The Bengaluru-Mumbai divide got stronger for India’s tech ecosystem

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Last year, I met a tech investor in Bengaluru over coffee. This was the time Reliance JioMart — then known as ‘new commerce’ — was expected to roll out by Diwali. ‘So, what’s Reliance Jio’s ecommerce venture all about?’ this venture capitalist (VC) asked me? Many others in the tech fraternity were talking about Jio and what it was possibly putting together on the kirana front, touted as being the foundation for its ecommerce ambitions in a market where Amazon and Flipkart have been dominant players.

By early 2019, the company had two products — the Jio PoS (point of sales) terminal and MyJio app — that had been distributed to shop-owners to build an ecosystem. My coffee-sipping VC made a remark, which stayed with me: ‘Bombay is getting ahead of Bangalore,’ adding that Bengaluru founders and companies were unaware of what was going on in Mumbai. ‘They live in a bubble and aren’t able to fathom what’s going to hit them,’ he had said. On a broader level, he also mentioned how the frothy valuations of Indian startups are mostly never understood in Mumbai’s financial circles.

A year down the line, a lot of what was going on in Mumbai has come to the fore, when in April, in the thick of the Covid-19 outbreak, Facebook announced its investment of $5.7 billion for 9.99% stake in Reliance Jio Platforms. That was just the start of the rush of capital coming into Jio Platforms, culminating with Google’s $4.5 billion infusion earlier this week.

Jio Platforms is a subsidiary of Reliance Industries, which owns the telecom operator Jio and other digital businesses of the Indian conglomerate. In a span of about three months, Jio Platforms mopped up $20.4 billion — almost the valuation of Flipkart when it was acquired by Walmart two years ago and the combined value of Zomato, Swiggy, BYJU’s and Freshworks. Not surprisingly then, most Bengaluru VCs, and even founders, are shocked at how Jio successfully raised this gargantuan financing without them getting a whiff of what technology the conglomerate has actually built.

For what it’s worth, Jio isn’t the typical consumer internet company, which gets valued on vanity metrics like gross merchandise value (GMV), daily active users (DAUs) and monthly active users (MAUs). But it is the biggest telco-tech company in suburban Mumbai with no connection to Koramangla.

What stands out is how, till a few months ago, Jio was hailed by the tech community as a great pipeline offering cheap data reaching the deepest parts of India. But the local entrepreneurial ecosystem wasn’t sure if Mukesh Ambani’s efforts around Jio would translate into building digital products with the same finesse.

Many startup and VC folks were heard applauding how Jio was sheer ‘execution-propelling internet connectivity to Bharat’. On many occasions, I would ask these same people what they thought would happen if Jio started using the same pipe to push its own services and products – something that all telcos have tried, but most have failed. No one gave me a clear reply. And I suspect that’s because none knew — or knew very little — about what the Mumbai company was up to.

Many have said how Facebook, Google and a dozen financial investors have lined up for Jio Platforms to possibly move to the right side of Indian regulations and policies. Globally, big tech has been at loggerheads with antitrust regulators, governments and various agencies. Amazon, Facebook, Google and Apple are all facing regulatory and government scrutiny of some kind. So why would they not want to be in a safer zone in India? This, to many watching the events unfold, is a small price to pay.

While this may be true, who stopped Bengaluru startups from not making their policy pitches better? Why were they siloed away from business realities, other than making some noise about capital-dumping by foreign competitors and protectionism a few years ago?

Also, on the question of execution, remember, the same Jio was praised repeatedly for laying the foundation for many tech startups to flourish beyond India’s metros. To dismiss Jio’s newly formed collective and say that Google and Facebook invested in Ambani to win a policy battle is far too simplistic.

Wall Street and Silicon Valley came together, bridging the gap between New York and San Francisco, because the bankers smelt a gold rush in technology upstarts and their impending initial public offerings (IPOs). If Indian tech startups had been able to build a bunch of super-scaled businesses that could go public, it may have averted the concentration of power in a legacy company that’s likely to bring in massive returns to 14 of its investors.

SoftBank’s Silicon Valley play resembles India tech market of 2014-15

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Having returned from my annual trip to Silicon Valley, I’ve been assimilating all the talking points that emerged as I went about meeting investors and founders. As was expected, the conversation starter this time around at most of these meetings was SoftBank.

