E-commerce was one of the first spaces to attract venture capital (VC) funding after the 2008-09 financial crisis.
In early 2010, hedge fund Tiger Global invested $10 million in online marketplace Flipkart at a valuation of $50 million, a whopping 12.5 times higher than its previous valuation a few months ago.
Two years later, Tiger Global invested $5 million in Ola Cabs. What followed in these market spaces is now folklore. VCs could only watch in bemusement as Tiger pumped in unprecedented volumes of funding into these two companies and obliterated the competition.
Until the 2014 monsoon, Tiger had a monopoly of sorts. Then, Alibaba went public. It unlocked nearly $100 billion in cash. Those who made money in Alibaba or China made a punt in India to repeat the feat. Those who missed made a bigger punt in India to undo the mistake.
In 2014, VCs that invested in start-ups representing large market spaces with Chinese equivalents—real estate, financial services, health, accommodations, automobiles, etc.,—got protective of their turfs. To avoid getting out-funded by Tiger, they kept their start-ups under the radar for as long as they could. When the companies eventually caught Tiger’s eye, it chose to bet on competitors instead of partnering with the VCs. This became a declaration of war.
For example, Tiger invested $40 million in real estate portal CommonFloor to compete with Housing.com, $20 million in online insurance marketplace PolicyBazaar.com to compete with BankBazaar.com, $10 million in health services aggregator Lybrate to compete with Practo, $15 million in affordable accommodations service Zo Rooms to compete with Oyo Rooms, $30 million in automobiles marketplace CarTrade to compete with CarDekho, and so on.
On the back of the Alibaba listing, there was a glut of foreign funds suddenly looking to buy positions in India. This was the opportunity for VCs to get back at Tiger by building a consortium of investors. They found traction with two types of investors, late-stage funds and public e-commerce companies. SoftBank invested $90 million in Housing.com, Amazon and others invested $60 million in BankBazaar.com, Tencent and others invested $90 million in Practo, SoftBank invested $100 million in Oyo Rooms, Hillhouse Capital invested $50 million in CarDekho.
From the outside, these seemed like large investments in start-ups that were not late-stage companies by any stretch of imagination. However, seen as a war strategy to pre-emptively strike and keep Tiger at bay, these investments did the trick. Meanwhile, e-commerce and taxi-app markets continued to lead the funding volumes in the industry.
In the e-commerce market, SoftBank had taken a decisive position in Snapdeal to compete with Tiger’s Flipkart, both doubling down on their bets by bringing in other investors to back their positions. In the taxi-app market, SoftBank had partnered with Tiger to bet on Ola.
The dynamics between Tiger and SoftBank in these two markets may seem contrary to the uninitiated, but mirrored their respective bets in the Chinese market. Alibaba took a position in Snapdeal while at the same time creating an Indian subsidiary in Paytm, the AliPay of India.
With money becoming a cheap commodity, the market lost perspective in 2015. Entrepreneurs, angels and VCs at large started speculating around other market spaces that would be rewarded with similar hyper-funding dynamics. Food delivery, service marketplaces, grocery delivery and hyperlocal logistics networks come to mind.
The irrational exuberance of hyper-funding in the Indian start-up ecosystem was simply looking for an external market trigger to regain some sanity that all stakeholders agreed had been lost. China obliged. In August, the Chinese markets dropped dramatically. The US markets responded to this with a 10-15% drop of their own. Over the next few months, the US markets recovered to their original levels. The recovery of Chinese markets has been slower, more volatile and the future upside remains uncertain.
Since then, Tiger has not made new investments in India other than existing portfolio or synergies. Tiger has invested in Amazon and Uber to stay true to its identity as a hedge fund, hedging its bets in Flipkart and Ola. Tiger has informed all portfolio companies in India that it is withdrawing the unconditional commitment to invest proportionately in follow-on rounds, let alone lead the round. This effectively instructs companies to look at other firms for future rounds and then come to Tiger with the co-investment option. Tiger-funded vertical classifieds CommonFloor is speculated to be merging with its horizontal classifieds Quikr. Tiger-funded Zo Rooms is speculated to be merging with SoftBank-backed competitor Oyo Rooms. Tiger-funded Grofers has been able to bring in SoftBank and avert the merger with Flipkart. In other words, Tiger has raised the white flag of peace and willing to work with others rather than become the market. For now, it looks like the war is over.
What can we expect in 2016? For all the macro reasons, India remains the most interesting global destination for e-commerce investments. However, money just got smarter than it was when we entered 2015. Investors have started wondering what it will take to get exits. Investments are more measured and exit time-frames are less dreamy. US and Chinese equivalents will continue to be the touchstone to evaluate Indian counterparts. Hyper-funded Indian startups in the larger e-commerce space would be growth or unit economics driven to the same extent as their US and Chinese equivalents are. To make sense of what happens here, continue to look at what is happening there.