Hailing under the Clouds of Doklam

A delightfully-named Chinese company called Eternal Yield International Limited recently invested in Ola, the Indian ride-hailing company. There’s an interesting story behind this investment.

In November 2016, Softbank completed a $244 million investment in ANI Technologies Private Limited, the company behind ride-hailing platform, Ola.

Ola’s lawyers called it a Series I round. Softbank had previously invested $321 million in September 2015 and the new investment bumped up Softbank’s fully diluted shareholding in the company from 25.5% to30.8% making it the single largest shareholder in Ola.

As it currently stands, it was also the last time Softbank invested in Ola.

The next year, between March and September 2017, Falcon Edge, UC-RNT, Tekne Ventures andTencent invested $543 million, with Tencent contributing 74% of this round. Softbank did not participate but Ola appears to have clubbed Softbank’s previous investment from a year ago (at a different valuation) and publicly announced that it had raised $1.1 billion. By our calculations even including Softbank’s investment the original $543 million round could only be pushed up to a grand total of $864 million.

Ola’s press release indicated that it was in advanced talks to raise another $1 billion concluding a total raise of $2 billion. Sixteen months later, Ola has concluded a number of small financing events, but nothing close to the $1.1 billion it announced, let alone the $2 billion it said it was about to close.

Two events occurred that, we speculate, possibly impacted Ola’s financing effort.

The first one is obvious — Softbank’s investment in and acquisition of a large stake in Uber in November 2017 and the ensuing confusion regarding a possible merger between Uber and Ola.

The second is less obvious.

In June 2017, while Tekne was closing its $35 million investment in Ola, Chinese troops entered the southern part of a disputed area called the Doklam plateau in the area between Bhutan, Tibet and India, to, of all things, build a new road (it’d have been more appetising I suppose if they’d put a high speed train there). Within days Indian troops moved in from Bhutan and blocked Chinese troops and equipment from proceeding with work, setting up a confrontation that lasted until late August 2017. During this period China’s shrill and vocal response, India’s determined and steady troop and equipment buildup, and the media frenzy on both sides of the border gave many cause to fear the possibility of an armed conflict between the two Asian neighbours.

The 75-day Doklam border standoff had many longer-lasting consequences on both sides of the border. One of them was the chilling effect it had on evolving cross-border business relationships. Chinese capital had begun to enter India in a more direct manner than it used to previously but the possibility of war created an issue that Indian and Chinese businesses had not had to consider until then.

Optics.

Indian and Chinese entrepreneurs and professionals who were just beginning to engage and acclimatise themselves with each others’ locales (through numerous visits, deals and events) now had to worry about how their collaboration would be viewed by both people and governments on both sides of their disputed border.

Ola’s financing event was a classic example. Ola had to acquire significant capital to compete with Uber and until reports emerged of Softbank’s interest in Uber, Softbank represented one route towards acquiring a warchest large enough to compete with the global ride-hailing giant. At that altitude, there were few other investment firms that were equally aggressive both in terms of time and capital for Ola to reach out to.

There were no firms in India that were willing to assume the level of risk associated with venture plays of this size. There were an assorted set of sovereign wealth funds that were active in Asia. There was Naspers, a company that was actively competing with Softbank to garner stakes in key growth stage companies around the world. Then came Baidu, Alibaba and Tencent (BAT), the three large Chinese Internet companies.

Soon after Doklam, Ola and Flipkart (then led by Sachin Bansal) joined hands to set up Indiatech.org a lobbying organization for Indian startups. The ostensible purpose of this organization was to ensure a level-playing field for home-grown startups vis-a-vis incoming competitors from overseas.

Simply put Ola wanted the Indian government to make it easier for Indian startups to raise money from overseas and India and more difficult for overseas companies to operate in India. Bhavesh Aggrawal, the CEO of Ola, wanted to raise massive amounts of capital but on his terms. And he could not do that i.e. maintain his operational independence, by raising money from a Chinese technology company. He had to do so from companies outside BAT.

There were a large number of Chinese companies and entrepreneurs that could rapidly channel large amounts of capital that they were sitting on without swaying Ola in a given direction. Capital that was in many cases partly owned by the Chinese communist party or the Chinese government. In hindsight it appears that Ola was in active discussions with one or more such companies to be part of its $2 billion round. But Doklam appeared to have put a spanner in Ola’s works.

A year later, when Ola submitted filings in mid-2018 indicating that it had just allotted shares to a set of strangely named offshore entities, it raised a few eyebrows but not enough to move the news.

The press did report that these entities were offshore vehicles of Sailing Capital and China Eurasian Economic Co-operation Fund (if there’s one passive-aggressive term the Chinese are in love with, its co-operation — you’ll see it dispersed like garnish in every dish they serve, although I’m certain it conveys a different meaning in their tongue).

But the numbers were small, too small compared to the large numbers Ola puts out in its press releases.

But what caught our attention was the label on the round. The securities issued to these three entites,Odyssey Bravery, Auto Fortune1 Limited and Eternal Yield International Limited, were classified as I2 shares. That’s when we noticed that Ola had skipped a round that should have occurred between September and December 2017.

Courtesy: paper.vc

For reasons that we can only speculate about, Ola decided to place its Series I2 round, the round where it raised capital from entities owned or controlled by the Chinese government, a year after it should have occurred.

It should have occurred shortly after the Doklam standoff.