Rife is what news has been with what SoftBank apparently told Snapdeal:
1. Merge with Flipkart
2. Come be a part of the Alibaba/Paytm entity
3. Have a writedown of our investment in you down to a duck
It’s all about Amazon, actually…The battle to merge Flipkart and Snapdeal or make Snapdeal a part of One97 Communication’s Paytm Mall isn’t about any of these marketplaces. For SoftBank, it’s about going to war with Amazon on an equal footing with an Indian ecommerce platform that is large enough to beat the American ecomm giant, which coincidentally is spreading far and wide even in the Middle East with the announced acquisition of the leading ecomm player of the Arab world, souq.com.
Amazon has announced it has billions to spare to invest in India. And it will take the combined efforts of SoftBank’s investee companies to make a play for one of the fastest growing online markets in the world, right here in Bharat desh.
Here’s what an ecommerce analyst of a leading consultancy firm told us: Investors have all the right in the world to write down their valuations. SoftBank isn’t about to suffer any legal penalties nor are they likely to be sued just because they seem to be burning down the same ecommerce platform they put major monies in.
The same goes for Tiger Global. They have all the right in the world to sell 10 percent of their existing 30 percent stake in Flipkart for a billion dollars, and if that means they will earn back what they invested in the beginning, then they are just being sensible.
So does SoftBank have every right to force their hand as the largest single shareholder (apparently Masayoshi Son, chairman of Softbank is getting involved as well, so you know they mean business) in Snapdeal to make sure they walk away with something to show for all the sweat on their brow. In fact according to a startup mentor who follows the ecosystem as his god given duty, SoftBank will be the biggest winner if the other, early investors of Snapdeal just agree to one of the three options.
If things were only that easy though. While writing down investments to a zero sounds catastrophic, its effect is more superficial and nominal than not. Valuations are only on paper, Snapdeal would still have SoftBank as an investor (writing down to a zero is not a sign of desertion). But it does reflect badly on the other VCs involved. Every institutional investor forms their fund or corpus by taking in the money from a pool of investors who are expecting a return on their investment.
In the same vein, when a VC takes on other people’s money and then invests in a startup, the VC is expected to give back returns. What happens to the valuations Kalaari and Nexus Venture Partners put on their Snapdeal stake when they invested back in 2011, if SoftBank who swooped in, in 2014 says they will write down their valuation to a zero?
Our sources explained, “Ultimately valuations are on paper and it’s an understanding between the VC and the startup founders. Things get more real when the company goes to IPO. But a valuation lowered means the ROI a VC will owe one of their investors may be lowered, expectations may be lowered. This means the other participating VCs who haven’t written down their valuations are either pressurised into turning in an ROI that is seemingly higher than what the other VC (which devalued their stake) is supposed to give in. It just contributes to a lot of negative sentiments.”
Not that every time a devaluation or a down round happens these founders are thrown into the depths of gloom. It is a just day in the life of an entrepreneur, said our trusted startup ecosystem mentor.
The ones who may actually suffer are the multitude of suppliers on any of these ecommerce portals who may have to cave in. After building your reputation, your trusted base of consumers and positive reviews, if a platform is shutdown, then these smaller businesses will lose all of that.
SoftBank just gave Snapdeal an ultimatum in three options. So what? A lot of suppliers who can’t afford a shutdown maybe affected in a bad way, that’s what.
BW Reporters
Regina is a reporter for BW Businessworld. In her previous assignments, she has worked with Independent television Network as a news anchor and reporter in Sri Lanka
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