Six out of nine Indian start-ups with valuations of over $1 billion and operating in the consumer segment, while being completely controlled by domestic shareholders early on in their life cycle, have now ceded majority control to foreign investors. The remaining three were founded with holding companies or key shareholders from outside India. For the six – Flipkart, Snapdeal, Paytm, Ola, Zomato and the latest entrant Swiggy – it was the quest for capital to scale their businesses that was easily available from entities across the border that had the founders dilute their stake in their entrepreneurial ventures. Together these six start-ups have raised more than $15 billion in funding over the last decade and accumulated a combined valuation of nearly $40 billion.
Filings made with the Registrar of Companies and press statements issued by these companies show how since their inception, they have let foreign investors acquire significant stake. For example, post the Walmart deal, 77 per cent of Flipkart stake will be owned by the foreign investor. Similarly, for its competitor in the e-commerce space Snapdeal, as per the latest available information, 51.91 per cent stake is held by foreign companies including Japan’s SoftBank, China’s Alibaba Group, Nexus Venture Partners, Foxconn, among others. For online payments and retail company Paytm, at least 80.96 per cent stake in the company was held by overseas investors including Alibaba, SAIF Partners and SoftBank. Founder Vijay Shekhar Sharma, who, in 2003, held 60 per cent stake in the company (One 97 Communications Ltd), now holds 16.42 per cent.
Food discovery and delivery platform Zomato, which counts another homegrown internet company Info Edge as one of its earliest investors, had 47.77 per cent stake held in the company by foreign investors, according to the latest shareholding pattern filed by the company. However, post the filing Info Edge has divested some of its stake to Chinese Alibaba Group resulting in foreign shareholding in the company further increasing. Zomato’s key rival in India – Bengaluru-based Swiggy – raised $210 million in its latest round of funding in June from investors such as South Africa’s Naspers and Hong Kong-headquartered DST Global catapulting the food-delivery start-up into the unicorn club. The company’s founders hold 17.47 per cent share in the company while the remaining 82.53 per cent is held by foreign investors including SAIF Partners, Accel Partners and Bessemer Venture Partners. Taxi-hailing platform Ola was also a part of this trend. The company, which saw the share of its founders reduce from 100 per cent in 2011 to 11.15 per cent in 2016, has 65.54 per cent of its shares held by overseas investors such as Softbank, Tencent, and US-based fund Tiger Global. Even in case of the remaining three unicorns – Quikr, Shopclues and Hike – significant funding has come in from foreign investors such as Softbank, Tiger Global, eBay, Tencent and Nexus Venture Partners.
Experts believe that Indian investors have been reluctant from making huge bets on Indian start-ups primarily due to limited appetite for this investment class that operates on a non-traditional business model focusing more spending towards marketing than building assets.
“Capital does become a very important factor. The options are either to build a great product and scale it rapidly to compete with others; or to build a product and letting it evolve in its own time. If the choice is made to scale it rapidly, for which there is a need for capital to build the team, build the technology and to spend on marketing, it seems to be easily available through some of the international players. That’s what we have seen so far,” Rahul Chari, co-founder and CTO of Flipkart-owned digital payments firm PhonePe told The Indian Express.
“We haven’t seen enough appetite (from Indian investors) to take bets on large consumer internet players. The only reason for that, I think, is the whole model in the consumer internet space is very different. For example, the kind of investment that we have now seen in Flipkart through Walmart will be a strong validation that taking a long bet and building out the business will actually see good returns. Now, probably, we will see a lot more investments that are local within the ecosystem here. Sometimes it takes a large event like Walmart’s investment in Flipkart to get the ball rolling,” he added.
Commenting on the business approach of the new-age tech start-ups, Sunil Goyal, managing director of angel fund YourNest said that investors in India are still used to investing money in instruments that create physical assets. Giving the example of plant and machinery, Goyal said: “These investors are used to setting up a factory for, say, Rs 500 crore, but they are not used to putting Rs 500 crore in marketing and human resources and then seeing the fruits of that. The difference is that in start-ups people will come and build intellectual property — investing in them seems riskier. Some of these perceptions are there and until they are shattered and until people start realising that creating IP is far more valuable than investing in plant and machinery, things won’t change.”