India has more execution challenges than other markets: Nikesh Arora, President, SoftBank

So, is there a valuation bubble? I think it’s not just in India but there’s a valuation challenge across the world.
India has more execution challenges than other markets: Nikesh Arora, President, SoftBankAfter investing nearly Rs 6,400 crore, or $1 billion, across four fast-growing Indian startups—Ola, Snapdeal, Housing and OYO Rooms—Nikesh Arora, President and COO of Japan’s SoftBank Group, flagged the potential for a valuation bubble. In an exclusive interview with ET’s Pankaj Mishra and Archana Rai, Arora said India’s unique execution challenges do not justify highly rich valuations. The former Google executive also, for the first time, opened up about the episode that ended with the startup’s cofounder and former CEO Rahul Yadav being fired after a run-in with investors. Edited excerpts:

It has been a mixed bag for you in India...

The nature of investing is such that I don’t know an investor out there who has turned every investment into gold. Investment is a portfolio business—we invest in many things; some do well and some do poorly. You want to make sure in the universe of investment you are more on the better side and not on the worse side. From that perspective, I don’t think we have done poorly... I think Ola has not done poorly, Snapdeal is not doing poorly, and OYO is something we invested in just last week. I suspect your conversation is around Housing, so why don’t we talk specifically about that instead of having the “mixed-bag” conversation.

So what went wrong?

You think something went wrong?
You know the details.

So ask me the question.

What went wrong at Housing?

My question back to you is (do) you believe something went wrong?

The exit of a founder is unusual, isn’t it?

It is unusual, yes. If you take a step back and see how we figure out where we want to invest, you want to see that the company has a large market, and can I see them as a leading company in 10 years or more in India. From that perspective ecommerce is a big space, transportation is a big space, hospitality is a big space. We also think real estate is a big space.

So, we don’t think we got the space wrong. Then, obviously, we are looking at many players in the space who have a differentiated proposition. After meeting several of them, we thought these guys (at Housing) had a unique take on how to solve the real estate problem. They were very product-focused, and I am a big believer that you have to think hard about the product before you start thinking about revenue. They had the right proposition, the right product. Then you look for a team that can execute. And we looked at them, they looked like they could execute.

The part which I think blindsided us was that the founder had a personality and I think in this case the personality overwhelmed the company…

I think it’s too early to pass judgement on any of the investments we have made, not just Housing.

Yuri Milner was (in India) last week, the world’s biggest investors are visiting India frequently. SoftBank entered last year. There’s a feeling that some founders are raising too much, at too high valuations, and spending too fast. Is there the threat of a bubble?

So, is there a valuation bubble? I think it’s not just in India but there’s a valuation challenge across the world. Around the world if you look at valuations, there are private companies valued more than the public ones…

I think valuations around the world are rich. Now, why are they rich? Because money is cheap, the world is a stable place, risk is not being priced in, and execution risk is priced very low. People believe every business model and team is going to have a flawless execution.

In today’s world, startups are getting created much faster than what it took 10-15 years ago. Today, you can create a Google or a Facebook in 15 years, you couldn’t have done it 25 years ago. Today, the internet provides a free distribution platform for goods and services. Distribution used to take a lot longer in the past. In that context, this is why valuations are rich. In some cases it’s overpriced because of free money and ease of execution. In some cases it’s not. Transport that to India. I think probably two-three years ago valuations were much more reasonable, I think they have got far ahead and they are probably rivaling China or US at this point in time.

So is that fair or not fair?

I think it’s a bit excessive because in India execution has a lot more challenges than executing in a different market. As we noticed from doing business in India, execution is a challenge. I think a lot of founders haven’t actually sat through and said how will I be able to build this business and at what point in time do I become self-sustained that I don’t need funding. Because revenue in India is very weak and a lot of startups in India are more service-focused than product. And service-focused startups require a lot more money to be able to get to a point where they are self-sustained…

Ten-years ago if you wanted to start a business, you couldn’t walk in and get funded for anything. First thing (investors) would have asked you is where do you make money. Today, you can walk in and get funding and most of these guys are not going to ask you when you are going to break even. They believe that a good model is that you keep burning money until you get to a certain scale when the magic will happen and you will start generating profits.

Given this context, what is SoftBank doing to keep valuations sane?

So, in the generic distribution of companies, there will be good companies, there will be bad companies. I don’t mind paying two years ahead for a great company because I see that a great company’s valuation will exceed what I paid for it. I may be paying a little early, but I don’t mind if the company is going to become a $20-billion (company) in 10 years. The choice is whether I pay a billion or a billion-and-a-half today if I believe it’s a $20-billion company—I am just paying a bit too early. If it’s never going to become a $20-billion company then I am making a mistake and that billion or a billion-and-a-half might face a downround when the company goes bust… So we’re not going to invest in early stage because we think the risk is not priced in, we are not going to be investing in companies that are in the markets that we believe are not going to be big.

Will you step up your pace of investments compared to last year?

I don’t think so. I think what’s happened in the last one year is that a lot more people have come to India with far bigger cheques. So there are more people chasing the same number of investments and valuations have gone up two-three times from last year. So I think from all these indicators I don’t see us stepping up the pace. I think now in this market you will have to go up further on the risk curve or down the stage curve, which I am already on. It’s just increased risk...

My biggest learning from the last one year is that we have to strike the right balance between writing big cheques to entrepreneurs and making sure that (they) are ready to accept those big cheques… I think if the cheque is too big they don’t keep the discipline that is required to build a great business.

Is that specific to India?

I think it’s specific to India right now because of the speed at which Indian valuations have gone up and the lack of ability to have mature teams with startup experience. You need a team that knows how to keep the speed up and yet have the discipline. I would much rather still write big cheques but give them in a distributed fashion, but Indian regulations don’t allow that. You can’t say I will buy shares at three different valuations.

We are going to be more careful about investing, we would like to know who are the others, the investors, etc. We realised both from the (Housing) example… the ecosystem is not mature enough. We just need to be more cautious.

Then there are infrastructural challenges. The question is not only about whether Flipkart, Amazon and Snapdeal do $60 billion worth of business, but is there an infrastructure that can deliver that much worth of goods to customers…

We will probably spend more time looking at some of the product ideas in the country. That’s just beginning to happen. The first wave had a bunch of clones in this space. The next phase has been about people finding indigenous solutions to indigenous problems, very specific to India.


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