Flipkart: Dance of the dragons

From $6 billion in July 2014 to $11 billion in December 2014 to $15.5 billion in July 2015.

Back to $10 billion in March 2017.

Down rounds are tricky. Unless managed proactively and communicated positively, they can be the beginning of a death spiral for startups.

The clock is turned back on a company’s valuation, replacing investors gains with losses. New investors get more shares per dollar invested as compared to the ones already around. Older investors either end up owning even lesser of the company than they already had or thanks to “anti-dilution” clauses they manage to extract their pound of flesh from the company in terms of more stock. Employees and other equity holders are left with options with negative worth. Bitterness and ennui everywhere.

Hectic Schedule Ahead

To Flipkart’s credit, it seems to have pulled off its down round rather well. Normally in down rounds, when a newer investor comes in at a lower valuation, older investors are issued additional stock at no extra cost so that their earlier shareholding levels aren’t “diluted”.

But hectic behind-the-scenes discussions between Flipkart’s older investors (there are 15-16 of them) convinced them to not exercise their anti-dilution rights when Tencent and Microsoft invested $1 billion.

No Indian investment bankers were learnt to have been involved in the deal. Instead, the deal was orchestrated by a heavyweight Goldman Sachs’ partner, Pawan Tewari, who’s based in San Francisco.

And when the dust from the discussions settled, Flipkart had done a “clean reset” of its overvalued past and established $10 billion as its new valuation benchmark. $5 billion of notional gains had been erased without much acrimony.

If that hurt Tiger Global, Flipkart’s biggest investor, staunchest backer and largest shareholder, it didn’t show it publicly.

Even tigers get the blues

In January, Tiger Global emerged from the shadows from where it was alleged to have controlled Flipkart, and took centre stage. It did this by installing Kalyan Krishnamurthy, previously an MD at Tiger Global itself, as the new CEO of the company, formally marking the passage of Flipkart to being an investor-run company. Sachin Bansal and Binny Bansal, the founders of Flipkart, were both, in turn, shunted out of the hot seat of CEO and given respectable sinecures.

While there is no doubt that a meaningful part of Flipkart’s ascent could be credited to Tiger’s bold and early bets, it might be pertinent to keep in mind that Tiger itself is a venture (or even hedge) fund that has to show “exits” sooner or later in order to deliver returns to its own investors. Tiger’s first bet on Flipkart in 2010 was a seminal event that reset startup valuations and funding round sizes in India. Since then it has ploughed in more than a billion dollars into Flipkart over multiple funding rounds. At some point in time, it needs to start harvesting these investments and actually return money to its own investors.

Tiger is learnt to be in discussions to sell a large percentage of its Flipkart equity to recoup some or all of the money it has invested in the e-commerce company till date, around $1 billion.

The two most common ways for an investor to exit a company are through an IPO or an acquisition. Unfortunately for Flipkart though, it is probably too big for a simple and outright acquisition. And an IPO seems unlikely in the short term.

Thus, what Tiger needs is a new investor—someone who can give it a “secondary” exit by buying a large chunk of its Flipkart stake. Which investor could possibly be a knight in shining armour to Tiger and give it the exit it seeks?

The answer might be obvious in hindsight but comes with its own set of attendant challenges.

Most favoured strategic investor

Of the prospective buyers, Tiger Global has had discussions with, the strongest candidate is said to be SoftBank.

Masayoshi Son, the founder and CEO of SoftBank, is one of the rare few tech investors left in the global arena who has the capital, vision and chutzpah to take long bets on technology. His latest fund, announced in October 2016, is a $100 billion one, which will invest in technology companies.

Given the long bets that Son likes to take, an investment into Flipkart, the largest e-commerce company in a country that’s got the most potential for growth, doesn’t seem that tough.

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