Can Banks be SOFT?

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With Snapdeal and Flipkart no more in its portfolio, SoftBank is now adamant to play its game in the Indian ecommerce sector with Paytm Mall. Just two months after receiving the commitment of an investment of $445 million (about ₹3000 crores) from SoftBank and Alibaba, Paytm Mall has received the final tranche of $225 Mn from both investors. SoftBank put in close to $200 Mn (341 crores) while Alibaba put in $25 Mn (167 crores) in the ecommerce company. SoftBank looks to take up a 21% stake in Paytm Mall with this funding, while Alibaba will hold 46%.

SoftBank is now a looming figure in India’s startup scene. It’s the rare investor with the appetite and ability to cut big cheques. And coming off two fiscals when venture capital funding had virtually dried up, the presence of an investor looking to invest billions of dollars would normally be welcomed without reservation. Except, SoftBank’s size, strategy and methods all complicate matters. Whether you are an entrepreneur or a rival investor, there are reasons to be wary. 

Some observers worry that SoftBank’s sheer financial heft can skew India’s startup ecosystem by putting too much power in one investor’s hands. SoftBank has more than $8 billion (54,000 crores) invested in India. The returns, so far, have been mixed. Snapdeal and have virtually disintegrated, while Paytm, Oyo and Grofers have prospered.  After stumbling with Snapdeal (now worth a sliver of its peak valuation) and (virtually dead), SoftBank has sought to steady its ship. After the Flipkart exit (sold stake to Walmart), a major play is Paytm. Through Paytm Mall, the group hopes to build a strong third player in India’s burgeoning e-commerce market, slated to hit $200 billion by 2026.

Investors worry about losing their cachet and bargaining power, under SoftBank’s shadow. But simultaneously, SoftBank also represents an opportunity, for exits. A lack of returns for venture-funded deals has been a key constraint for India’s startups. While a few older firms such as Makemytrip, Info Edge and Just Dial managed to go public, providing an exit option, most ventures and their investors have had to lean on secondary sales to other funds to make their money.

Softbank’s investment thesis has a strong bias towards startups that can define or dominate an industry. It’s a tough and high-risk pursuit, that can sometimes clash with the interests of the entrepreneurs involved. Then there is the matter of seeking industry domination through synergies between investee companies, which are sometimes rivals. Entrepreneurs who compete with a SoftBank backed firm can sometimes suddenly and mysteriously find the going getting tough. Platforms and aggregators, for instance, might treat Softbank’s investee companies favourably, to their rivals’ detriment. Because, who wants to be on the wrong side of all manner of access — to funds, global linkages and co-investment opportunities?

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Globally, SoftBank is known to flex this sort of muscle. For example, in ride sharing, it has been a keen votary of Uber’s moves to consolidate elsewhere and exit Russia, China and South East Asia. In China and SEA, Uber sold its operations to Didi and Grab, respectively. Both are SoftBank portfolio companies.

In India, too, its investments in Uber and arch-rival Ola have fuelled talks of consolidation. At Ola, a $2 billion round from investors including SoftBank was announced in September 2017.

In online grocery and ecommerce, too, SoftBank is making its influence felt. For instance, Big Basket, the country’s largest online grocer and a SoftBank investee, is figuring out the mechanics of selling some of its wares on Paytm Mall, another SoftBank investee.

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In food tech, SoftBank could again play kingmaker, when it seals a deal to back Zomato, since its portfolio firm Ola had previously acquired Food Panda in India. Uber is also building out its food delivery service, Uber Eats, in India. Grofers and Big Basket, two SoftBank portfolio firms, have been linked to each other by rumour for the better part of 18 months. While Grofers started with hyperlocal grocery delivery, it pivoted into conventional inventory-based business, as its original market imploded. Big Basket, meanwhile, is stepping on the gas with its private labels, with expansion into categories as diverse as meat and make up (cosmetics).

In hospitality and travel, SoftBank is a backer of Oyo, the technology platform for an assortment of accommodation. Oyo’s rivals Treebo and Fab Hotels found themselves de-listed from Makemytrip’s influential platform suddenly. There’s been speculation of Oyo merging with Makemytrip.

After funding tightened for two consecutive years between 2015 and 2017, this year has seen entrepreneurs breathe a little easy, as some semblance of normalcy has returned. Several investors have raised fresh funds for their India units, with Sequoia and Accel leading the way. Despite the easing in fund availability, entrepreneurs remain guarded about SoftBank.

As India’s startups enjoy the green shoots of a funding resurgence, SoftBank’s looming presence in the Indian startup space is occupying a lot of mindspace. The Japanese investment giant’s steps will be closely watched.

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