A file photo of Ola CEO Bhavish Aggarwal. The deal helps Ola deepen its presence in the taxi hailing space with over 100,000 vehicles on its platform and puts it in a stronger position to fend off rivals such as Uber and Meru Cabs. Photo: OnlyPix (OnlyPix)
A file photo of Ola CEO Bhavish Aggarwal. The deal helps Ola deepen its presence in the taxi hailing space with over 100,000 vehicles on its platform and puts it in a stronger position to fend off rivals such as Uber and Meru Cabs. Photo: OnlyPix
(OnlyPix)

Ola’s buyout of TaxiForSure signals e-commerce consolidation

Ola will retain all 1,700 employees at TaxiForSure and nothing will change for customers, drivers and operators at TaxiForSure

Bengaluru/New Delhi: Cab-hailing service Ola’s acquisition of smaller rival TaxiForSure is the first sign since the e-commerce funding boom of last year that investors are starting to think twice before throwing huge amounts of capital at cash-intensive and loss-making business models, possibly heralding more consolidation among Internet companies over the next two years.

Ola on Monday bought TaxiForSure for $200 million in a cash and stock deal— the second-biggest ever in India’s fledgling start-up world—to fend off rivals such as Uber and Meru Cabs. The deal is likely to be followed by a fund raising by Ola, according to two people aware of the matter, who declined to be named.

TaxiForSure co-founders Aprameya Radhakrishna and Raghunandan G. will move to advisory roles and chief operating officer Arvind Singhal will take over as CEO at TaxiForSure, which will continue as a separate entity. Two of its top executives—chief financial officer Ganesh Venkataraman and chief people officer Hari T.N.—will also step down.

The sale of TaxiForSure comes less than four years after the company started out and just six months after it received between $35-$50 million from deep pocketed investors such as Accel Partners US and Helion Venture Partners.

TaxiForSure was by any measure one of the fastest-growing Internet companies and in a sector—cab services—that has a long way to run until growth slows. It has also been considered a well-run company with co-founders who had graduated from the Indian Institutes of Management.

Investors pumped more than $4 billion into e-commerce companies last year and valuations of several start-ups are soaring.

Why sell, then?

According to several people familiar with the matter, after rival Ola received as much as $200 million from Japan’s SoftBank in October, TaxiForSure came under tremendous pressure to raise its next round of funding.

The people cited above said that TaxiForSure held discussions about a fund raising with several investors in November and some of these firms expressed reservations about TaxiForSure’s ability to compete with Ola, which had by then guaranteed itself access to large amounts of capital by getting SoftBank on board.

Ola also counts the large US-based hedge fund Tiger Global Management among its investors. Uber is another well-capitalized rival that is growing fast in India after launching its services in August 2013.

Both Ola and Uber slashed prices last year and spent tens of crores on advertising to attract users.

Ola was also trying to poach TaxiForSure drivers by offering higher incentives and more business, the two people said. In response, TaxiForSure, which was run in a much more cash-efficient manner than Ola until then, was forced to cut prices and start spending heavily on funding discounts. By year-end, it had spent much of the $35-$50 million it raised in August on marketing and funding discounts and it was clear that the company would need more money—and lots of it.

Even though TaxiForSure raised a small, interim round from its existing investors late last year, the company still urgently needed to raise its next round. Just as the fund-raising talks were progressing, TaxiForSure ran into an unexpected hindrance. Delhi’s transport regulator banned cab-booking services Uber, Ola and TaxiForSure in early December after a female passenger using a cab through Uber’s service said she was raped by the driver.

Following the ban, investors who were in discussions with TaxiForSure told the company that they were unwilling to put up money immediately and they would wait to see how the regulatory troubles played out, according to the two people cited above. Even though all the three cab services have restarted in Delhi since, Ola’s massive fund raising in October and the ban in Delhi helped trigger the sale, these people said.

“(Cab services) is a hyperlocal business which will require a lot of cash to build a strong supply chain. It’s a high cash burn-driven model where only companies which have strong investor backing will sustain and the rest will go through consolidation," said Vineet Toshniwal, managing director at Equirus Capital Pvt. Ltd.

TaxiForSure held talks with both Ola and Uber for a sale but eventually opted for Ola. Mint couldn’t independently verify why TaxiForSure chose Ola over Uber.

TaxiForSure co-founder Raghunandan disagreed that the company was forced to sell out.

“This is a great time for raising funds for start-ups, and especially for cab aggregators, as there is regulatory clarity now. No, it wouldn’t have been tough for us to raise funds. We decided to sell because both Ola and TaxiForSure have the same vision: of revolutionizing transport. Over the past six months, both Ola and we had burnt huge amounts of money to fight each other. We didn’t want to keep doing that. It’s much better to grow the industry together than spend lots of money fighting each other," Raghunandan said.

Avendus Capital advised TaxiForSure on the deal.

Fighting Uber

The deal gives Ola scale by adding 15,000 cars to its fleet of more than 100,000 cars. Ola works directly with drivers while TaxiForSure works with local cab operators who own cabs and employ drivers.

“There is significant complementary value that this acquisition adds both on the supply and demand side for Ola and TaxiForSure," Ola said in a statement. “(Apart from the different models) TaxiForSure has also focused heavily on the economy segment of cab consumers with innovative offerings like Tata Nanos as part of their fleet and 49 as base fares in the past."

Ola is fighting a cash-intensive battle with US-based rival Uber for dominance in the booming cab services market in India. Ola and TaxiForSure have seen growth surge over the past year after the companies released their mobile apps, which give on-demand and convenient access to customers. These three companies have taken away a share of the growing market from Meru Cabs.

Consolidation ahoy?

Several analysts and investors say that with the flood of money going into e-commerce firms, consolidation is inevitable, especially because no e-commerce company is profitable or anywhere close to achieving profitability.

Over the past six months, e-commerce market leader Flipkart as well as smaller rivals Snapdeal and Shopclues have all raised between $100 million and $700 million. Even electronic wallet Paytm is moving toward a marketplace model and raised $575 million from a unit of China’s Alibaba earlier this year. All this, despite the fast growth of Amazon India, whose parent company has promised to pump in more than $2 billion in India over the next few years.

Other online retailers such FirstCry and Lenskart have also recently raised money and several others as Urban Ladder, Pepperfry and Zivame are in the market to raise funds.

Analysts have expressed doubts whether there is enough room for so many e-commerce companies.

“In cash-intensive businesses, consolidation is likely over the next two years," said Rutvik Doshi, director at Inventus (India) Advisors, a venture capital firm. “In these kind of businesses, investors back many companies early on. But after the first few rounds of funding only the winners are able to attract funds and these kind of categories become winner-takes-all or duopolies."

Globally the cab services space is witnessing a consolidation.

In February, China’s taxi hailing service Didi Dache merged with Softbank-backed Kuaidi Dache, creating an entity that is valued at close to $6 billion, according to a Reuters report.

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