Sau Sunaar Ki, Ek Luhar Ki — #RelianceJio #JioDigitalLife #Facebook
#WaterBridge Ventures #Perspectives #India #startupIndia #eCommerce #SME #Retail #Payments
Literal translation of the popular Hindi language idiom:
Sau Sunaar Ki, Ek Luhar Ki
A single blow of a blacksmith is equal to a hundred blows of a goldsmith
Not all literal translations make sense, especially for idioms which are soaked in local context. This one with a little bit of translation perhaps does. But we have to begin the story somewhere else, far from the American (Facebook HQ) and Indian (Reliance HQ) shores.
Chinese investments in Indian start-ups
The importance of Chinese investments in the Indian startup ecosystem is well understood. Just in the last 3 years (2017 -19), Chinese investors (mostly strategics like #Alibaba #Tencent #ByteDance — #TikTok owner, et al) have pumped $7 — $8 Billion into Indian startups. That constitutes ~25% of total investments in all Indian startups. The number of startups worthy of receiving Chinese money is north of 50 and runs across Indian sectors (E-commerce, Payments, Education, Logistics, Food Delivery, Mobility, Gaming to count a few). Measured another way, more than 50% of Indian #Unicorns flaunt Chinese investors in their crowded cap tables.
The boost provided to payments company #PayTM from Alibaba’s #JackMa’s early support are well known. “Mere paas Ma(a) hai” i.e. “I have Jack Ma” has been touted as a badge of honour by some Indian entrepreneurs, and why not since it has been a healthy association of objectives. Similarly Tencent’s early (and at that time massive $100 Million) investment in #Dream11 helped provide average young Indians access to #FantasySports. Anything that helps fuel one of the 3 passions of Indians — Politics, Religion and Cricket has to go down in history as monumental. While #SoftBank #TigerGlobal have played significant roles in the journey of a long list of Indian unicorns like #Oyo, #Flipkart, the role of Chinese strategics has been more consistent in the Indian startup ecosystem over the last 5 years.
FaceBook’s $5.7 Billion investment in Reliance Jio
This slide from Morgan Stanley (financial advisors in the transaction) captures the #Reliance group and deal highlights’ well. 10% stake valuing Jio at $66 Billion Enterprise Value. Lot of deal tombstone worthy material.
Largest FDI (Foreign Direct Investment) for a minority stake in India
Largest strategic investment by a Tech company anywhere in the world
The financials and structuring of the deal are obvious. This is Jio’s 1st share sale outside the Reliance group. Reliance Industries (parent) has spent almost $50 Billion (mostly fuelled by borrowings) to build Jio, which has become India’s №1 wireless carrier (388 Million subscribers) within 4 years of its debut in a hyper-competitive market (#Airtel, #Vodafone, #Idea and over $200 Billion of total investment in the sector). Free calls and cheap data have played a role in the growth of Jio to date.
This partnership with India’s biggest wireless carrier gives Facebook a boost in its top global market (at-least by user base — 330 Million FB and 400 Million WhatsApp users), one that is rapidly embracing online payment and e-commerce as more Indians can afford smartphones. For a company that has faced regulatory scrutiny in India over fake news and privacy concerns, the tie-up with a well-connected ally may also help cement its position. Earlier it also ran into opposition in 2019 while trying to launch a payments feature inside WhatsApp (source: Bloomberg).
For Reliance, if not anything else, timing of the deal makes perfect sense. “This will ease the market fear of a debt hangover,” said Nirmal Gangwal (Brescon & Allied Partners).
The Facebook deal is a “great catch for Reliance Industries that has been struggling with delays in its deleveraging exercise,” said Abhimanyu Sofat (IIFL Securities). “It will have to pursue further opportunities, including Aramco, at the earliest” to cut its net debt to zero, he said.
Stock market and private market pundits are already coining theories around how this tie-up will help the plethora of Jio Digital Apps (MyJio, JioSaavn, Jio Health Hub) and most importantly JioMoney by establishing the connection with WhatsApp digital payments which is slated to be launched soon — https://inc42.com/buzz/whatsapps-struggles-with-digital-payments-launch-in-india-could-end-next-month/.
Tech startups vs. Jio (David vs. Goliath, or 800 pound gorilla thrashing the rest)
What has the startup ecosystem been saying about the impact of this investment for Indian Tech startups?
There are currently 13 consumer-facing apps on the Jio platform offering video content, payments, messaging, news and music streaming services. Saavn, India’s leading music- streaming app, was the first acquisition in March 2018. Since then, the ecosystem has grown substantially, with Reliance Strategic Business Ventures (RSBVL) leading the deals. More recent additions include cloud-based web development services provider NowFloats Technologies (source: AVCJ).
