
That’s a separate story that write-downs have also been a part of the SoftBank investing experience in India. In November 2016, it wrote off around $550 Mn in the value of shares in its investments in India, which include ANI Technologies (runs Ola) and Jasper Infotech (which runs ecommerce marketplace Snapdeal).
SoftBank: Not An Easy Ally To Have
And then there is the narrative of SoftBank’s strong-arming tactics in Snapdeal and Ola, which made Ola safeguard itself against absolute investor power by making changes in its shareholding terms in the latest articles of association (AoA). These restrict the purchase of Ola shares by the investors representing 10% or more of the company’s capital without the consent of the co-founders.
From now on, SoftBank cannot buy more equity shares in Ola, unless to maintain its existing shareholding in the company. Ola has also added terms regarding the addition of new members on the Advisory Board of the company. As mentioned, SoftBank will have the right to appoint one more director “provided that such person is reasonably acceptable to the founders, and all other shareholders.” SoftBank has already nominated one member to the Ola Board. However, this condition will not apply if, post the new funding deal, SoftBank ends up having 50% shareholding in the company.
Flipkart needs to remember these narratives, too, as it enters a new partnership with SoftBank. Of course, for now, SoftBank has reinstated its faith in the Flipkart growth story. Along with showing faith, it has further expanded its dominance in the Indian startup ecosystem by backing the poster boy of ecommerce and the Indian startup ecosystem.
Vinod Murali, Managing Partner, Alteria Capital Advisors LLP said, “SoftBank is clearly seeing the Indian digital opportunity as a strong bet and aligning with the leaders at a later stage is still an attractive proposition, as we have a long way to go. It is a great signal for many young companies with reasonable traction, aimed at massive markets. It will help to have some more investors in the mid-growth segment to ensure well-performing companies are not starved for capital till they become relevant for the likes of SoftBank, given their cheque size preferences.”
Once again, Flipkart, which is facing tough competition on account of rival Amazon’s expanding playfield in India, looks sturdy enough to survive the upheavals in the ecommerce space. But then when we talk of the competition, we are talking about none other than Jeff Bezos here.
This reminds me of a post of a few days ago that satirical publication The Onion circulated, on fictional advice for all the entrepreneurs from Jeff Bezos. It read, “Value your customers, hire well, find a market that isn’t being served, and realise that someday I will utterly crush you.” While these words are satirical and not spoken by Bezos, they are pretty much rooted in reality.
For now, with SoftBank backing Flipkart, Bezos will surely find it tough to crush Flipkart anytime soon. But then the fundamental question remains-why should someone shop at Flipkart and not at Amazon? It is this differentiation which Flipkart needs to create with this fresh money in its coffers. Meanwhile, who’s the eventual winner? The average Indian online shopper like you and me, who will make hay while the funding Son shines.