Senior-level exits, not valuations, are the key issue in e-commerce

Each start-up can only have one or two sultans or sultanas, but constancy in the top teams is vital


A file photo of Flipkart co-founders Binny Bansal (left) and Sachin Bansal. and Photo: Hemant Mishra/Mint
A file photo of Flipkart co-founders Binny Bansal (left) and Sachin Bansal. and Photo: Hemant Mishra/Mint

Investors in Internet start-ups and growth-stage companies have to traverse a strange universe. The closest parallel I can find is the film industry. As a producer (investor), I might have all the right ingredients—a star-studded cast, a fantastic storyline, chart-busting music scores, breathtaking sets and cinematography, and a visionary director—but whether or not the film does well at the box office is still somewhat of a gamble. You never know whether the reagents are just right to serve up a blockbuster.

Except with the Internet start-up, it’s even worse since there is another twist—the simple fact that there are a bunch of other start-ups with the exact same storyline! This would be akin to several independent production houses producing the same James Bond movie (since they all own the “idea” or “franchise”)—at the same time and trying to bring it to the market as fast as possible. This means that there are multiple, simultaneous, identical experiments all taking place at the same time, and no one knows who will win.

But “wait”, I hear you say; “doesn’t the one who is first to the market end up winning since they will have the first-mover advantage?” Well, not necessarily. The “me too” scenario also works. And not just with the Lyfts and Olas who are replicating Uber today. History also shows us this. Yahoo was the first, true
large-scale search engine. It was upended by Google, which, apart from having (at the time) a better search algorithm, also quickly added other chemical reagents to the mix—free email, Web hosting, smartphone software, smart glasses and so on.

The result? Google’s market capitalization, as I write this, is almost 14 times that of Yahoo—$517 billion compared to Yahoo’s $35 billion. I remember burning my fingers by investing in Yahoo prior to the dot-com burst of 2001. The stock first fell like a stone—and then remained at the bottom of the pond for years thereafter, before staging a weak comeback afterwards. It’s still around, and is still a great company, but a Google it is not. And as a footnote—while Yahoo went public in 1996, Google didn’t go public until almost eight-and-a-half years later in 2004—which in Internet terms is like a day and night of Brahma—8.64 billion solar years, to be precise.

In the interim, Yahoo, the firm, has had several chief executives—Bartz, Morse, Thompson, Levinsohn and Mayer. (That string sounds almost like the name of a white-shoe law firm.) Not so Google, where, though India’s own Sundar Pichai is now CEO, the founding team of Larry Page, Sergey Brin and Eric Schmidt agreed to work together for 20 years after the IPO (until 2024). Page handed the reins over to Pichai only last year, but still remains very involved.

The same analogy can be drawn with our own earlier generation of labour arbitrage-based start-ups: the technology services firms. Firms like Infosys, Cognizant and Mindtree, while sometimes criticized for the collegiality of their founding teams, have ended up having had the last laugh despite having had to weather financial crises before. All said and done, Infosys—like Cognizant, Tata Consultancy Services and some other large Indian services companies with stable management teams—is now a global champion, and Mindtree is a strong contender in the next rung.

Maybe there are lessons to be learnt from this for India’s array of current start-ups, which saw a market arbitrage opportunity to enter the Internet retail space before their larger global counterparts could enter the market, essentially creating the equivalent of Jack Ma’s Chinese Alibaba. Flipkart and Snapdeal’s valuations seem to have hit a wall. Much of the publicity associated with this has been focused on the fact that foreign investors, afraid of a global slowdown and “unproven” business models, have written down their existing investments in the sector and are unwilling to pony up more cash. And the global market leader, Amazon, has entered the Indian market in a big way.

The current “bearish” scenario in international markets will surely change, just as it did post-2001 and then again post-2008, so the trick is just to hold on and fend off Amazon’s advance until the financial tide turns. Despite recent changes in the law, Amazon is after all not an Indian firm and will face more hurdles than the home-grown rivals. But, meanwhile, instead of signing long-term agreements to work together and weather what is just a simple financial storm—so that they can later go public and monetize their holdings—many senior executives at these firms seem to be using the revolving door.

Just like in the movies, you can only have one or two heroes/heroines in the cast. And the same is true of the villains. Similarly each start-up can only have one or two sultans or sultanas, but constancy in the top teams is vital. Google has its Page, Facebook its Zuckerberg, Alibaba its Ma, and Snapdeal and Flipkart have their Bahl and Bansals. But the sultans need to think of Henry Ford’s maxim when it comes to business: “Coming together is a beginning; keeping together is progress; working together is success.” A series of cameo appearances does not a blockbuster make.

Siddharth Pai is a world-renowned technology consultant who has personally led over $20 billion in complex, first-of-a-kind outsourcing transactions.

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