Start-up ecosystem is at a very, very nascent stage in India: Nikesh Arora

The vice-chairman of investment firm SoftBank Corp talks about his journey so far, his investment strategy in India and how the start-up ecosystem is evolving

Nikesh Arora says a lot of start-ups are in the high seas and they don’t know what to do if the winds change or clouds show up or there is rain. Photo: Pradeep Gaur/Mint

Nikesh Arora says a lot of start-ups are in the high seas and they don’t know what to do if the winds change or clouds show up or there is rain.

From being the fourth most-important person at Google to becoming the vice-chairman of investment firm SoftBank Corp., 47-year-old Nikesh Arora talks about his journey so far, his investment strategy in India and how the start-up ecosystem is evolving. Edited excerpts of a free-wheeling interaction Mint:

Tell us about your journey from Google to SoftBank and what your plans at SoftBank are.

I worked at Google for about 10 years and during the time I was there it went from a $2.5 billion company (in revenues) to a $60 billion company. During that time, I had the privilege of opening and scaling about 40-50 Google offices around the world.

In that journey, about 5-6 years ago, Masayoshi Son came to meet us and made propositions to look into Japan as Yahoo US was about to use Microsoft as a search engine. He was looking at how Google could power Yahoo Japan.

In the process, Masa and I got to know each other. About a year and a half ago he started coming to California and in one of those trips we met for dinner. We had an enjoyable conversation and the next time he came by he sounded me out again.

Slowly, our conversations were less about Google and more about SoftBank and what he was trying to build around the world, whether in the telecom space or in the Internet space. And in one such meeting, he asked if I would work for him and I thought it was a joke. Little did I know that three months later he would convince me and I wouldn’t say no. So I talked to the founders of Google and reached a situation where I left Google and started working for SoftBank.

I had just left Google and had taken four weeks off and I got a call from Masa saying that he met Kunal (Bahl) from Snapdeal. He had made an offer to buy some parts of the company but Kunal was not taking the offer. So I sought Kunal out and talked to him. I realized Masa told him that “I think e-commerce is going to be big in India and I would like to buy half of this company”, which didn’t go down well with the existing board of Snapdeal.

I spent the four weeks talking to their shareholders and managed to get the deal done. We ended up buying slightly over 30% of the company…not as much as Masa wanted but we got a good deal.

In that process, I spent a lot of time understanding what is happening in India and it got me more excited about the country because we were going to see more investments come into the country. (Narendra) Modi had just been elected (prime minister), so Masa and I planned to come back in October. We met around 40 companies in two days, sitting out of Sunil Mittal’s office. Two days later, we had a reasonably good idea of what was going on with start-ups in India.

We were interested in real estate categories but we couldn’t make up our mind. There were four-five companies so I met everyone. I had Rahul Yadav (then CEO of Housing.com) come back twice. And that happened to be our third investment.

Oyo (Rooms) was another investment we made. We met Ritesh (Agarwal) and I was really impressed by his maturity, his level of understanding of the space.

That’s like our history in India.

Today, Masa and I spend hours talking…just trying to understand our existing portfolio and where we plan to invest money.

So part of the conversation is what SoftBank wants to be because he had a spectacular investment for the last 37 years, but he does that as a hobby. He had a small team, which was really looking to invest in core businesses—actually large telecom businesses in Japan.

We have spent six months restructuring the company, basically pivoting the whole company into a holding company where there are portfolio assets. Today we have 15-18 companies.

Masa hired about 15 people on the investment side in California in the last one year. They are supposed to help manage these portfolios.

Our view is that we would like to have a sustained business for 300 years or more. And if you look at the history of business everywhere, most companies start by these small entrepreneurs, they reach a certain point and then they plateau…entrepreneurs are older, they find other things to do, they have other pursuits and they hire a management team and, at some point, it becomes hard to innovate.

There are very few examples—perhaps Apple’s Steve Jobs, IBM—of a resurgence.

So we said how do you survive that kind of a downtrend and how do you ensure growth. We decided that we will take the cash flows or returns from these investments and try to find the next Jack Ma and the next Steve Jobs. That way, we are not trying to build operationally new businesses. Instead, we are trying to find people who can build great business solutions in the next 20 years. We don’t have a fund, we have a portal—company, cash and investments. We can just use that to invest in these companies and we don’t have to return money to anyone like a fund does.

To what extent is investing in a company a gut feeling, because you really can’t value a company based on cash flow?

Yes, but I think this is a bit of a fallacy. The reason it is a bit of a fallacy is because you can’t value it based on what they are doing today. You have to value it on the belief that they are going to go somewhere. So take any business—at the end of the day, even Google has revenue, has costs, has a profit margin, has cash flows. Eventually, all these companies will have to generate profits.

But the question is how does the market see them. You have to have a point of view—whether these guys would get there or won’t get there. Take e-commerce, for example. You know what the margins in traditional commerce are. Somewhere between 2% and 12%, depending on how well it is executed. So, if I did not have the cost of real estate and if I do not spend a lot on logistics, the margin will go up to 6-15%. You have to be able to fantasize what the long-term strategy will look like.

Life is very simple. Valuation will depend on what somebody is going to pay for a business.

Alibaba has recently seen a drop in its market cap. To what extent do you see such movement affecting Indian e-commerce companies? Are there any lessons that the Indian companies can learn?

Alibaba has a GMV (gross merchandise value or cost of goods sold) of around $300-400 billion. No Indian e-commerce company comes close. My guesstimate is that the Indian e-commerce market is a $12-15 billion market now. India’s GDP is $2 trillion. If the economic winds shoot up and the $2 trillion grows at 1.7%, it doesn’t change the outcome of $12 billion because now people are purely opting for e-commerce for the convenience or the deals.

