SoftBank’s Bumpy Ride in India; Why Have the Majority Of SoftBank Startup Investments Failed in India?

The SoftBank’s Less Than Starry Investments in India

One of the critical narratives is from Aswath Damodaran, a renowned finance professor, who has aptly pointed out that “SoftBank doesn’t have a soft touch when it comes to building businesses.”

Damodaran’s comments resonate with the plight of companies in India where SoftBank has made substantial investments.

Some of the prominent companies that count SoftBank as a significant shareholder include Paytm (One 97 Communications), Zomato, Policybazaar (PB Fintech), and Delhivery.

Surprisingly, none of these companies have managed to generate significant profits for investors after their listing; at the same time, however, it’s worth noting that there has been some recent recovery, primarily due to progress on the path to profitability.

The Valuation Rollercoaster
The story of SoftBank’s investments in India is marked by valuation fluctuations; according to the latest filings, the fair value of SoftBank’s ownership in these Indian entities increased by a remarkable $544 million between January 1 and June 30.

While the surge in value seemed promising, but at the same time, it was followed by a significant decrease; in fact, the data showed that the fair value of SoftBank’s stake rose by approximately $400 million over just three months leading up to June.

To capitalize on this volatility, SoftBank initiated the process of offloading stakes in companies like Paytm and Zomato, aiming to cash in on rising stock prices.

Late-Stage Investing Stagnation
One of the pressing challenges SoftBank faces in the Indian market is the reluctance of late-stage startups to lower their valuations.

This stands in stark contrast to their global counterparts, who have often been willing to accept significant cuts in valuations, and this hesitancy among Indian late-stage startups has deterred investors like the SoftBank Vision Fund from deploying fresh capital in the market.

As a result, late-stage deals have been hard to come by, and the creation of new unicorns in India has become a rare occurrence.

For instance, up until recently, there had been no new unicorns in India this year until quick-commerce startup Zepto broke the trend by announcing a $200 million funding round at a $1.4 billion valuation.

What makes this funding round significant is that it happened at a time when most growth-stage funds had become cautious due to the excesses of 2021.

In fact, according to weekly funding data from Tracxn, early-stage deals had been contributing to 70-80% of total funding on average over the past few months, and deals like Zepto and large secondary transactions like Lenskart’s $600 million funding had been exceptions rather than the norm.

The Difference in Market Maturity
Rajeev Misra, CEO of SoftBank Investment Advisers, acknowledged in an interview that India is the best-performing market for the Japanese investor; however, he also conceded that the country’s market had been overestimated.

A crucial difference between India and more mature markets like Europe and the United States is the willingness to accept reasonable down rounds and embrace consolidation.

Misra stated, “I think if you compare Europe and India, maybe because of the maturity of the market, we’ve started seeing entrepreneurs and cap tables being very reasonable with down rounds, and that has opened up deal flow there quite nicely. In the US, too, high-quality companies got heavily overly capitalized which have now taken big valuation cuts.” This difference in market dynamics highlights the challenges SoftBank faces in navigating India’s startup landscape.

The Indian Balance Sheet
SoftBank has been actively involved in the Indian market for several years, with the India investment team at SoftBank Investment Advisers running the show for the past five years.

During this period, Vision Fund-I and II have deployed more than $4 billion across 14-15 companies in India. Based in Mumbai, the investment team focuses primarily on writing checks of $50 million and above, with a few exceptions, such as the investment made in payments startup Juspay.

Expanding on this, Misra mentioned, “If you do series B and C, you need to do a bunch of them together; the DNA of SoftBank is that of late-stage growth tech investing. So, can we be flexible on that $50 million (cheque size) to go slightly earlier to that on the edges? Yes, we have done this when we found good software-as-a-service (SaaS) companies, which might not be $20 million ARR (annual recurring revenue) but might be at $15 million. For example, Juspay, Sense.” Thus, this approach reflects SoftBank’s adaptability in some instances.

The Challenge of Finding the Right Timing
One crucial factor affecting SoftBank’s investment strategy in India is the timing of its investments.

Misra pointed out that the current market conditions are an outcome of decisions made six to twelve months ago. He emphasized that the pipeline for investments is determined by past actions rather than immediate choices, and SoftBank’s India team believes that timing plays a pivotal role in their investment strategy, and they remain patient in the face of market challenges.

Exits, Share Sales, and Corporate Governance
SoftBank’s Indian portfolio firms, as Misra highlighted, typically have at least three years of cash runway left, reducing the immediate need for capital infusion. While some companies may opt to raise fresh funds, they generally aim to do so on their terms, whether for pursuing mergers and acquisitions or international expansion.

But the critical point is that are these companies not in desperate need of capital to keep their operations afloat?

SoftBank has pursued a series of partial exits through secondary deals in privately held companies like omnichannel retailers FirstCry and Lenskart.

Simultaneously, the company has been selling its public holdings in firms such as logistics firm Delhivery, digital payments major Paytm, and food delivery platform Zomato. This approach of SoftBank reflects adapting its investment portfolio based on market conditions.

To provide some context, SoftBank has recorded cash exits of just under $6 billion from its India bets so far, including the $4 billion it received from Flipkart’s sale to Walmart in May 2018; interestingly, SoftBank returned to back Flipkart in 2021.

Additionally, the Vision Fund’s most recent exit from a privately-held company in India was in Lenskart when the Abu Dhabi Investment Authority invested $500 million in it, and SoftBank is estimated to have garnered about $90-100 million from part-selling its stake in the retailer.

Looking Ahead, The Prospects of Indian Startups

Despite the challenges and fluctuations in SoftBank’s Indian investments, there are indications that several Indian startups are gearing up to go public in the near future. Prominent companies like Swiggy, Lenskart, First Cry and OfBusienss were among the portfolio firms from India readying to go public.

SoftBank also diluted about 1.5-2.0% of its holding in FirstCry as three family investment offices bought its shares in the e-commerce firm.

The Last Bit, SoftBank’s foray into the Indian startup ecosystem, while filled with ambition and promise, has encountered formidable challenges.

The rollercoaster of valuations, the reluctance of late-stage startups to compromise on valuations, and the absence of widespread consolidation have tested SoftBank’s investment strategies.

Nonetheless, SoftBank remains committed to the Indian market, banking on patience and prudent investments to yield favourable results in the long run.

Time will tell whether SoftBank can overcome these hurdles and realize its vision of success in the diverse and dynamic Indian startups.