 funding round, would have meant effectively ceding control of his six –year old startup to Japan’s Softbank.
The downround was acceptable to Aggarwal but not the tacit loss of control to one of the world’s largest technology investors, said two people aware of these developments at the Bengaluru-based company during November 2016.
Ola finally accepted only $ 250 million from Softbank and chose instead to seek out newer investors who could provide further capital, which it so badly required. Its American rival looked invincible at that time with over $10 billion in the bank and all its focus on India after divesting control of its Chinese operations.
For Aggarwal, this was not an easy choice. If he wasn’t successful in raising fresh money within the next six to nine months, he could go back to Softbank for more capital but the terms would be different. “In an open market like India, having a strategic is a necessity,” said the founder of one India’s most valued Internet Company.
But more important, say seasoned entrepreneurs and industry watchers is to have two strategic investors, with each balancing the influence and reach of the other. In a prudent move, Ola’s Aggarwal decided to keep his company’s funding round open to other existing investors, while he also scouted for fresh backers.
After all, he had seen New York-based Tiger Global Management, Ola’s earliest investor, pick up a stake in rival Uber in late 2015. While Tiger Global is regarded as a financial investor, Softbank views ride-hailing more strategically. The investment powerhouse-- which is also an investor in ride-hailing companies like China’s Didi Chuxing, South-East Asia’s Grab and Latin America’s 99-- is currently negotiating a potential $10 billion investment in Uber. Top Softbank executive Rajeev Misra told ET in a recent interview that his fund hopes “to make peace” between Ola and Uber if the deal goes through.
As for Ola, Aggarwal’s decision proved to be prescient. Slowly investment trickled in as the company won more market share by launching a premium subscription service like Select and entertainment offerings like Ola Play, besides localising by adding autos. And in October, Chinese internet giant Tencent came in as the lead investor in the new $1.1 billion round that Ola had worked on since last year.
Ola declined to comment, while Softbank did not reply to email queries from ET.
Tencent, which is nearly as big as Alibaba in terms of market capitalisation, is emerging as a potential counter to Softbank’s presence on the board of India’s largest internet companies Flipkart and Ola. The Chinese conglomerate has bought stakes in Flipkart, Ola, Byju, Hike, Practo and owns a small holding in Makemytrip with close to $1.4 billion invested. It is also working with Flipkart on further strategic investments in the market, according to two sources familiar with the matter.
Softbank, meanwhile has backed Flipkart, Ola, Paytm, Oyo, Proptiger (through the merger with Housing, Grofers, Inmobi, Hike and Snapdeal with over $6 billion invested in the country. Some lessons for India’s most valued internet companies may have come from the failed attempt to merge online retailer Snapdeal with market leader Flipkart.
The merger talks were led, in large part, by Softbank--the biggest investor in Snapdeal—according to sources aware of the negotiations which failed to fructify.
Snapdeal co-founder Kunal Bahl wanted to rope in Tencent, owner of WeChat as an investor in late 2015, as ET had earlier reported. Snapdeal, at that time, was also keen to launch services on its platform. But its biggest shareholder Softbank had other plans, said company executives, and instead backed fresh investment from China’s Alibaba and Taiwan’s Foxconn into Snapdeal. Meanwhile, the Japanese investor was keen to see a merger between Snapdeal and Flipkart or even the Alibaba Group-backed Paytm, the company sources said.
Aware of the pitfalls of untrammeled investor influence, Indian entrepreneurs are now devising ways to maintain a modicum of independence.
Earlier this year, Ola also amended its Articles of Association (AoA) to require SoftBank to seek approval of Ola’s cofounders Aggarwal and Ankit Bhati, besides the board, to increase its stake through either primary or secondary share purchases.
Meanwhile at Flipkart, Tencent along with Naspers will have a 20% stake in Flipkart, which will counter Softbank’s similar stake and allay any fears of overt influence. Naspers is the largest shareholder in Tencent, and has been an investor in Flipkart since 2012.
