For investors, start-up Goliaths are for show and Davids for dough
In the period between 2014 and 2017, there has been no single believer in India, technology or otherwise, more emphatic than SoftBank. The SoftBank Vision Fund was formed with the purpose of creating or buying into sizeable chunks of the Goliaths of Start-up Land, geography no bar.
The SoftBank mantra has been “if you’re not #1, we’re not interested”. Its India portfolio fits the pattern perfectly. If one has reconciled the Vision Fund’s positions in Grab, Ola, Didi, and now Uber, then their giving up on Snapdeal and taking positions in Flipkart and Paytm is an obvious corollary.
Between SoftBank, Tencent, Alibaba and Naspers, India has all the backers needed for the making, nurturing and feeding of homegrown Goliaths.
However, while a great start-up ecosystem is easily recognized by the faces of the Goliaths, its sustainability is as importantly determined by the birth and success of 100s of Davids.
The nurturing of the Davids is the job of the smaller investors—starting with angels and seed-stage VCs to the Series A and B investors.
The past five years have brought in many such investors. It's not the entry cheques that keep this David ecosystem going—investor fatigue sets in quickly; it’s the exit cheques that need reaping. And the ecosystem has failed the Davids, in achieving this end state.
Start-ups are all about nimble execution that can topple the large incumbents. One can argue that the current tech/ Internet Goliaths were indeed Davids to begin with. So, winners are but a natural progression and a great achievement. Sadly, it’s not enough. It’s just the first arc of the virtuous cycle. These Davids are not championed or respected enough, especially in terms of value created. They are almost always undervalued, just as the Goliaths are almost overvalued to price in their deemed oligopolistic power. The market accords this differential to the winners but the differentials in India are acute in our view.
Until this convergence happens, we will yet be building a relatively weak ecosystem. Every year since 2013 has been a marginal improvement on the earlier one. 2018 will further nudge these unsung heroes towards the limelight, of being paid a fair market price for value creation. For this to happen, some guidelines:
Existing investors seldom have faith or capital reserves to do justice to the conviction needed to uplift the Davids. They rely too much on external validation, not internal conviction. Learn more about your own founders and double down!
The founders are in a hurry to ascribe increasing valuation to themselves without creating the value the Indian market traditionally needs to see — revenues and profits, not just intellectual property or loss-making (unprofitable) customers.
In this pursuit, founders need to find the balance between growth and low burn, if not profitability. To be reliant on larger outside capital and seek low dilution are contradictory states.
There is no one answer. If the shallow venture market stops believing 5x value appreciation is possible with their new round of capital, funding ceases. Either one can sell to a Goliath or build profitably hereon and tap into hitherto unknown capital bases like the Small Business Exchange IPO. The Goliaths are seldom paying fair value. So, profitable bootstrapping and small IPOs maybe a good end state to grow into and grow from.
It’s critical to note that for 90% of the investors, the Goliaths are for show, the Davids are for dough.
Karthik B. Reddy, co-founder and managing partner, Blume Ventures.