Softbank’s $93 Billion Vision Fund ( which may swell up to as much as $900 billion) started deploying slugs of capital this year in various Silicon Valley and US tech startups arresting everyone’s attention. Considering the average size of these cheques, which typically are upwards of $500 million, the investment vehicle is obviously the new hot thing to unravel for everyone there. Some call the whole SoftBank phenomenon “unreal”.

The tech media is evidently hopped up, trying to put out as many stories as they can about the Japanese telecoms and internet group which was so far largely known in the US for its acquisition of Sprint, the telecoms company in 2012. But SoftBank is a different beast today.

Steered by its maverick founder Masa, who is on a world altering mission through what he says are investments in future technologies, and famous for his maiden bet on the Chinese e-commerce behemoth Alibaba back in 2000.

What struck me amid all of this, as I read reams on SoftBank and Masa ( and continue to read some more) and met people in the Bay Area tech fraternity, is how similar all of this is to when the Indian tech press and the larger ecosystem was in the process of discovering the group back in 2014.

What added to the storyline at the time was the flamboyant ex-Google hotshot executive Nikesh Arora who was hired by Masa as his trusted lieutenant. The two swooped down on India, sprayed capital in startups like Snapdeal, Ola, Housing, Oyo and Grofers, all in a span of about a year. Even then, the same worries were being highlighted about SoftBank spending very little time in due diligence before closing deals and about the dizzying valuations at which money was being raised by startups with no real business models.

I’d met and interviewed Masa and Arora twice between 2014-16. Arora was this flamboyant deputy and the perfect foil to Masa. Who’d have known that by mid of 2016, Arora would abruptly leave the group because he wouldn’t become Masa’s successor as announced publicly. He told me in an extended interview just a few days after stepping down that waiting for the top job didn’t make sense for him.

I asked myself if there’s any difference in how SoftBank approached investing in 2014 in India and what’s happening now in Silicon Valley? For starters, three years ago SoftBank did not have a gargantuan sized Vision Fund, and was investing out of its balance sheet. Also the focus of investing was mostly on consumer internet and a bulk of its wagers were in the south east Asia and India region (Arora’s presence was partly the reason for that). With the Vision Fund, the canvas is far bigger and the mandate from Masa is to invest behind a wide range of future technologies like robotics, biotech and artificial intelligence.

Recently when I spoke to Rajeev Mishra, another Indian who is heading up the Vision Fund, it was apparent the fund was aware its mammoth size was a big advantage for it to win deals.

A VC told me the other day, “No other investor can match them (SoftBank) in the near future. They are also looking to add another $200 billion. It remains to be seen how this will play out,” he said.

This is again similar to what happened in India three years ago when SoftBank became the hottest investor in town, no one knew what was the long-term effect of this windfall of capital into companies.The questions around SoftBank are still the same— a massive pool of capital which can distort valuations, an investing team which is not known for scoring technology deals, and the large stakes they hold in companies along with favorable terms that come as a result of it.

But like in the period of 2014-15 when Indian founders took money from SoftBank as it was readily available, so are their counterparts in the US.
What’s the choice really, would you let them back your rivals, asks an entrepreneur while talking about the current Softbank driven tech investing market.
And with the cross over funds and mutual funds (folks like Fidelity and T. Rowe Price) more or less having disappeared from the investing landscape, Silicon Valley has only one giant backer of the size of SoftBank to go to for private money in the near future. I wrote a piece about how SoftBank emerging as the new IPO for many tech companies and providing secondary sale options to early VCs.

It remains to be seen how things pan out over the next few years and whether or not these billions of dollars being pumped into hot Silicon Valley startups by SoftBank would lead to unfortunate fallouts like the ones we saw in India between the fat cat investor and its portfolio companies like Snapdeal and Housing.

For now though SoftBank is stirring up Silicon Valley and no one is complaining.

Taking stock-Through the journalist’s lens.

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It’s been overwhelming, exhausting and consuming in equal proportions to cover the tech startup ecosystem in India over the past two years. I’ll take the liberty of assuming, a majority of you reading this blog post would be familiar with the frenetic and never-seen-before pace of activity that took place among startups, investors and everyone else involved in this current boom cycle.

As a journalist I may not have gone through the pressures of running a business or of taking investment decisions in a period which was fraught with wild exuberance. But, as someone covering this space and having an inside track, I felt the heat of keeping up with the pace at which things were evolving. This period also got the focus of many publications- offline and online- onto this sector bringing about competition among journalists on who gets what first. I’d first written about the media euphoria and boosterish coverage in January 2015, but the headiness only got amplified post that.

