While most people are aware of Amazon’s global market leadership position in the e-commerce sector, few are attuned to the growing potential of local e-commerce startups in developing economies. With Softbank’s recent $2.5 billion investment in Flipkart, a leading e-retailer in India, investor confidence in these local startups is bound to increase. Through Softbank’s $100 billion Vision Fund, Softbank has invested in Flipkart via both primary and secondary share purchases for a 20% stake in the company. With this equity investment, Softbank replaces Tiger Global Fund as Flipkart’s largest investor after buying a third of Tiger Global’s shares for $800 million. Garnering much media spotlight, the deal happened just 10 days after Softbank failed to merge Flipkart with its investee Snapdeal, Flipkart’s smaller rival, in an attempt to defeat Amazon in India.
Softbank’s Vision Fund is the world’s largest technology investment fund with successful investments in both Yahoo and China’s Alibaba. Softbank has invested more than $6 billion in the Indian market, including stakes in 4 unicorns: Flipkart, Paytm (India’s largest digital payments startup), Ola (India’s largest ride-hailing app) and InMobi (mobile ad firm). In 2014, Softbank invested almost $1 billion in Snapdeal, an Indian e-commerce startup, and was Snapdeal’s largest investor with 47.5% stake in the company. At the time, Snapdeal’s year on year growth was almost 600%! Nonetheless, during FY2017, Softbank reported a $1.4 billion loss on both Snapdeal and Ola. Both investees were unable to demonstrate clear market leadership and financial sustainability against their competitors. Consequently in 2017, Softbank has written off its $900 million investment in Snapdeal after failing to merge Snapdeal with Flipkart.
Founded in 2007 by 2 co-founders who previously worked for Amazon India, Flipkart has proven to be a lucrative investment due to its competitive advantage in offering a cash-on-delivery system. Since April 2017, Flipkart has also raised $1.4 billion from China’s Tencent, Ebay and Microsoft, which values the company at $11.6 billion with $4 billion cash reserve. In June 2017, Flipkart made a $300-400 million offer to merge with Snapdeal but was rejected as the deal represented a 93% markdown of Snapdeal’s $6.5 billion valuation. Subsequently, despite Flipkart proposal of a much higher M&A offer of $900 million in August, Snapdeal’s minority shareholders still rejected the deal to retain their controlling interest.
Softbank’s investment in Flipkart evidently signals growing investor confidence in India’s e-commerce sector. Nevertheless, many analysts postulate that the reduction of Tiger Global’s stake in Flipkart entails negative repercussions. Tiger Global has previously moved Flipkart’s co-founders to non-operational roles and assigned Kalyan Krishnamurthy, former Tiger Global Executive, as Flipkart’s CEO since January 2017. It was primarily due to Kalyan’s turnaround strategy that allowed Flipkart to rebound from its 2016 financial fiascos. With Tiger Global no longer the biggest investor, there is now a possibility that the original founders will return to their executive roles. Thus,it will be interesting to observe whether Flipkart is able to use Softbank’s investment effectively to establish a stronger footing against its competitors.
Overall, this deal raises several questions for the Indian investing community. For instance, how will Flipkart’s growth affect the Indian Internet ecosystem? If Softbank’s philosophy is that “You have to emerge as the winner or merge with the winner. There is no room for a third”, is Softbank too dependent on Flipkart to generate high IRR for its fund? What lessons can Softbank take from its Alibaba investment to best increase Flipkart’s valuation and expand this unicorn to international markets? How will Softbank impact domestic investors’ confidence in India? A lot is at stake with Flipkart, and if Flipkart is unable to beat Amazon, this will prove to be a very costly experiment for Softbank. For now, all eyes will be on Flipkart and everyone is anticipating to see who wins in this battle to conquer the Indian e-commerce market.