31 Aug 2017 20:00 IST

The power financial investors wield over tech companies

It’s interesting to see how they’re steering the course of ‘new economy’ companies

The last decade has seen an unprecedented rise in technology companies, cab and hotel integrators, e-commerce companies and financial technology (fintech) start-ups. Of late, tech advancements and the entrepreneurial zeal of Silicon Valley are also powering more innovations in the autonomous car and energy storage space.

Although the success of such companies has been primarily driven by technology and quality of management, financing entities are now playing a major role in shaping the growth and scaling-up of such new ventures.

Making an entry

There has been a large spillover of such technology initiatives — such as e-commerce sites or cab hailing services — into emerging markets that have a large customer base.

When it comes to strategic decision making, a clear trend is emerging where the techies and the promoters are, in fact, being overshadowed by the financial investors — the so-called, ‘early risk takers’. From the perspective of such early investors, a timely exit is even more important than backing the right horse. As these tech ventures start gaining scale, it is unsurprising that financial investors start taking an aggressive stand in charting the direction of these companies.

Not a soft stance

SoftBank is a classic case in point. It’s quite well known for aggressively making early stage investments globally and, more specifically, in India. This Japanese company operates a $93-billion ‘SoftBank Vision Fund’ that primarily puts money in technology start-ups in the US, Europe and Asia Pacific region.

In cab hailing operations in the Chinese market, Didi Chuxing and Uber were locked in a cut-throat competition. Earlier, Travis Kalanick, the then Uber CEO, was bullish about Uber in China and believed that’s where the company’s future lay. But in 2016, Uber sold its China business to Didi and got out of the Chinese operations.

Who’s behind it?

It is widely believed that the Chinese state and its regulations were so discriminating against Uber that it was forced to sell its share. It is interesting that SoftBank made large investments of around $5 billion in Didi Chuxing, providing it that extra financial muscle to outdo Uber. SoftBank’s hand in Uber’s exit from China cannot be ignored.

Also note that the telecom group was one of the earliest investors in Ola, another cab hailing service that is pitched against Uber in India.

A vacant space

Recently, a number of scandals plagued Uber, forcing Kalanick to take a leave of absence and eventually resign. With this development and at least six other senior positions remaining vacant, there seemed to be no clear executive in charge of running the company in such testing times.

Concerted effort

After the CEO’s resignation and the uncertainties that followed, analysts expected Uber’s market position to have weakened and its valuation to have dropped by as much as $10 billion, from the peak valuation of around $70 billion seen at the beginning of this year.

This opened up an opportunity for Uber’s rivals to join forces globally. And SoftBank seems to be taking the lead in this initiative.

One rival, Grab Taxi (also earlier funded by SoftBank) operates across South-East Asia including Singapore, Indonesia, the Philippines, Malaysia, Thailand, Vietnam and Myanmar. SoftBank and Didi are now funding Grab to the extent of $2 billion to scale up and strengthen its offerings. There clearly seems to be a concerted effort to displace Uber.

Indian e-commerce scene

SoftBank’s strategy in India’s e-commerce space cannot be missed either. Here, it seems to be devising a strategy to fight Amazon. One of its early investments was in Snapdeal, way back in August 2015. Currently, it holds around 33 per cent of the e-commerce site. The other major shareholders are promoters Kunal and Rohit Bansal, who jointly hold around 7 per cent and minority shareholders, who have around 28 per cent. Other shareholders include eBay and venture capitalists.

SoftBank was aggressively brokering a deal to sell Snapdeal to Flipkart, purely to see how it could influence the Indian e-commerce market. It was of the view that Flipkart and Snapdeal together would be better positioned to take on Amazon in the Indian market.

Snapdeal has been struggling to remain in business, especially because it is caught amidst the price wars between Amazon and Flipkart, both of which are well positioned in terms of cash, at least for now.

Snapdeal’s valuation has been declining steeply every day. The company, which was valued at around $6 billion not very long ago, is now pegged at not more than $0.7 to $0.8 billion. SoftBank had become restless and wanted to broker the deal between Flipkart and Snapdeal’s Bansals. But other minority shareholders of the latter were reluctant to sell at this point as they believed the company could still compete independently.

Snapdeal stratgey

Snapdeal has a battery of high-profile minority shareholders, such as Ratan Tata, Azim Premji, Alibaba and Foxconn. Although many of them approved the Flipkart deal, the minority shareholders didn’t give their approval. Eventually, the deal was aborted, leaving SoftBank, the majority shareholder, disappointed.

Their promoter’s strategy will now be to scale down the operations, pick up a niche and run a focused and efficient operation such that sustainable profits emerge. The promoters feel that with such scaled down operations, the company can steadily improve its valuations.

The recent sale of Snapdeal’s digital payments platform Freecharge to Axis Bank, and revenues from its logistics business Vulcan Express, have provided it with the cash and working capital required to sustain the company for some more time, before which the promoters expect to restructure the company on the desired lines and make it profitable and sustainable in the short run.

Within a few days of the Flipkart-Snapdeal deal being shelved, reports emerged that SoftBank had invested $2.5 billion in Flipkart. It also invested $1.5 billion in Paytm a couple of months ago. These actions reaffirm its aggressive stance in the Indian market and in positioning a strong contender against Amazon.

SoftBank’s road ahead

To orchestrate a consolidated opposition in the Indian market, SoftBank needs to do more. Even with founder-promoters jointly holding only 7 per cent in Snapdeal, SoftBank was unable to obtain the approval of all shareholders. The question is how it can achieve the same with other companies, say, Flipkart, where the promoters hold 15 per cent; or in Paytm, where the founder Vijay Shekhar Sharma holds close to 20 per cent.

All said, the aggressive steering of the course of ‘new economy’ companies by financial investors is getting very interesting!