This year though has started on an extremely sombre note and one that made me write this post. I know it’s a little late in coming but it’s here!

Things have perceptibly and very evidently changed over the past five-six months. The media has been writing about that , too, in equal doses as when the times were exceptionally good. 

But beyond the skittishness there’s a big shift that’s happening. IMO, the most important change from the peak of the go go times to the situation that we are in today has been the way entrepreneurs talk to me now. Some of them are in the midst of their toughest test, trying to wade through a period which they never saw coming. Many of them may not be able to survive this phase but they would have learnt a huge lesson and will hopefully comeback with an ever better business which will be far more efficient and sail through the storm. I can already see acceptance among the smart founders. Some of them are admitting that they got carried away. 

They are taking the right strides in the right direction, after having gone astray, they say. I don’t want to point to who was responsible for these egregious mistakes. Bill Gurley’s post from a few days back encapsulates very elaborately on that topic.

I can only tell you from knowing about the goings-on in the ecosystem that some of the founders are in this not-so-envious place where they are shuttering operations, laying off employees and have literally hit the brick wall, because they had no one to guide them on what was the right way to steer a business. They were only guided to grow and grow faster. This applies to not all founders, though. I hope as I write this post, they are surrounded by people who can tell them that even if their chips are down, no one is judging their calibre to bounce back successfully.

In the meantime, as a journalist I want to tell  founders, investors & all and sundry, that I don’t derive pleasure in writing about the bad times. But just the way we covered the euphoria, we are in the business of disseminating news which is not as good, too.

Being transparent serves us all good especially now. Just the other day I was with a founder who told me unabashedly how difficult it was to raise money and that it took him over eight months to do so. Like Gurley said in his post, don’t bother too much about the wrong things– image/ego/perceptions. Ultimately, all of this is not what gets you success, it will be what you make of your company.

Good luck, everyone. And let’s all be honest.

“India looks more like 1999-2000 than the US does”

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I was in the Bay Area recently on work and met a host of VCs and tech investors. The bubble talk was one of the first conversation starters, not surprisingly. To think of it I was discussing this with the same set of people around nine months ago on my last trip but this time the chatter was significantly louder. The answers though were more or less the same.  A lot of the stuff that I gathered from meeting these investors—some of them are actively chasing deals in India as well– spread all across Sandhill Road was ‘on background’.

I’ve been trying to convince these folks to come on-record but I’ve hit the wall most times. It’s pretty much the same thing being played out in India, too. Privately held companies and investors in these companies are holding off the most relevant and also vital information from the press which is working very well for them. All you get is a string of platitudes when people come on-record. It’s a big concern which tech journalists in the Valley are starting to highlight because it gives a lot of cover to companies and investors.

So I’ve decided to put this one interview out I’d done with a top VC who after going back and forth decided he did not want anything at all out in the media. I chose to use my blog instead to publish some parts of our conversation where he tells it like it is. I think he summed up the irrational exuberance among his Indian brethren and also among entrepreneurs pretty accurately.

Let me know what you think? Why is it that so few or none of the investors publicly admit to failures, talk about valuations being out of whack or say anything critical about entrepreneurs? In India these issues are even more pronounced.

Issues in the US tech market?

There are no simple answers for the US like it’s a bubble or no or that it’s different this time. It’s too simplistic. So, there are a lot of interesting things that are worth investing in while the opposing force is that there is over exuberance and sloppiness  among both entrepreneurs  investors. Surrounding the good opportunities is a lot of noise, and unsustainable or bad behavior. So we have to pick through all of this. However, we should feel good about being a VC right now because there are lot of great ideas and businesses to invest in. It’s just that our job has gotten harder because we have to sift through a lot of ridiculous stuff to get there.

What are the big issues?

There are some fundamental bad habits like some entrepreneurs are micro optimizing and getting caught up in the hype cycle. They are thinking that they can do the same thing like Facebook or Google did. That is a bit unrealistic. But things will come back around. People who have the mindset which is that they want a good investor, find a partner, thankfully there are lot of such founders. However, there are some who are not in this for the long run but are in a quick hit kind of business. It’s the same with some investors who have too much money but not enough attention and help to offer to entrepreneurs. Along with that they are doing their bit driving up valuations as they are not in it on a persistent basis, they come when markets are frothy and go away. We have to contend a little bit cause this is the only business we’ve always be in. Sometimes watching someone do a bit of a silly deal, that’s the price you pay for being part of this market. But if I had to make any prediction, I’d say invariably if you have this much noise and sloppiness, and too many companies being funded and prices being out of the whack, there’s an inevitable correction that is bound to happen. It’ s not like a bubble that bursts and totally caves in on itself, it’s a correction. That’s the normal thing that should happen. If you zoom out the longer term trend line though is on the rise.

