Ola puts pragmatism before pride in fresh funding, but underlying challenges remain

Fresh funding might help India’s star startups fight for a tad longer, but can they fix their business model and make money?

Harichandan Arakali
Updated: Feb 27, 2017 05:14:09 PM UTC
Image: Johsua Navalkar (For illustrative purposes only)

The founders at ANI Technologies, Bhavish Aggarwal and Ankit Bhati, have decided to bite the bullet and get funding in a deal that values their ride-hailing service startup considerably lower than at their previous major round.

This is a smart move that puts pragmatism before pride and gives the young first-time entrepreneurs a breather in their fight against deep-pocketed Uber Technologies for market share in India. Only three months ago, Aggarwal was of the view that a case could be made for some form of government protection against competition from overseas multinational companies.

Aggarwal and Bhati have raised in the range of $350 million from investors, including SoftBank Group, in a transaction that values Ola at about $3.5 billion, a person with knowledge of the deal told Forbes India. An ANI Technologies spokesman, however, declined to comment. A SoftBank spokesman couldn’t immediately be reached on phone in Japan, and an email to him hadn’t elicited a response by the time this piece went online.

The money comes at a time when the ride-hailing service providers are facing multiple challenges in India, a market in which Uber’s founder Travis Kalanick has committed to investing billions of dollars. And indeed, Uber has ramped up its operations in the country, adding and expanding an engineering centre and striking innovative local partnerships.

In one of the latest, Uber announced a deal with Reliance Jio Infocomm, which operates a pan-India 4G network, to accept payments via the wireless provider’s mobile wallet.

Ola’s $350 million and $3.5 billion value compares with Uber’s staggering $69 billion valuation and a war-chest of some $11 billion. The flip side, of course, is that Uber is fighting multiple battles in multiple markets around the world, not the least of which is the combination of lawsuits in which it is fighting to not classify the drivers on its network as employees.

Ola will certainly face mounting demands along the same lines — to give its drivers more say in one form or another. Already, a strike that some of its drivers have joined, seeking tariffs that match more conventional taxi services, and better work conditions, is set to spread from city to city — the largest metros are the biggest markets for both Ola and Uber and drivers on both networks are involved in the strike.

Which brings one to the most basic problem with ride-hailing as it’s being sold today. The fare paid by a user typically covers less than half or so of the actual cost of the ride — established experts, including well-informed financial analysts, have done the math and this is their conclusion. The balance is being subsidised by money the ride-hailing startups have taken from investors.

Not very different from how Snapdeal got itself into its current quandary, fighting for market share in a so-called ecommerce business about half of which is accounted for by just smartphones — funding discounts with money from investors, in massively marketed sales.

Flipkart, the other unicorn startup that called for state protection, alongside Ola, was seen to have faced its own moment of reckoning not long ago. An executive from its biggest investor, Tiger Global Management, is now running it as chief executive, in an attempt to curtail any profligacy, and rumours are swirling of a downround at Flipkart as well.

Certainly, Flipkart too will jettison pride and take the money so it can live today to fight another day. The pride part is easier. What financial rammifications are involved in a transaction that values the company lower from the perspective of investors who invested at a higher value, is another story. And finally, what can India’s unicorns do differently with the fresh funding, and can they do enough to actually make money and survive? The answer to that is far from clear.

The thoughts and opinions shared here are of the author.

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