How Flipmart deal hits home rule of startups

MUMBAI: Kunal Shah, who co-founded mobile wallet firm FreeCharge, posted on his Facebook timeline the importance of startup exits the day Walmart announced it was buying a 77% stake in India's most valuable internet company, Flipkart, for $16 billion. Shah said in India, selling one's company was met with disapproval because we as a country suffer from what he called a "tribal mindset", where a founder is expected to build a company like an empire and be a warrior king who'd rule over it.

Having sold FreeCharge to online marketplace Snapdeal in 2015, Shah was reacting to the many voices on social media expressing displeasure at the outcome the 11-year-old internet venture and its founders Sachin Bansal and Binny Bansal had achieved as they notched up a $21-billion valuation for the e-commerce firm. They said Flipkart selling majority control to a US behemoth like Walmart wouldn't augur well for the overall startup ecosystem, which is looking for local inspiration and role models to build large, independent companies.

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There's no denying Flipkart's unparalleled impact on Indian startups. Having started life as an e-bookstore in 2007, the Bengaluru company went on to spawn a new generation of entrepreneurs even as it helped bring in a never-seen-before slug of capital into the domestic market.

So what's next for young, fledgling startups fighting tech giants like Google and Amazon? Would all of them have to sell or merge with these global Goliaths? Does this mean India won't have its own version of a Baidu, Alibaba, Tencent (BAT) like China does?

Tarun Davda, MD at Matrix Partners, an early-stage venture capital fund, says, "The answer is a Yes and a No, because some of the largest Indian startups are now owned by the US and Chinese strategics. I think that ship sailed a few years ago when as a ecosystem we didn't do much to avoid this outcome. We were myopic and continue to be. No, because there are some Indian startups that are scaling independently and my hope is some of these will go for an IPO in the next 3-4 years."

Tech IPOs are few & far between
Exits in the form of an IPO, sale or a merger are critical for startups as liquidity events help investors - who bet on these young companies - return money to their limited partners (LPs) or sponsors of funds, which typically have a life cycle of 10-12 years. In India, where most venture capital funds have found it tough going, a deal which brings in billions of dollars in gains is a welcome sight. Flipkart's big shareholders like Tiger Global, SoftBank, Naspers and Accel Partners have all exited with $1 billion or more in cash.

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But the holy grail of exits is when startups go public, and India has had a measly share of that. Deep Kalra, cofounder of MakeMyTrip, which listed on Nasdaq in 2010 valued at $480 million, says, "We have stayed independent and so have companies like InfoEdge (runs portals like Naukri.com), which went public locally. As for the Walmart-Flipkart deal, it's a great outcome for its founders who have weathered multiple storms, and for the company's investors."

Indian startup mkt needs long-term funds
While Flipkart can still explore an IPO, after four years, according to the deal terms with Walmart, it's not certain the online retailer will go that path.

'Indians will lose control sans sovereign funds'
Anand Lunia, partner at venture fund India Quotient, says, "The truth is startup founders prioritise disruption over perpetual control and rent-seeking. Disruption has to happen in a high-risk, binary outcome environment. Loss of control and independence is a fallout of that choice. Control will go out of Indian hands unless very big money is put in through sovereign funds. We cannot give it over to public markets which have no appreciation for the risks involved and the negative cash flows. Ultimately, we'd need increased purchasing power and hence profits - that's a long wait," he says.

Indian internet witnessed its first wave of big investor money come in after 2014, coinciding with Alibaba's much-ballyhooed IPO and Flipkart's $1-billion raise thereafter. It is evident, India is a market that needs extremely long-term capital. This is why strategics who invest from their balance sheets are a better bet. But with both strategic and financial capital being foreign, there's much desired from Indian businesses.

A founder who runs a consumer internet platform says on the condition of anonymity, "The fate of startups will depend on the willingness of the ecosystem - particularly established Indian players - to step up and fight for the Indian market. As things stand, the investment community will most likely be open to newer bets on smaller players as they see big exits possible. However, India Inc also needs to realise that the tech economy is here to stay so they can be willing participants or be on the outside looking in as a lot of these companies fight the battle against global companies."

Lunia of India Quotient adds that the big issue is we don't have high-quality money in India. The LPs have the same rent-seeking mindset, which is reflected in VC money from domestic funds going into 'safe' companies. "We need to have money that is for a horizon of 10-12 years. We can't have public market value mindset in venture investing," he points out.