Chinese Startups are From Mars, Indian Startups are From Venus

What Happened?

After a take no prisoners, spare no expense, two year battle in China, the world’s two largest ride hailing app companies, Uber and Didi Chuxing decided to cease hostilities and merge their operations in the country. This is somewhat of an anti-climactic end to a raging battle between the two companies. Both companies had recently raised significant money (Uber $8-9 billion; Didi $8 billion, as per data from venture capital research firm CB Insights ) to compete with each other and Uber was believed to be losing as much as a billion dollars a year in China.

Uber will hold 20 percent (actually 17.7 percent, Baidu/other shareholders in Uber China will hold 2.3 percent) of the combined operation and in turn Didi will invest $1 billion in Uber. Both founders, Travis Kalanick and Chang Wei, will join each other’s boards. Uber is perhaps the world’s most valuable private startup valued at $68 billion; Didi is no shrinking violet either, it is valued at $35 billion.

Didi’s President, Jean Liu, said it best:

Enough said!

(By the way - Jean Liu is the daughter of Lenovo founder Liu Chuanzhi)

The Pundits are Having a Field Day!

The experts, both global and local, are out in full force. The comments are wide ranging and very interesting. Some conclude that yet another U.S. company has given up on China while others believe it to be a masterstroke planned by Travis all along. One insists that it is a win-win deal, only for others to call it a hasty retreat by Uber. Recently imposed regulations on taxi hailing companies are blamed by some, even the long arm of the Chinese government is spied.

Meanwhile local experts are bemoaning the lack of protection offered by the Indian government to domestic start-ups and how India is the largest open internet market in the world left. Folks are concerned that now Uber will train its sights on India and hence, Ola will be toast, just like Amazon is hurting Flipkart. Others are drawing lessons that the focus now will be on profitability and sustainability in India as well.

One-off or a Trend?

What’s interesting to me is that, while this is undoubtedly a big deal and a lot of what the pundits are saying is right, this deal infact marks the continuation of a trend in China and is not a one-off event. I have often wondered why Chinese companies, despite the significant capital that they have raised, are willing to be sensible and consolidate, whereas their Indian counterparts are bent upon destroying each other. I am not referring to bottom feeding deals such as Myntra-Jabong, but deals where two strong players come together to create a stronger entity and capture a greater portion of the profit pool. Let me explain this a bit more.

In almost every segment, Chinese companies have been relatively pragmatic about merging to create larger entities. Here are some examples:

• Online Video: In 2012, Youku (NYSE: $2 billion market capitalisation) merged with Tudou (NASDAQ: $400 million market capitalisation). In 2016, the combined entity has been acquired by Alibaba.
  
• Offline to Online (O2O): Dianping (Tencent) merged with Meituan (Alibaba) to form the largest group buying company in China. Subsequently, Alibaba sold its stake to focus on its in-house effort with Alipay called Koubei. Dianping-Meituan went on to raise $3.3 billion at an $18 billion valuation.
  
• Online Travel: Ctrip, the market leader merged with rival Qunar in a Baidu Inc.-backed share-swap deal giving the two companies an estimated 80 percent of the Chinese hotel and air ticket markets. Ctrip also bought a majority stake in Elong Inc., an online trip-booking service which was the second largest online travel agent in China.
  
• Ride Hailing Apps: Uber-Didi is not the first deal in this space in China. In an equally important move, Didi Dache and Kuaidi Dache (backed by Tencent and Alibaba respectively) merged to form Didi Chuxing and become the clear leader in China.
  

I could go on but you get the drift. The other interesting thing about these deals is that each of them required mutual concessions by founders and investors. They posed control issues where, in many cases, the combined entities had a dominant shareholder, but no controlling shareholder. They involved founding teams that had competed with each other, learning to cooperate and give way to a unified structure. In other words, it took a lot to get these done.

The Indian Scenario

In India, we have rarely seen such deals, even though Indian startups face similar issues like those in China – fierce competition, venture funded, loss making, and even more relevant, the lack of exits for early investors. My experience has been that founders and investors talk and explore several opportunities but rarely ever pull the trigger. Perhaps, because it is too early or perhaps, there is a lack of pragmatism, but the deals have just not happened. It is possible that Uber –Didi will prompt some of these companies into action as profitability and sustainability are not Chinese concerns alone! The following are clear segments where consolidation will benefit the key players and their investors:

• Online Travel: There is no rationale to explain why why four players (MakeMyTrip, Yatra, Cleartrip, GoIbibo) keep killing each other like this. MakeMyTrip has the currency (listed on NASDAQ) and GoIbibo has the backing (Naspers) to act as consolidators.
  
• Classifieds: Long rumored but with no tangible progress, OLX and Quikr should merge. Both are spending significant amounts of money to create a peer to peer classifieds market. They will be better off as one company focused on improving customer experience.
  
• Auto: Both CarTrade and CarDekho are spending money to create a second-hand, consumer to consumer market. In this particular case, from a consumer perspective the two brands are indistinguishable (sorry Vinay and Amit!) so no one will be any wiser if they merge.
  
• E-commerce: Finally, to come to the big one, if they really have to fight Amazon (and Alibaba eventually), the so-called ‘domestic’ companies have no option but to band together. Perhaps, there needs to be a big bang merger of Flipkart/Snapdeal with ShopClues and/or BigBasket.
  

Again, one could go on but the key point here is that Indian companies faced with relatively small profit pools and significant penetration opportunities must be pragmatic and come together to form sustainable businesses. The battle in most cases involves consumer education, change in habits and serious logistical challenges. This needs money and resources all of which can’t just come from investors but needs to be some part needs to be generated internally. Also, many of these companies are arguably overvalued and have bloated cost structures, so mergers could be an effective way to maintain the fig leaf around their valuations and use the event to slash costs and become more efficient. So here’s hoping that like all good ‘didis’, Uber Didi will show the way and Indian startups will be pragmatic in making the most of consolidation opportunities. This will result in more sustainable businesses and a robust venture eco-system.

Sarbvir Singh is an experienced venture capital investor in India and was the founding Managing Director of Capital18. The portfolio of companies that he has worked with include BookMyShow, Yatra and Webchutney among others.

Also Read: Man in The Mirror

The views expressed here are those of the author’s and do not necessarily represent the views of Bloomberg Quint or its editorial team.