Bengaluru/New Delhi: Tiger Global Management’s roughly $1 billion bet on Flipkart India Ltd began inauspiciously, if an apocryphal story is to be believed.
The year was 2009. Tiger’s legendary fund manager Lee Fixel called Flipkart’s call centre number and asked to talk to the Bansals who founded the company. A Flipkart executive promised to have them call back. That didn’t happen.
Then, Fixel tried to reach out to them through McKinsey & Co., which was then representing the relatively unknown New York investment firm. That didn’t work either; the Bansals weren’t too interested because they hadn’t heard of Tiger.
Sachin and Binny Bansal (they are not related) were not yet 30; Flipkart was selling only books; and it had just raised $1 million from Accel Partners.
Eventually, a common acquaintance connected Fixel and the Bansals. After a few weeks of talks, Tiger invested in Flipkart, and thus began one of the most interesting and under-the-radar relationships in the Indian start-up ecosystem, between a secretive investment company fronted by an obsessively reclusive fund manager and what would become India’s largest e-commerce company.
In a strange inversion of the old proverb, Flipkart rode the wave, and Tiger rode Flipkart—although the fund manager’s ride threatens to be just as risky as the one in the proverb (and maybe, it too is afraid to dismount).
Since that first investment, Fixel has pumped nearly $1 billion into Flipkart, one of the riskiest and most unique bets on a start-up ever made by an investor. Fixel upended the venture capital (VC) playbook with his bet on Flipkart. Not only did Tiger lead a majority of Flipkart’s early funding rounds, it has also led or participated heavily in the last three Flipkart fund-raising rounds, which happened at peak valuations of $7 billion, $11 billion and $15 billion, respectively.
The speed at which Fixel moves was in evidence over the past week. Fixel pushed Flipkart’s executives to go for Jabong, which was available at a cut-price deal. In a matter of just three days, Flipkart agreed to pay $70 million for the online fashion retailer, blindsiding rival Snapdeal, which had emerged as the front-runner for Jabong.
For Flipkart, the acquisition of Jabong will extend its dominance in the fashion space and is seen as a move by the company to preserve its position as India’s No. 1 e-commerce marketplace in the face of an onslaught by Amazon India.
“The price was very attractive and Lee was in favour of picking up Jabong. With Jabong, Flipkart will be out of reach of Amazon for good in at least one category. Lee really pushed for the deal,” said one person familiar with the deal.
Flipkart is an Internet behemoth now. It has become India’s largest e-commerce company, employing more than 33,000 people, and generated some Rs.10,000 crore in sales for the year ended March 2015, the latest year for which official numbers are available.
But since the start of the year, Flipkart has seen its valuation marked down by several of its investors and is struggling to raise fresh funds at its preferred valuation. The company has changed its CEO, replacing Sachin Bansal (now executive chairman) with Binny Bansal. It has also removed several senior executives and brought back an old Flipkart and Tiger hand, Kalyan Krishnamurthy, in a key role. The changes followed a disastrous 2015 in which Flipkart tried changing its business model and attempted ill-thought-out experiments.
Flipkart is now struggling to defend its market leadership position from arch-rival Amazon India (Amazon.com Inc.’s local arm), which has expanded rapidly in India, fuelled by an unprecedented spending spree.
For Fixel, Flipkart’s struggles put an uneasy spotlight on his $1 billion bet, especially his eager participation in the company’s last three funding rounds. An investment that looked attractive even until the end of 2015, suddenly looks precarious now.
There’s more than just money at stake. The reputation of Fixel, seen as one the rising stars in the global VC business, hinges on the Flipkart investment and in turn, on the turnaround efforts of Binny Bansal.
Tiger has invested more money in Flipkart (and its subsidiary Myntra) than it has in all other Indian start-ups put together over the past five years, according to Mint research.
The relationship between Tiger and Flipkart is central to the Indian e-commerce story and perhaps as important as the one of the competition between Flipkart, Amazon India and Snapdeal.
