By Sunil K Goyal & Vivek Mansingh, YourNest Venture Capital
Unlike the Demonetization of 2016, the Walmart investment in Flipkart was not what Nassim Nicholas Taleb termed a ‘Black Swan’ event: this was more like the long, slow waltz – or even a swayamvar with multiple suitors vying for the hand of a bride.
Everyone knew that Flipkart would be sold: the question was when to whom and for how much.
And when it eventually happened, it did flip the table in several ways with multiple ripples or trigger effects.
A bumper exit is one of the critical drivers for entrepreneurs and investors.
A mega acquisition by a global giant reinforces the faith of investors in the Indian growth story moving confidently towards a USD 5 trillion-dollar economy in coming years.
But there are several other significant ripple effects of this investment by Walmart. These are:
- Demonstrable evidence that Indian businesses can create $20+ billion value in a relatively short period of about ten years. Even if it is just one instance currently, it is the first.
- That an Indian startup can take on global giants like Amazon and first-generation entrepreneurs can make it happen are, in themselves, sure to re-inject optimism in a sector that was in danger of being dismissed as a bubble. As a direct, and immediate, consequence of this deal, global corporates will continue to pursue their ambitious plans for India.
- Boardrooms waiting to enter our markets will reopen or accelerate their execution strategy. Walmart has revenues of nearly USD 500 billion, and all their worldwide partners can be the early-movers to establish their presence in India to ride along with Walmart’s growth aspirations.
- It shows India’s ability to showcase a mega exit. This transaction has addressed one of the most significant objections of the Limited Partners (LPs) or the Fund of Funds viz. India’s ability to show a mega cash exit. This cash for cash exit at a good exit-multiple for Venture Capital and Private Equity funds is bound to push LPs to make higher allocations to these asset classes.
- Indian startups can attract global money: Flipkart has proven that Indian startups can attract global money (from Tiger Global, Softbank, Microsoft, etc.). If one can build a business that can scale, there is interest from global players for M&A, and healthy exits can happen.
- The magic of USD 15 billion new investment in India: Softbank with its nearly USD 10 billion investment started picking up stake in 2016 in companies like Ola, Oyo, Flipkart, etc. A fresh set of startups will attract this released capital which, this time, should remain in India. The magic of USD 15 billion coming back to the start-up ecosystem should provide much-needed capital to the next round of winners, who will further consolidate smaller players. The ripple effect will soon reach the Series-A and angel stage investments. Much needed capital will flow towards the starved, but promising,early-stage start-ups.
- Indian tech entrepreneurs are competing with the best from the US, Israel and China for deep-tech and SaaS solutions to serve the world. Internet of Things (IoT), Robotics, Artificial Intelligence reis here to enhance productivity and efficiency for the value-conscious Indian consumer. These start-ups are ready to absorb capital to serve the global markets.
- This deal is also bound to galvanise legacy retail players in India to review their click-and-mortar strategies and accelerate their investments. With the entry of established Indian retail brands, more consumers will enter the eco-system, which, in turn, will create a virtuous cycle for all stakeholders.
- Renew faith in Indian e-commerce: Finally, the Walmart-Flipkart deal is like a talent magnet that will renew the faith e-commerce employees have in their employers and ESOPs: we should not be surprised to see talent migrant from legacy companies to small and medium e-commerce companies where new jobs will come up.
AfterNote: Besides, it is worth adding here that India’s current policy on 100% FDI in the marketplace model is encouraging and forward-looking.
Each retailer/SME has instant access to the market for their products on Flipkart-like marketplaces.
The marketplace does not kill existing businesses, and in fact, it gives an equal opportunity to everyone to serve a broader market.
At the same time, we will welcome some policy changes. Flipkart had to move its ultimate holding company outside India.
It bothers us local fund managers, who would like to nurture Indian start-ups headquartered in India.
The Indian government is taking up a lot of initiatives for Ease of Doing Business.
However, every element that leads to the decision by a start-up founder to incorporate, or move the company offshore, needs to be studied and the reasons addressed soon.
Some go out for easy availability of capital – this shall fall into place gradually.
However, we need to look at our laws. To give an example, the Companies Act, 2013 has made raising capital a daunting task.
A start-up is running for funds to pay salaries, but it cannot borrow a loan from a friend or shareholder.
The private placement requires three board meetings, a valuation report, new bank account, and no access to share application money until allotment.
On protection of minority interest, India ranks number 4 amongst all the countries in the world. We need to question: can our Companies Act 2013 smoothen the process of fundraising for SMEs?
In sum, therefore, the ripple effect of the Walmart-Flipkart deal will galvanise founders, investors, employees, customers and policy-makers. And, in the long run, everyone wins.