BackWill Softbank turn off the funding tap?
The absence of a visibly strong advocate for the India opportunity within the board is likely to impact how the money will be deployed
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Nikesh Arora isn’t a popular guy. At least not within a sizeable section of India’s venture capital community. Still, his sudden exit from SoftBank Group Corp., where he was until recently heir apparent to founder and CEO Masayoshi Son, has triggered some anxiety. Chiefly because local venture capitalists had hoped, despite their reservations about Arora, that SoftBank would play an important role in plugging the critical need for growth capital in the country’s technology start-up market.
Arora, as is well known, was at the forefront of channelling SoftBank’s investments into technology start-ups here in the nearly two years that he was at the helm of the Japanese Internet and telecom conglomerate. In all, five Indian start-ups have raised funds from SoftBank during Arora’s tenure. Shortly after he took charge, SB Group US Inc. (formerly known as SoftBank Internet and Media Inc.) pumped $627 million into e-commerce marketplace Snapdeal and led a $210 million investment round in cab-hailing service Ola.
The two deals announced SoftBank’s and Arora’s entry into India’s technology start-up market, in the midst of an unprecedented funding boom. The Ola and Snapdeal investments were part of a $10 billion kitty that SoftBank CEO Son announced for India during a visit to New Delhi in October 2014. The corpus, he had indicated, would be deployed across the information technology and communications spectrum and in e-commerce in particular.
After Snapdeal and Ola, SoftBank and Arora wasted no time in cornering stakes in some of the country’s other well-known start-ups. Through 2015, they would go on to invest in property search and listings platform Housing, budget stays aggregator OYO Rooms and on-demand grocery delivery service Grofers. Including ad network InMobi, an earlier investment from 2011, SoftBank currently sports a portfolio of six companies in India with total investments estimated at nearly $2 billion.
Arora’s abrupt departure, the reasons for which are well-documented, raises two important questions for start-ups and venture capitalists here. One, will the $10 billion kitty continue to find its way into technology start-ups at the pace it has so far?
The last time that SoftBank closed a deal here was more than six months ago. Last November, it led a $120 million investment round in Grofers. The only other investment since then is a $14.7 million follow-on investment in Housing (it had raised $90 million from SoftBank in December 2014). The company fired founder and CEO Rahul Yadav last July after a public spat with its investors, including SoftBank, and separate media reports suggest that it is now up for sale. Housing CEO Jason Kothari denied those reports in a May interview with Mint.
The absence of new investments may merely be a manifestation of the general air of caution that investors have adopted over the past six-eight months as they wait for valuations to cool in India’s start-up market. It may equally have to do with internal problems that SoftBank has been grappling with. In April, a group of shareholders demanded that the board investigate Arora for alleged conflict of interest and other performance- and investments-related issues. The investment in Housing, for instance, was one of the issues cited. Arora was given a clean chit by a panel of the board’s independent directors a day before he resigned.
Even if SoftBank does intend to continue to deploy the $10 billion, the absence of a visibly strong advocate for the India opportunity within the board is likely to impact how the money will be deployed.
That brings us to the second question and the matter that is causing anxiety among local venture capitalists. To what extent would SoftBank slowing down on investments impact the growth capital market for technology start-ups?
By industry estimates, there are close to 50, perhaps more, venture capital-backed start-ups currently in the market for growth capital. SoftBank-backed Grofers is one of them. Mint reported this week that the company is laying off 10% of its employees because of slower-than-expected growth and a funding crunch. The existing investors in most of these companies don’t have the resources to finance those rounds on their own. Most of the non-traditional sources of growth capital, hedge funds, for example, have all but withdrawn from the market. Private equity firms, the traditional sources of growth capital, aren’t particularly interested in technology start-ups. They find valuations still too high and business models untenable.
It was hoped that the withdrawal of hedge funds and the lack of interest from private equity firms would be somewhat offset by the presence of strategic investors such as SoftBank. With the US Securities and Exchange Commission now opening a probe into Arora’s actions before he resigned last week, according to separate media reports, it may be a while before SoftBank is able to get back to business as usual.
When it comes to deal-making, especially in high-risk start-up assets, the Japanese are generally considered followers rather than leaders. However, in this case, the absence of an investor that has deployed nearly $2 billion in less than two years could be a cue for other growth investors to err on the side of caution.
Snigdha Sengupta is a consulting writer with Mint. She contributes stories on venture capital and private equity.
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