How different is it from 1999-2000?

It was different because everything that was being built was unsustainable. Right now, there are many companies with big valuations, but at the core they are good businesses, they may be running too fast and burning too much money but they still have a viable business proposition. Instead of a massive correction in stock market, what will happen is screws will get tighter, and people will get more disciplined. I don’t think there will be a massive implosion. I look at our portfolio and compare it to 1999-2000 at that time  everything looked flimsy. Right now, all of these are very good companies, even if they get valued at 50% of what they are valued at today, it would be a bargain as opposed to going from billion to zero like in the original bubble of 1999-2000.

Unicorn hunting

There’s never been so many of these billion dollar technology companies. Where will they all go? So if you have a recurring revenue model with a strong consumer proposition you can work just as well in a downturn because you have real stickiness, product for which consumers will pay. It’s companies that have no real business and are valued at a billion dollars and they are thinking someday they will invent an ad model- that’s problematic. Consumer businesses are the flimsiest businesses. I think the ones you see the most likely to be hit are so far ahead of themselves with audience and engagement but no money. So when things start tightening these consumer facing companies will be disproportionately impacted.

Where does India stack up?

India has bigger challenges than the US. It has two things that make it very exciting and scary at the same time.On one hand, it’s so early in what’s potentially a massive domestic market that you get excited about investing in products and services that will address that market. Where will you see from 10 to 100 kind of growth? Also, there’s some thread that connects China and India. The challenge I see is that there has not been any prescribed path to liquidity in venture investing in India. Whereas here in the US, you can think of selling your company, or going public. So there is no evidence of an Indian multi billion company exiting and that’s a big bet to take on huge dollars going into these companies. How are you going to go public ? How do you get out? Who’s going to buy it? There’s lot of risk in India. Also, all these companies are buying the hype a little bit too much—no one has forced them to prove that they can make profits. It’s one thing to lose money but know you can make money, and another thing to lose money and always lose money.

Investors are treating India as the flavour of the day and making a big splash there. A lot of people are coming in doing crazy deals which makes me feel India is poised for a bigger and more dramatic correction than the US.Companies there burn a ton of cash, they have very thin management teams and have not shown an ability to withstand a downturn so what happens when the money dries up. It could look more ugly than the US, India looks more like 1999-2000 than the US does.

Media’s new found euphoria around startups, justified?

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I’ve been discussing this with fellow journalists, entrepreneurs and some of my VC friends over the past year– how the mainstream media has discovered startups and lapped up every little thing that they do as front page news. They have good reason to do that- after all gobs of investor money has gone into consumer internet companies, how do you ignore the gold rush? I really can’t be griping about this considering I’ve written so many of those stories myself, but now is the time to start asking some tough questions to these same startups.

Over the past few months, I’ve noticed the bigger and well-funded startups have been feeding journalists only things that they want to and gotten away with more favourable pieces than critical ones.

I started reporting on this space (consumer tech) sometime in 2010-11, I remember fund raise stories involving Myntra, Flipkart and others would go at best as a single column. I’d explain to people that these folks will become billion-dollar companies sooner than what we think they will. And it did not take long for that to happen. However, the fun was in pushing for those stories then and not now.

I’d think what’s happening now is that entrepreneurs— big and small–have realised that startups are getting phenomenal space in media and they are smart  to take advantage of this boosterish phase.

It’s still great to celebrate that budding startup,  break that big scoop on a billion dollar fund raise, but I hope this year we also see a few breakthrough and hard hitting pieces on this new breed of companies. I realise a lot of reporters want to do these kind of stories but then the pressure of a newsroom is not easy to deal with, what if you miss that big fund raise news? There’s increasing competition with so many publications starting to cover this sector but then somewhere we as journalists need to put things into perspective.  I face this dilemma everyday..

People in the ecosystem tell me the honeymoon period will end once the funding bubble bursts but I say why wait for that to happen?

Let me know what you think…happy new year everyone!