Catching ‘em Young

In April 2018, for the first time, Google’s parent company, Alphabet Inc, revealed the value of its sizeable start-up holdings at $11 billion. While its investment in India is not exactly eye-popping, the search giant has thus far made two direct investments in Indian internet-based start-ups — Dunzo (a personal concierge company) of Rs.600 million and Fynd (an offline to online fashion portal) of an undisclosed amount.

Not surprising then that Google’s annual ‘Google for India’ jamboree last August in New Delhi was chock-o-block despite a heavy downpour. The audience heard in rapt attention as Rajan Anandan, managing director, Google India, spoke about the explosion of internet usage and the emergence of a ‘new economy’ in the country. Later on, Pankaj Gupta, head of India strategy and sales operations at Google, spoke about the euphoria around local start-ups. “There are around 5,000 [start-ups] in India. In the first half of 2018, a billion dollars have been raised by them.” Google is taking a keen interest in these young companies and in 2016, the internet giant started the Google Launchpad Accelerator to support and incubate start-ups, and of the 100 start-ups selected, 30 were Indian.

Dhruv Kapoor, managing director, Sistema Asia Capital, says, “Google seems to be making investments to modify its search engine, with others such as Amazon and Pinterest, too, in the fray.” It’s not without reason. Consumers are increasingly exploring shopping and cataloging sites, and Google’s search market share has declined from 88% in 2011 to 78% in 2016 (according to Forrester USA). Going forward, search will need to be more fulfillment-oriented.

Besides modifying its core service, what is Google’s larger plan in shopping for start-ups? Google refuses to comment on its investment strategy but, the last two ‘Google for India’ events have been about ‘Indianising’ the search engine. It seems like Google wants more Indians to come online, be it through search or shopping. According to recent media reports, Google, alongside Amazon and Paytm Mall, is vying for a stake in offline retail leader — Future Group.

Harsh Shah, co-founder, Fynd, feels Google is interested in the start-up’s inventory-integration model. “It is unique for integrating its inventory with other online and brick-and-mortar stores,” he says. With every sale, the partner store gives Fynd a commission. The larger company’s interest seems to have worked well for Fynd. It’s topline has gone up 4x over just six months period and they now get 2,000 orders a day, 2x more than what they used to get before Google’s interest. But Shah says, “While having Google as your investor helps, I wouldn’t peg the sales growth only to this.” What is helpful to Fynd is the many Google properties such as Android, Map, YouTube and Assistant on which a consumer spends time. “The amount of traffic those platforms have is very, very large,” he says, adding that discussions are on to integrate the fashion store with these platforms. Also, a bigger investor means a wider horizon. “They think in terms of billions, be it users or revenue. They encourage us to think big too,” he says. There is better technology at hand and learnings around organisational structure. Also, if Google does aggressively pursue the shopping vertical, as market rumours suggest, then Fynd could find itself very lucky.

Handsome bets

Online giants, such as Google, have always acquired or invested in start-ups to meet their long-term strategic goals. In short, Indian start-ups are having their day in the sun. More interestingly, they are now seeing interest from legacy business houses (See: Big buying small). Take for example, Bombay Shaving Company. Consumer goods behemoth, Colgate Palmolive, picked up 14% in it for Rs.180 million this August. It was the maiden investment in India by the two-centuries-old conglomerate’s Asia Pacific subsidiary, and also Colgate’s first attempt at e-commerce.

Bombay Shaving is an online men’s grooming brand that started in 2016. The company started with six products and ramped up to 32 across shaving, bath, skin care and beard care. The grooming brand’s subscription-based model is akin to the US-based Dollar Shave Club. Interestingly, the Dollar Shave Club was acquired by Unilever in 2016 for a billion dollars. With 16% market share in the US, Dollar Shave Club, which mails affordable blades and razors to subscribers, is giving Gillette a run for its money.

