With Walmart closing in on Flipkart, the spotlight shines bright on exits
Amid speculation that Walmart is looking to acquire over 80 percent in Flipkart, startups are focusing on the one thing that validates success - an exit.
Over the past few weeks, the Indian startup ecosystem has been abuzz with what seems like the almost-done Flipkart-Walmart deal. Speculations are rife, and have caused much excitement among startups, entrepreneurs, and the investment community.
From initial market talk that the deal would see Walmart acquiring between 25 and 51 percent stake in Flipkart, to the latest speculation that it might grab a larger pie - up to 86 percent – the one thing that stands out is the massive exits.
Over the past week, there have been several speculative reports on who will get an exit, and who won't. Broadly, it is believed SoftBank and Tiger Global will exit Flipkart. It is also possible that one of the founders - Sachin Bansal or Binny Bansal - will sell their stake. Other reports say SoftBank wants Flipkart to wait for an offer from rival Amazon.
Reports say Walmart might inject a total of $12 billion in the Indian ecommerce giant, taking its valuation to $20 billion.
By the looks of things, most major investors and shareholders in Flipkart like Tiger Global, Naspers, and SoftBank will get a significant exit. Yet, how is this good for the entire startup ecosystem?
Over the last decade, while there has been enough said about the startup ecosystem in terms of the funding raised, billion-dollar valuations, moonshot goals, and dreams, the one thing that has been missing from the equation is what would validate it all – an exit.
A validation of the India story
Speaking of how this deal and the exit may benefit the startup ecosystem, Vinod Murali, Managing Partner, Alteria Capital, a Mumbai-based debt fund says, “This completes the lifecycle for one of the largest success stories in the Indian startup ecosystem. So far, the Indian startup ecosystem has shown great potential. We have been talking about the market size, talent, demographics and consumption. This hasn’t shown conversions in terms of ROI (return on investment); the Flipkart-Walmart deal just validates the potential we have been talking of all this while.”
If one were to look closely, there aren’t too many strong venture markets. Having an exit that runs well into tens of billions of dollars is a strong statement for a market from a funding and investment standpoint.
A virtuous cycle
Exits help create a virtuous cycle. Most investors and VCs raise capital from their LPs (Limited Partners). The exit that investors may get from the Flipkart-Walmart deal would mean the LPs get their investments back, and make a tidy profit. This works as a market validation for the LPs.
Srini Vudayagiri, Managing Partner, Peepul Capital, adds that a Flipkart-Walmart exit deal brings confidence that the consumer internet market in India can create a big impact for investors. The investors, in turn, believe in investing in the Indian startup ecosystem.
“There are several funds raising capital this year, an exit story bolsters positively towards those efforts,” says Vinod.
The importance of scale
This, however, doesn’t mean that every other startup will get funded. Investors will still be wary of me-too startups and product ideas. Srini says: “Flipkart wasn’t chosen because it was in a list of 20 ecommerce companies. It is India’s biggest ecommerce startup and has achieved a certain scale. Size and execution therefore become important. Consolidation is the name of the game here.”
However, these "big-ticket" outcomes give rise to other "medium-ticket" outcomes.
It also demonstrates the importance of omnichannel in retail. The lines between online and offline channels are blurring. “The very fact that someone like Walmart sees importance in this kind of investment shows that they are clearly looking at omnichannel as a long-term perspective,” Srini says .
For omnichannel model to work efficiently, technology and logistics should be strong. Technology should be able to forecast what items will be in demand in a particular period and enable sellers or retailers to stock up accordingly. Flipkart has been able to build the strong tech side, and has a fairly strong logistics arm.
Interest in startups
“This also shows that corporates are now slowly starting to show interest in startups,” says Srini. Over the past two years, international giants such as Tencent, Alibaba, and now Walmart have been looking to invest in startups.
With someone like Walmart looking to acquire a controlling stake in Flipkart, it opens the way for Indian companies to look at startups. An investor, on condition of anonymity, said, “It will take some time for corporates to look closely at Indian startups and entrepreneurs. Only when the startups actually make big news and possibly affect the workings of the businesses, would the corporates take notice.”
Will the Tiger come out of hibernation?
“For the past two years, Tiger Global hasn’t invested in new startups, or even participated in follow-on rounds. There are few funds who can invest in startups in later rounds. While SoftBank has been active, Tiger Global hasn’t. With this speculated exit, hopefully, it will look back at pumping in money into the Indian startup ecosystem,” says an analyst on condition of anonymity.
“Although Tiger Global has not invested in Flipkart in the last two years, it is keen for a successful exit for itself and the founders. Naspers and other smaller investors will also exit completely,” the analyst adds .
Exits clearly create a virtuous cycle in the market. What matters is how this exit, in particular, will help bring more exits and more investment to the Indian startup ecosystem.