Unlike China, where global technology companies face tough regulations from the government, India is an open market. Global internet and technology corporations are becoming the largest backers and shareholders of homegrown internet giants in one of the world’s fastest-growing digital economy.
In the hyper-competitive internet landscape, getting backed by Tiger Global was seen as a ticket to victory till a few years back. Led by Lee Fixel, the firm had the deepest pockets and was much quicker than any other venture capital firm operating in India. By 2015 it had poured $1 billion in Flipkart alone, besides counting Ola, Shopclues and Quikr in its portfolio as well. This changed with the aggressive push made by US-based rivals Amazon and Uber in 2014 take away market leadership from local players. That’s when Softbank emerged as the champion of local companies, looking to replicate it’s success in China with Alibaba.
“The local player has the advantage of knowing the local culture and adapting to it....Global players cannot change their technology platform easily according to each market. They have the benefit of scale but that itself becomes their weakness,” Masayoshi Son told Times of India in an interview published in January 2016.
But the board and founders across the country view any strategic capital as a double-edged sword.
“As an entrepreneur, I would like to make sure all my eggs are not in one basket, just like how I diversify my customer or supplier base. Once balance sheet investors like Softbank or Tencent come in they continue to invest and influence a company for a long time,” said Rutvik Doshi, managing director at Inventus Capital.
Indian entrepreneurs find themselves in the middle of a global three-dimensional chess game being played primarily by cash-rich American, Chinese and Japanese technology corporations. And they are trying to make their moves well to make sure they are not one of the pawns.
Flipkart, whose fundraising strategy since last year has mostly centered around “enemy of my enemy is my friend (read investor),” according to a top company executive, first held discussions with Wal-Mart, and then with Microsoft, Google and eBay all of whom compete with its major rival Amazon.
Finally, it brought in Tencent--whose Chinese rival Alibaba had already built a significant presence here with Paytm— announcing a $1.4 billion round in April from Tencent, eBay and Microsoft.
It’s not only Flipkart and Ola who have hedged their bets.
Budget hotel chain Oyo had an offer for an investment of $500 million from Softbank, which would have given the Japanese investor a majority stake. But, Oyo, said executives in the know, wanted to raise only $100 million. Finally, the deal size was brought down to $250 million, giving Softbank little over 45% stake in the startup founded by Ritesh Agarwal. Days after the Softbank round was announced, Oyo brought in a small investment of $10 million from China Lodging Group, one of the largest hotel groups from the country valued over $9 billion.
Softbank, especially with its $93 billion Vision Fund, has emerged as the investor no founder can say no to (what if it backs the main rival?) but no one wants it to be their only port of call. Tencent, therefore, is regarded as a buffer--more so as it takes no more than 10% stake unlike Alibaba and Softbank both of which insist on at least a 20% stake and board seats, according to two investors and one entrepreneur who have negotiated with these investors.
These moves by no means indicate a strained relationship between the entrepreneur and investor say industry members. The primary motivation is to have another large pool of capital that can be tapped, and terms are not dictated and there is no dependence on anyone strategic backer.
“It is always a good strategy to maintain tensions and competition on the cap table between large investors,” said a venture capital investor who has a Softbank backed company in the portfolio.
Paytm owner One 97 Communications was the first player to get a major Chinese company as a strategic investor when Alibaba and its payment affiliate Ant Financial picked up a stake back in February 2015. Earlier this year, Paytm raised $1.4 billion from Softbank. For the Vijay Shekhar Sharma-promoted company, getting Japan’s SoftBank on board gives it a stable source of capital. More importantly, it smoothens perceptions at a time when the geopolitical equation between China and India remains volatile.
Travel portal MakeMyTrip now has two strategic backers -- Naspers and China’s largest online travel player Ctrip. Zomato, where Naukri owner Info Edge is the largest shareholder with close to a majority stake, is in