Unlike the second story, though, it has never been told.
This is an attempt to tell it. Tiger declined to participate in this story. Flipkart commented on just one aspect of it.
In 2009, Fixel, who along with the Bansals is in his mid-30s, was impressed with the passion of the Flipkart founders, their ambition, and, not the least, their degrees from the Indian Institute of Technology.
At the time, Flipkart was selling books worth a few lakh rupees a month, and its minimalist website seemed as inspired by role model Amazon’s (the Bansals had worked at Amazon) as it was by Google’s.
Yet, within a few weeks, Fixel agreed to give them as much as $10 million. To understand how shocking that move was, consider this: the investment was as much as a fourth of the overall size of the online retail market in India in 2009.
Like Flipkart, Tiger Global too wasn’t a name in 2009.
When Fixel reached out to the Bansals, he and Tiger Global were largely unknown in the start-up world. Even executives at Flipkart’s first investor Accel Partners, who had been investing in India since 2004, hadn’t heard of Fixel or Tiger Global.
The American, who joined Tiger Global in March 2006, is a chartered financial analyst who graduated from the Washington University in St. Louis with a degree in business administration, finance and accounting.
Tiger’s initial investment valued Flipkart at $40 million. At that time, Tiger had just started betting aggressively on Indian start-ups and had accumulated large stakes in Just Dial and MakeMyTrip (both of which would go public and generate handsome returns for Tiger). More investments in Flipkart followed. By the middle of 2014, Tiger had invested roughly $200-250 million in Flipkart.
The fund manager and the founders worked closely. In 2013, as the company’s sales growth slowed and losses ballooned, Fixel named one of Tiger’s top employees in India, Kalyan Krishnamurthy, as Flipkart’s chief financial officer.
Krishnamurthy, first as interim CFO, improved Flipkart’s so-called unit economics by pruning costs. After that, as head of categories, he helped devise the company’s sales events strategy which catapulted revenue to more than $1 billion (on an annualized basis) in early 2014.
In the middle of that year, Tiger facilitated the e-marketplace’s acquisition of Myntra, a leader in the online fashion apparel space. The acquisition was supposed to turbo-charge Flipkart’s early growth in a market category that was becoming very important for marketplaces.
Things were going well. There were murmurs, of course, like there always are, about Tiger’s big bet on Flipkart and on then CEO Sachin Bansal’s management style, but things were good, for both Flipkart, whose valuation was around $2.5 billion at the time of the Myntra acquisition, and Tiger.
By 2014, Tiger had become one of the most recognizable games in the start-up business. In this time, the firm made hugely profitable bets on some of the world’s most recognizable Internet companies, including Facebook Inc., Alibaba Group, JD.com and LinkedIn Corp.
Along with Tiger’s rise, Fixel has become a near mythical personality. Like other Tiger executives, Fixel doesn’t give media interviews (Tiger doesn’t even operate a website). Fixel, who usually sports a stubble and dresses down, had literally bankrolled the Internet boom in India until the entry of the likes of SoftBank Group Corp. and DST Global. According to people who know him, Fixel is excellent with numbers, has a formidable memory and listens more than he talks.
The big bet
On 29 July 2014, Flipkart shocked the world by announcing it had raised a mammoth $1 billion at a valuation of $7 billion. Tiger and Naspers, the South Africa-based media and Internet conglomerate which is Flipkart’s second-largest investor, led that round. Like the first time Tiger invested in Flipkart in 2009, this $1 billion investment was equal to a fourth of the whole online retail market in 2014.
Announcing the $1 billion fund raising, Flipkart co-founder and then CEO Sachin Bansal said: “This is a big milestone not just for Flipkart, but for Internet firms in India in general. We believe India can produce a $100 billion company in the next five years, and we want to be that. Whether it takes 5 or 10 years, we are here for the longer term.”
