SoftBank gets ready for 3rd Indian innings

With a new $100-billion technology fund, SoftBank is likely to go after market leaders.

SoftBank Chief Executive Officer Masayoshi Son wants to propel his group towards what he calls SoftBank 2.0; in India he could be gearing for SoftBank 3.0.

The Japanese telecom and internet conglomerate is gearing up for a third innings in India, after failing to make a mark with its first and second set of investments in India.

With a new $100-billion technology fund, SoftBank is likely to go after market leaders (No. 1 or 2 players) in each market, say analysts.

“This fund gives it the ability to buy into any market leadership deal across the world,” says managing partner of a Mumbai-based venture capital (VC) firm.

In India, it is likely to invest more in mature businesses. Its recent $1.4-billion investment in Paytm and likely investment in Flipkart is illustrative, even as it tries to salvage its existing portfolio.

SoftBank is in talks with Tiger Global to partially buy out its stake in Flipkart and may invest more in the company once it acquires Snapdeal.

Last year, SoftBank had sold Housing.com to NewsCorp-backed PropTiger and decided against putting in more money in Snapdeal.

While Tiger Global is a fund (which has to return money to its investors within a stipulated period), SoftBank invests from its balance-sheet and can afford to stay invested for a longer period and push for consolidation.

“It can take longer positions on a fewer companies. You don’t want your investee companies to compete with each other and burn money,” says CEO of a SoftBank company.

“Flipkart makes sense for SoftBank as the combined business (with Snapdeal) could be larger, and it is getting it cheap (at a good discount to Flipkart’s existing valuation) Flipkart may not pay a fair value for Snapdeal but gets a strong investor,” says a partner with a VC firm.

Son missed investing in cab aggregator Uber, but is considering an investment of $6 billion in Didi Kuaidi, the ride-sharing service firm in China backed by Alibaba, Tencent and Baidu; it has backed GrabTaxi, the leading ride-sharing service in Southeast countries like Malyasia, Philipines, Singapore, Thailand, Vietnam and Indonesia.

“It has no capital constraints or ego. If Snapdeal didn’t work out, it is willing to buy out Tiger Global in Flipkart, acquire 20 per cent stake and support Flipkart. It wants to bet on the winner or No. 2 player in each market,” says a VC.

Earlier this month, SoftBank had written off nearly $1 billion in Snapdeal and $400 million in Ola -- the fourth consecutive write off in four quarters. In December 2016, SoftBank had written off around $475 million from its investments in the two companies.

Observers say one should not read too much into these write-offs as these are part of its conservative accounting policies and a rounding-off error in its big balance sheet. SoftBank also led a $250 million funding in Ola in 2016, at a valuation lower than $3 billion versus $5 billion in 2015.

When Son had invested in five-six firms in India in 2014, he was betting on them to achieve market leadership.

He expected one of them to give a 5X return, other two 2X, while others to just return him the capital.

“The return expectations are not the same for a $40 million deal and a $1 billion deal. If they can earn $2 billion on a $1 billion investment, it will be a big thing,” says a VC.

First innings

SoftBank first entered India in 1999 when it set up a VC firm called Eventures India with NewsCorp-backed media fund ePartners and Ispat Industries promoter P K Mittal. It invested $43 million in 14 companies, exited three, wrote off six and sold four companies to Nexus Venture before folding up during the 2000-01 dot-com bust. 

Around the same time, a new fund called SoftBank Asia Infrastructure Fund entered India. It was a JV with networking company Cisco Systems. It had invested in Sify Technologies and IL&FS Investsmart before it morphing into SAIF Partners in 2004, and had become independent of SoftBank.

SoftBank did not make any new investments till 2011, when it had invested $200 million in mobile advertising firm InMobi. While it was the first to join the $100-million valuation club, it reported losses for several years and faces stiff competition from Facebook and Google.

It also has a JV called Bharti SoftBank Holdings with Bharti Enterprises, through which it holds a stake in messaging app Hike (last valued at $1.4 billion).

Second innings

SoftBank’s second innings in India began in late 2014, shortly after Nikesh Arora was brought on board. Arora, who was to succeed Son as SoftBank CEO, left abruptly in June 2016 after an internal probe cleared him on some concerns raised by investors. Under Arora, SoftBank invested $ 2billion in India in a span of a year.

In a quick succession, SoftBank had invested $627 million in e-commerce marketplace Snapdeal and led a $210 million round in cab-hailing service provider Ola. By mid-2016, its portfolio had expanded to six companies, including realty portal Housing, budget hotel aggregator OYO Rooms and on-demand grocery delivery service Grofers.

“While they had picked the right spaces and invested in good teams, they didn’t get the timing right. They paid too much money at the top of valuation,” says managing partner of a venture capital firm.

Alibaba, with a 80 per cent share in the $1-trillion Chinese e-commerce market, is valued at $150 billion while the Indian e-commerce market is $15 billion today.