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Financial investors gain power in tech cos

  While it is a given that a tech company — especially a start-up — will be driven by technology, financial investors are beginning to play a major role. Apart from providing the funding, these risk-takers are taking an active interest in directing the company as well.  

Dr Suresh Srinivasan

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

On the one hand, the success of such technology companies has been primarily driven by the technology and quality of management. However, financing entities have started playing a major role in shaping up the scaling of such start-ups. There has been a large spillover of such technology initiatives that have now been well commercialised, even into emerging markets that have a large customer base, be it e-commerce or cab riding services.

Investors giving direction

When it comes to strategic decision making, a clear trend is emerging where the techies and the promoters are in fact being overshadowed by financial investors, who, for that matter, are called early risk takers. From the perspective of such early investors, a timely exit is even more important than backing the right horse, i.e., the entry and funding decisions. As these technology ventures start gaining scale, it is hence not a surprise that the financial investors have now started taking an aggressive stand in charting the direction of these companies.

Financial investors in tech firms

SoftBank is a classic case in point. Its aggressive  investments in making many early stage investments, globally and more specifically in India, are quite well known. This Japanese company operates the $93 billion SoftBank Vision Fund that primarily invests in technology start-ups in the United States, Europe and the Asia Pacific region.

In cab hailing operations, Didi and Uber were locked in cut-throat competition in China, and in 2016 Uber eventually sold its China business to Didi Chuxing and got out of the Chinese operations. This is despite Uber CEO Travis Kalanick being bullish about Uber in China, and believing that Uber’s future lay in China. It is largely believed that the Chinese state and its regulations were so discriminating against Uber that it was forced to sell its share to the Chinese competitor.

Behind the scenes?

It is very interesting that Softbank also made large investments of around $5 billion in Didi Chuxing, the largest cab aggregator in China. Another interesting point is that SoftBank is also one of the earliest investors in Ola, the cab hailing service that is fighting a pitched battle with Uber in India. Speculations are rife that both Didi and Softbank have a hand in Uber’s China exit.

Recently, with a number of scandals hitting Uber and Kalanick, he was forced to move out in leave of absence. In his absence and with at least six senior positions that remained vacant there seemed to be no clear executive in charge of running the company in such testing times. With his resignation and the uncertainties that followed, analysts expect Uber market valuation to have dropped down by as high as $10 billion from the peak valuation of around $70 billion seen at the beginning of this year.

This opened up an opportunity for the Uber rivals globally to join force; SoftBank seems to be taking lead in this initiative. Uber rival Grab Taxi, which was also earlier funded by SoftBank, operates cab hailing services across South East Asia including Singapore, Indonesia, Philippines, Malaysia, Thailand, Vietnam, and Myanmar. Soft Bank 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 by SoftBank and Uber competitors, where SoftBank is staying invested.

Softbank’s strategy in India’s e-commerce space also cannot be missed. In India SoftBank seems to be pulling through a strategy to fight Amazon. One of its early investments in India has been Snapdeal, way back in August 2015. Currently, SoftBank holds around 33% of Snapdeal. The other major shareholders are the promoters Kunal and Rohit Bansal jointly holding around 7% and a number of minority shareholders like holding around 28%. There are other shareholders like eBay and other venture capitalists.

Softbank has been aggressively brokering a deal to sell Snapdeal to Flipkart; purely as SoftBank wants to see how it could influence the Indian e-commerce consolidate. However, it has taken a call that a joint Flipkart–Snapdeal is better positioned to take on Amazon in the Indian market. More so due to the fact that Snapdeal is now a distant number three behind rivals Flipkart and Amazon India. Snapdeal has been struggling to remain in business, especially caught in price wars between the two largest players Amazon and FlipKart, both of whom are well positioned in terms of cash, at least for now.

Snapdeal’s valuation as been steeply declining every day; the company which was valued at around $6 billion not very long ago, is now valued not more than $0.7 to $0.8 billion. Softbank has become restless and was brokering a major deal between FlipKart and Snapdeal’s Bansals and the other minority shareholders who are reluctant to sell at this point in time.

The minority shareholders including the promoters have been reluctant to sell the company to Flipkart as they believe the company can still compete independently. Their strategy has been to scale down the operations, pick up a niche and run a focused and efficient operation such that the company sees sustainable profits emerging. The logic of the promoters further has been that with such scaled down and operations, the company can steadily better its valuations.

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

Snapdeal has a battery of high profile minority shareholders like Ratan Tata, Azim Premji, Alibaba and Foxconn. Although many of them approved the deal of sale to Flipkart, it failed to secure the approval of all the minority shareholders. Eventually the deal was aborted leaving SoftBank the majority shareholder, disappointed.

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

For orchestrating a consolidated opposition in the Indian market, SoftBank needs to do more it seems; even with founder promoters jointly holding only 7% in Snapdeal, SoftBank was unable to unite the minority shareholders.

The question is how it can achieve the same with other companies; say, Flipkart where the promoters hold 15% and in Paytm where the founder Vijay Shekhar Sharma holds 20%.

All said, the aggressive steering of the course of ‘new economy’ companies by financial investors as they scale up, who seems to call the shot, is getting very visible! 

Dr Suresh Srinivasan is a Chartered Accountant, has an MBA (Bradford UK) and a Doctorate in Strategy. He is the Director of the 2-year PGDM at Great Lakes Institute of Management, as well as a Sr. Associate Professor. He is also a management consultant.

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