“India technology: The Jio effect” published 2 months ago by Suhas Bhat (AVCJ) captures the issues succinctly — https://www.avcj.com/avcj/analysis/3018494/india-technology-the-jio-effect
While no conclusions were drawn, it has been amply clear that the threat of Jio is looming over many upstarts especially in sectors like Payments, Entertainment, Media, and the bastion of Indian Tech i.e. E-Commerce.
Industry: Facebook overpaid compared to Chinese investments in Indian startups
Industry chatter: Chinese investors invested in over 50 Indian startups with ~$7 Billion investment. Facebook paid almost $6 Billion for investment in just one company. What a dumb investment!
With all the noise around us, there is a tendency to lose perspective or miss the forest from the trees. In this case let’s examine the trees first. All unicorns in India (25–30 depending on the quarter and VC’s valuation games) combined delivered $8.6 Billion of revenue and $3 Billion of losses in 2019. If one takes out Flipkart which is now Walmart owned (https://techcrunch.com/2018/08/20/walmart-flipkart-deal-done/), and adding for global Indian B2B/SaaS revenues (like #Druva, #Mu Sigma), revenue is tracking $5 Billion with $2.5 Billion losses.
In comparison, Jio delivered $6.7 Billion of revenue and $2.6 Billion of Ebitda. At $66 Billion, Facebook didn’t get in on a cheap deal (25x EV/Ebitda) but it certainly seems more reasonable than the rest of the Indian startup world valuations (averaging 10x Revenue OR infinite multiple of Ebitda, depending on how we want to price that). You get the drift.
Mind you, I am a proponent of Chinese capital (Strategic and VC) flowing into capital deprived #startupIndia and an ardent opponent of arbitrary restrictions like this recent one. (https://www.moneycontrol.com/news/economy/policy/fdi-policy-india-finally-bites-the-chinese-bullet-5170891.html). But in no way that has a bearing on my opinion (counter as it may be to the industry chatter) that Chinese investments in Indian startups have been more expensive than Facebook’s bet on Jio.
Sau Sunaar Ki, Ek Luhar Ki
Let me now examine the forests argument, or what’s to be read between the lines. Simultaneous to the $5.7 Billion investment, a commercial partnership has been signed between WhatsApp and Reliances’ e-Commerce app (#JioMart) to ensure that the consumers are able to access the nearest kirana (vegetables and grocery) stores by seamlessly transacting with them. Under the agreement, Facebook’s WhatsApp will help almost 30 Million mom-and-pop stores — the backbone of India’s retail industry — to process digital payments in a seamless way. Through this, Reliance gains a payment platform for their e-commerce unit while Facebook gets a testing ground for its payment services — currently in pilot — in a market with a population of 1.3 billion people and significant potential. This is a watershed event, something Indian startup ecosystem and stock markets haven’t given much attention to. Unfortunately for many Indian unicorns and upstarts who stand little chance of fighting this move.
Goliath has won this round. This is the #WeChat moment of India
This is the one strike of the blacksmith that is equal (or bigger) than a hundred blows of the goldsmiths
What does this mean for the startup ecosystem? Encourage you to refer back to the “India technology: The Jio effect” article and some of the quotes cited above. It will certainly start to make more sense.
Payments in India will go through massive disruption. PayTm and other payment platforms beware. Perhaps it will settle down to be a 3 way battle between JioMoney, GooglePay and someone else(?). Don’t see more than 3 large players surviving in this cut throat margins sector.
This marks the Digitisation of Local Retail and Distribution and a watershed moment for Indian Retail Commerce. #Udaan #Amazon #PaytmMall #Flipkart #FutureRetail — you will regret underestimating this moment and finally #DMart has some credible competition.
Reliance will up its game on acquiring significant vertical leaders or challenging them through its own. Build vs. Buy would be the driving dynamic. Some sectors and players that should be on their toes — Travel (#MakeMyTrip), Content (#Netflix, #DisneyHotstar), Gaming (#Dream11), Food Delivery (#Zomato, #Swiggy), Groceries (#BigBasket), Entertainment (#BookMyShow), Insurance (#PolicyBazaar, #Digit), Education (#Byju, #Unacademy, #DoubtNut, #Vedantu). It’s time to saddle up and these upstarts will do well to strengthen their position, more fund-raise or consolidate with your current competition to put up a better fight against Jio.
It is no surprise that#Amazon immediately announced its move to up the game on ‘Local Shops’ initiative. It would be hard to beat Reliance’s kirana focus and footprint without significant investment though.
I can assure you that while steadfast entrepreneurs like #VijayShekharSharma #SanjeevBikhchandani #Byju Raveendran #HarshJain #HariMenon #AshishHemrajani #YashishDahiya et al have had some sleepless moments over the last week (since this announcement), they are preparing for a long drawn battle. This is while the financial and legal advisors order their deal tombstones for this ‘major’ minority investment.
Do reach out to me on Twitter, LinkedIn or write to me at manish@waterbridge.vc if you’d like to share your views on this post.