Flipkart’s fund raising signalled a dramatic escalation in the e-commerce war it was fighting with Amazon.com Inc.’s India unit, which had launched a year ago, and Snapdeal. Sure enough, a day after Flipkart announced the $1 billion round, Amazon fired back and said it would invest $2 billion in India over time. A few months later, in October, Snapdeal investor SoftBank stepped up and said it will put in some $627 million into the online marketplace.
Flipkart’s $1 billion fund raising also heralded the beginning of the funding boom for Indian start-ups that lasted until the end of 2015.
Two people familiar with the matter say the logic behind the fund raising was straightforward: To maintain its market leadership, Flipkart would need to spend huge amounts on discounts, advertising and logistics. That meant the company would have to keep raising money and it was acutely aware the funding boom wouldn’t go on forever.
Tiger’s Fixel was convinced that Flipkart’s early lead, the strength of its brand, and its superior local knowledge would be enough to keep Amazon at a comfortable distance, even over an extended period of time, the people cited above added. Fixel was also encouraged by the fact that despite pumping billions of dollars into its China operations, Amazon had been outsmarted there by nimbler local rivals (and Tiger portfolio companies), Alibaba and JD, the two people said on condition of anonymity.
And Fixel had enormous confidence in the ability of Sachin Bansal. Bansal and Fixel had grown close over the years.
Consequently, Fixel led or participated heavily in the last three rounds of investment in Flipkart (between July 2014 and April 2015), investing $650-700 million in the company, according to official documents and the two people cited above.
“You have to remember that in 2014 and early 2015, Flipkart was at the top of the world. Both Tiger and Flipkart had a strong conviction that Amazon wouldn’t come near them any time soon. So, if Flipkart could strengthen its management team and do a few other things right, they would win the battle with Amazon by a good margin. There was talk of $50-100 billion IPO whenever Flipkart would go public,” one of the two said.
Still, there was much debate within Tiger about the firm’s participation in Flipkart’s funding rounds, the two people cited above said. Some executives at Tiger were unsure of leading funding rounds or participating heavily, particularly in the last two rounds. Fixel, however, was the loudest voice in favour of maintaining Tiger’s stake at 30-33% in the company, which meant Tiger would have to put up huge chunks of cash, they said.
As a reaffirmation of its confidence in Flipkart, Tiger didn’t ask for superior liquidation preference rights on its last three investments and negotiated the same rights as the other investors, the people said. (Liquidation preference rights determine who gets paid how much and in what order in the event of a sale or an initial public offering).
“Lee had kept pumping in huge amounts of money into Flipkart in its early years when everyone was saying it was foolish of him to do so. His boldness was richly rewarded when Flipkart silenced all critics and became so big. Then he thought he would pull if off all over again (with the late stage investments). This stemmed from his confidence in Sachin’s ability to execute. He was enamoured with Sachin so much so that he wouldn’t listen to any criticism of Sachin. People had raised flags about Sachin’s management style and his tendency to do extreme things. But Lee didn’t want to listen to any of it. Sachin had executed to the T until then and that’s all that Lee cared about. So he blocked out everything else,” said a third person, a Flipkart executive, who, like the other two people, spoke on condition of anonymity.
According to the three people cited above, Krishnamurthy’s exit in 2014 was brought about partly by his clashes with Sachin Bansal over his management style, which, the former was convinced, was alienating some senior Flipkart leaders. Krishnamurthy was also against Flipkart abruptly moving wholesale to the marketplace model as Bansal wanted to.
But despite the fact that Krishnamurthy was a Tiger representative, Fixel didn’t challenge Bansal. Eventually, Krishnamurthy left Flipkart in November 2014 and returned to Tiger, managing the firm’s portfolio investments in India. (In any case, contrary to popular belief, Fixel doesn’t “run” Flipkart; he weighs in on strategic decisions, but the Bansals and their leadership team pretty much have a free hand in managing the company.)
