Dance of the Unicorns

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Binny Bansal’s email to Flipkart’s employees is perhaps a good place to start this story. On Thursday, SoftBank announced that it has invested close to $2.5 billion in the company. This investment is an extension of Flipkart’s funding round in April this year, when Tencent, eBay, and Microsoft invested in the company. Needless to say, Bansal was enthused. To quote from his email:

Why this investment though?

“This is truly a watershed moment for the Flipkart Group and India. This is the largest ever private investment round in an Indian technology company. And coming from a visionary investor renowned for backing innovative, winning companies, it is a big vote of confidence in Flipkart. At the same time, it augurs well for India because we are among the few economies globally that is able to attract such massive interest from top-tier investors.

As I’ve said earlier, the ball is in our court now. With razor-sharp execution, we must continue to transform commerce in India through technology and India-specific innovations. As the leader of Indian e-commerce, the onus is on us to make its benefits reach the farthest corners of India.”

We are still wrapping our heads around what this means for Flipkart. The simplest explanation is more money. Where Flipkart had $2 billion in cash, it now has $4 billion. What Flipkart does with this money is a good question to ask and we will get to that shortly. More importantly, it is the SoftBank angle you must consider. Perhaps you already know that Softbank has poured in $900 million in Snapdeal. As things stand today, that money hasn’t amounted to anything. Now SoftBank might be a behemoth but even for a firm of this size, $900 million is a lot of money, especially so when this money has come out of its own corpus and not from the $93 billion Vision Fund that SoftBank is now shepherding.

While it might seem that by making a bet on Flipkart, SoftBank is essentially writing off its investment in Snapdeal, the imperatives of the Vision Fund (from which the Flipkart investment has been made) are at an altogether different level.

The world has never seen a fund of this site dedicated to making investments primarily in unproven technology startups.

But the magnitude of the fund is a double-edged sword. On the one hand, SoftBank can enter pretty much any deal it chooses to but on the other, it can’t afford to miss having a stake in any of the hot sectors/startups that could emerge as the totemic companies of tomorrow, essentially ending up with an index fund of the most important startups in the world.

Billion-dollar unicorn exits won’t even begin to nudge the needle for SoftBank—they need Decacorn exits of $10 billion-plus to reach their target returns. Given that there are only a handful of companies that are likely to be in this range over the next 10 years, SoftBank has to invest in pretty much every single one to achieve its target Internal Rate of Return. If this means investing in competing startups in a hot area, entering a company at a late/overvalued stage, or ignoring its previous bets to pick the likely numero uno winner in a hot sector, so be it. This dynamic probably explains why SoftBank chose to back Flipkart at this stage.

But, what about the other erstwhile Unicorn?

The situation inside Snapdeal is tense. And employees are talking. “I don’t think Kunal has it in him,” says a senior Snapdeal official, who has spent more than two years at the company, and is still one of very few, senior people left. “You almost want to believe that Snapdeal 2.0 will work.

But it requires a complete change, no baggage of the past. Rebuilding the organization from scratch. There’s money on the table, so you hunker down and just execute.

But I don’t know if Kunal is up for it. I don’t think Rohit can do it either. Actually, I don’t think he has it in him at all. Snapdeal 2.0 requires someone completely fresh.”

 

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