When you grow to $400 billion you get buffeted by the GDP growth more than when you are at $12 billion. The buffeting that is happening in China is happening because of general economic concerns and Alibaba being one of the bellwethers (in that country) from a commerce perspective. Hence, people from a purely mathematical perspective are projecting a lower growth rate and hence they are presuming that the valuation of the company will be lower than what was earlier anticipated.

In the Indian context, it is too early for people to be worried about the general economic landscape and its impact on e-commerce. First thing would be to take a share from offline and the second phase is going to be a significant share in GDP.

What is your investment thesis in the country?

I am trying to stay away from market definitions because people define things the way they want to define things. There are about 1.5 million companies and we can invest in only a few. We decided we will not be a venture capital company so we had to shut down SoftBank Capital, which was a venture capital business. We will invest in a space where there are 4-5 players in the market, where there is an obvious leader. We will operate where we think the market is beginning to consolidate. We won’t get in too early into the market. If there are 500 companies, I don’t have the scale to look at all of them in the market. I can look at 5 companies and say that A or B can be the winner.

Is SoftBank’s investment in the solar sector a financial bet or a strategic one?

Broadly speaking, we are interested in the renewal energy space in India. The commitments towards renewal energy that the country is making. But it is a step by step process. The first step is to see if we can actually participate in the current RFPs (request for proposals) for bids in Maharashtra, Andhra Pradesh… We are looking at each one of them. Each one of them has different characteristics. You want to de-risk it as much as possible. The states are putting packages that are guaranteed by the centre or not guaranteed by centre, there may be long-term leasing or no long-term leasing. First, we want to understand what each bid means and whether we can win a bid or not.

So if you win a bid, it could be for a gigawatt or 500 megawatts, how much capacity am I going to create in India from a renewable energy perspective? Then you turn around and see should I be building this internally for the market. There’s an inflection point when you go to your partners and start encouraging them to build and create more capacity. We are not manufacturers. We have a partnership with Foxconn for renewable energy here.

There’s a long way to go before we start seeing scale. There are a lot of people getting into this and every state seems to be creating some sort of auction process for this solar energy opportunity.

What was the idea behind you buying the SoftBank equity?

It is called alignment of interest with my shareholders.

How much does the age of an entrepreneur matter to you before investing?

When I was young, I thought that the elder people weren’t as smart, now when I am older, I think all young people are immature. Of all the entrepreneurs that I have interacted with, maturity and age do not have a direct correlation.

When we met Rahul (Rahul Yadav of Housing.com), he was very different from the other entrepreneurs operating in that space. He said that this space was creating products for end consumers…it is not about trying to do listings or trying to get people to buy because there is a fundamental challenge in the quality of the marketplace and I 100% agreed with him. Because the first thing you align with is: what is the problem that the entrepreneur is trying to solve? Do you believe that the problem that he is trying to solve is big enough…are they attacking the right thing? I still believe that Housing is trying to solve the same problem differently to other players in the market.

The structure of the company is very product-centric as opposed to business-centric, which we liked. Look at what is happening in the country right now…a lot of Internet companies are spending a lot on marketing without spending on customer experience. Take the top 20 companies in India, they are probably the largest media spenders compared with any other existing stakeholders, especially with Diwali around.

We liked the alignment in product part…the part we hadn’t bargained for was that he (Rahul Yadav) has a large personality and he can be erratic at times…and that you only find out when you interact with a company over a long period and he hadn’t shown that behaviour prior to that.

What is happening at Housing.com now?

We have an interim chief executive in place, we hired a chief business officer and they are streamlining the business. They are creating a balance between making sure that they continue to create a great product and also look at how they can monetize.

Do you think Walmart can rebuild itself as an e-commerce company? If they do, will they be strong competition?

It is unfair of me to comment on companies that I am not associated with. The odds are generally against companies like that. By that logic, the largest e-commerce company in India should be an existing commerce player…they have the buyers, logistics, suppliers, marketing and brand but somehow they don’t seem to be making that transition. Amazon would have never been the biggest bookseller in the world. Barnes & Noble existed way before them.

India has engineering talent and even finance but we seem to have a problem around product and customer experience. How do we bridge the gap?

It requires a cultural transformation of sorts. It is embedded in our culture, there is this constant de-risking that is applied. There is a cultural underpinning to this whole de-risking and thinking too far out of the box…so around the world Indians are great at solving problems within the box. Everybody is very resourceful here and we are a very resourceful country and that makes us great programmers. We have to push people and we have to keep innovating.

What stage is the start-up ecosystem at in India?

It is at a very, very nascent stage and my fear is that it needs a lot more nurturing and a lot more hand-holding for it to be a successful start-up ecosystem. A lot of these people (start-ups) are in the high seas and don’t know what to do if the winds change or clouds show up or there is rain…people in the (Silicon) Valley have been through these cycles multiple times and they have seen downs, they have seen all kinds of things happen to them.

The question I keep asking the companies is that even if you are not making money now, show me the path to making money, show me the math for what you need to get there. Also, there are a very few role models in the country… I think the last one was Sunil Mittal.

How do you see the regulatory environment in India? Do you engage directly with the regulators?

We do meet with people to understand their point of view. DIPP (department of industrial policy and promotion) has already spent time to understand…in one or two instances, they have even stepped in to help or to clarify things.

I am hopeful that there has to be some execution behind all the talk about making start-ups stand up in India. If the top 20-30 companies, which are very well funded, start running into problems with the regulators, it sends out a very bad signal to the rest of the 500 companies or to entrepreneurs who are trying to start.

India is considering a consumer protection bill where e-commerce companies will also be subject to class-action lawsuits. Does that increase the risks to your investments going forward?

Probably, but again, I think all these businesses will adapt to the changing regulations. As long as it is a level-playing field, companies will figure out what to do.

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