A Flipkart spokesman said it “is completely baseless and false” that Krishnamurthy’s departure in 2014 had anything to do with alleged disagreements with Sachin Bansal.
“Kalyan went back to Tiger Global after his first stint with Flipkart as interim CFO and interim head of category because we had by that time appointed a full-time leadership team, including the CFO. The decision to bring Kalyan back as the head of Category Design Organisation was taken by the Leadership team led by Binny,” the spokesman said.
Fixel had always infuriated venture capitalists in India by moving faster on deals and writing big cheques for entrepreneurs. He was infamous for pumping up valuations of fast-growing start-ups and pushing entrepreneurs to grow even faster without worrying too much about burning cash.
Yet, Fixel’s late-stage investments in Flipkart exceeded all of his other investments in sheer boldness, speed and ambition. Flipkart’s valuation soared some six times to $15 billion in 18 months (by April 2015) even though its financial performance didn’t improve at the same pace. The wider investor community was ever more sceptical.
Fixel wasn’t bothered by the scepticism; other investors had doubted his investments several times earlier, including his early bets on Flipkart, and look at how those turned out!
But this time, even Naspers, Flipkart’s second largest investor, which had backed the company as much as Tiger in the bleak years of 2012 and 2013, avoided investing in the last two Flipkart rounds.
Start-up investors typically put small amounts of cash in the early stages of a start-up’s evolution or large amounts in late-stage deals, but they don’t bet the house on a single company. Nor do investors usually pump in large amounts through the life cycle of a start-up. On average, VC firms don’t put more than 10% of their funds under management into a single company. From 2011 until the last Flipkart round in July 2015, Tiger’s investments in Flipkart accounted for nearly 15% of all investments made in privately-held companies by the investment firm. (What helps explain Tiger’s unusual style is the fact that unlike traditional start-up investors in the US who are based in California’s Silicon Valley, Tiger is headquartered in New York and it invests in both listed and privately-held companies.)
In recognition of his work, Fixel was promoted by Tiger in May 2015 to head its private investments.
Co-incidentally, things started to go wrong for Flipkart just around then.
Crisis and after
Over the next nine months or so, Amazon won significant market share at the expense of Flipkart and Snapdeal. Flipkart’s losses soared and its brand image and customer service levels suffered last year as it changed its business model. After the company changed its CEO in January, three of its other senior-most executives, commerce platform head Mukesh Bansal, chief business officer Ankit Nagori and product head Punit Soni left the company. Four mutual fund investors, including Morgan Stanley and T Rowe Price, trimmed their estimate of Flipkart’s valuation by anywhere between 20% and 40%.
In a matter of a few months, Flipkart’s status as India’s undisputed e-commerce market leader has come under serious threat, which in turn raises questions about Tiger’s decision to bankroll Flipkart’s last three rounds.
If things had gone according to plan, Flipkart would be preparing for a blockbuster IPO. Now, an IPO looks like a pipe dream as Flipkart is busy scrambling to regain its oomph, improve its service and save itself from being toppled by Amazon.
“In 2015, Flipkart lost its way a bit. And the speed at which Amazon has caught up has taken Flipkart and Tiger by shock. That, combined with the fact that Flipkart is still burning a lot of cash, are the main reasons Flipkart has seen its valuation marked down (by four investors). So, right now, it does look like Tiger miscalculated its late-stage investments,” the first of the three people cited above said.
The fact that Krishnamurthy is back at Flipkart as head of categories (his primarily charter is to revive sales growth and cut costs at the same time) is an indication of how Fixel’s equation with Sachin Bansal has altered.
At a board meeting earlier this year, Fixel and other board members grilled all the three Bansals—Sachin, Binny and Mukesh—about Amazon’s expansion and asked them how was Flipkart planning to keep the American company at bay, a second Flipkart executive said, asking not to be identified.
At that time, Mukesh Bansal denied that Flipkart had lost ground and claimed that all of Amazon’s market share gains had come at the expense of Snapdeal, the executive said.
“No one in the room believed that. And on the question of how to stop Amazon (while cutting losses), people were looking at each other for answers,” the executive added.
It’s been more than six months since Binny Bansal took over as CEO. A quick turnaround certainly hasn’t materialized. Flipkart has reduced its burn rate, but sales in the first half of the year were still sluggish.
What’s helped Flipkart’s cause is that Amazon India couldn’t discount as aggressively as it wished for three months after the government unveiled new foreign direct investment rules in e-commerce that banned marketplaces from influencing product prices.
Now, however, all the online marketplaces have figured out new ways of offering discounts and a resumption of the e-commerce pricing war is likely in the second half of the year.
To be sure, sales growth at Flipkart is likely to pick up in the second half of the year with the festival season around the corner.
Under Binny, Flipkart is moving back to its roots, focusing on improving customer service levels by expanding its product assortment, offering low prices and making its logistics service more consistent and faster.
Additionally, the reappointment of Tiger’s Krishnamurthy has energized rank-and-file employees.
“Kalyan’s comeback has really lifted the spirits internally. He knows the company inside out. He’s immediately taken charge and broken silos between teams. He’s very execution-oriented and he will get the basics back: widest product range and best prices on a daily basis. In the second half of the year, you can expect some big-bang moves by us,” the first Flipkart executive said.
So, how does it end?
Tiger is potentially the biggest beneficiary of the jump in the valuations of Indian Internet start-ups and it is siting on massive, potential returns from its investments in unicorns Ola, Quikr and Shopclues; enterprise software provider Freshdesk; and groceries delivery start-up Grofers, among others.
But eventually, its bet on Flipkart will go a long way in determining whether Tiger will generate blockbuster or lacklustre returns from its investments in India.
Some other large, single investments in venture-backed start-ups include SoftBank’s bet on China’s Alibaba Group; SoftBank’s bet on online marketplace Snapdeal; and, Tiger’s punt on China’s online retailer JD.com.
However, Tiger’s investment in Flipkart is far riskier and more complex than all of these bets.
Since SoftBank first invested in Alibaba in the late 1990s, the Chinese e-commerce marketplace had accumulated other backers, who led subsequent funding rounds in the company. Alibaba also raised significant amounts of debt and even listed briefly in Hong Kong before its blockbuster initial public offering in New York in 2014.
In Snapdeal, SoftBank is accompanied by two strategic investors, eBay Inc. and Alibaba. Besides, for all practical purposes, SoftBank is a late-stage investor in Snapdeal and faces all the risks and potential rewards of being one.
Tiger’s investment in JD, which is Alibaba’s biggest rival in China, paid off handsomely for the investment firm. Tiger invested in JD around the same time it first put money into Flipkart. But while Tiger participated in later funding rounds in JD, it didn’t lead late-stage deals. And unlike its paper gains in Flipkart, JD has already yielded windfall returns for Tiger. The two people cited above said that Tiger’s massive returns from JD was one of the factors that convinced the New York-based investor to back Flipkart to the hilt.
At a closer look, Flipkart’s financial performance looks inferior to JD’s. In 2013, the year before JD listed its shares in New York at a valuation of more than $25 billion, the company reported net sales of $11.5 billion and had net losses of just $8 million.
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For the year ended March 2015, Flipkart entities reported sales of Rs.10,000 crore and piled up net losses of Rs.2,000 crore.
In 2014-15, Tiger was convinced India’s e-commerce market would play out a bit like China’s and Flipkart could deliver a big exit within two years, the people cited above said.
But given Amazon’s rapid rise, the exit timeline for Flipkart is now far from clear.
“If Lee had not pumped in so much of Tiger’s money in Flipkart’s last three rounds, Tiger would have been sitting pretty even now. It’s clear that he overestimated Sachin’s ability to execute,” the first Flipkart executive said.
“He’s realized that now.”