Bombay Shaving claims to have 80,000 monthly subscribers. Kanwaljit Singh, founder, Fireside Ventures, which invested early in the grooming brand, sits on the board. “Of late, we have seen a lot of interest from consumer and personal care companies in this particular space (men’s grooming). They are making investments in start-ups,” he says. Another Indian FMCG player, Emami, also shopped in this segment last year — a 30% stake in The Man Company — besides 26% stake in Brillare. While the latter offers premium hair and skin care products and targets the urban aspirational crowd, the former is in the online male-grooming space.

Wipro Consumer Care has invested in Happily Unmarried. Again, it offers male-grooming products online including out-of-the-ordinary fare such as beard and moustache styling wax, beard comb set, and beard softener and wash. They have subscription plans too. Unique products, not so easily available offline, is a differentiator these start-ups offer to larger companies. They also target a different audience — largely millenials — through social media.

Harsha Agarwal, director, Emami, says, “Male-grooming portfolio, supported by digital marketing and online sales, is a rapidly growing segment. Our investment is in line with the company’s strategy of leveraging online opportunities.” A report by Assocham estimates the male-grooming market — online and offline — to touch Rs.450 billion in three years against the current Rs.170 billion. The online grooming industry, for men and women, is pegged at Rs.50 billion in India. The Brillare buy, Agarwal says, is to explore “professional personal care segment through channels such as high-end salons that have the potential to become one of the key channels in the future.”

With Happily Unmarried, Wipro is also trying to keep up with rapid digitisation. “This is an investment that is in sync with the company’s strategy of leveraging emerging online opportunities. Happily Unmarried operates in the premium youth-prospects segments,” says Anil Chugh, chief executive, Wipro Consumer Care. He says start-ups have the advantage of being nimble and flexible, and the older players offer “structure and stability” in return. “Established and bigger FMCG players come with the entire ecosystem of distribution, logistics, packaging and other support, and  consumer reach that takes time to build,” he says.

Besides FMCG, other sectors like telecom are seeing action too. “In internet and tech, Jio has been one of the more aggressive buyers,” says Pankaj Makkar, managing director, Bertelsmann India Investments (BII). To create a content library for its users, Reliance Jio has acquired companies in the education and media space. Jio merged its music app with Saavn for $104 million in cash and the rest in stock. It has also bought 5% stake in Eros and 24.9% stake in AltBalaji for Rs.4.13 billion. In addition, Jio has invested $180 million in Embibe, an AI-based edutech start-up.

Consumer is king

Over the past three to four years, one trend stands out. The consumer space is attracting way more funds than the traditional sectors such as IT (or enterprise applications and infrastructure). In 2018, year to date, consumer tech in India has received $4.76 billion as investment in 259 rounds. In comparison, the IT sector has received $1.12 billion in 159 rounds (See: Money migration).

In India, most large companies have been late to the game. Unilever Ventures (UV) was set up in 2001, to invest in start-ups and provide them access to Unilever’s treasure trove of experience. But, it started investing in India only after 2011. UV has thus far made two direct investments in Indian start-ups — Peel-Works (builds technology for grocery supply chain) and Gurugram-based Milkbasket (an app-based milk ordering platform).

Milkbasket, which currently operates only in NCR, delivers milk at your door step between 5 a.m. and 7 a.m. Surprisingly, it has no exclusive access to the 85-years-old company’s customer base and the investment has mostly been financial in nature. “Unilever doesn’t have customer data. It is dependent on retail channels to understand its customers,” says Anant Goel, co-founder, Milkbasket. But, there is scope for partnerships in the future. The behemoth’s distribution channel is massive, which delivers goods to mom-and-pop stores. “Some day, when we are looking at that particular scale, we would love to understand that,” says Goel.

Interestingly, Singh of Fireside Ventures has an association with UV as well. His fund, which invests in seed or early-stage consumer brands, has raised money from UV, ITC, PremjiInvest, Sharrp Ventures, RP-Sanjiv Goenka Family Office, and Emami.

That funding  is really a picture of the who’s who of India’s FMCG world hedging their bets via a consumer-brand fund, and also pursuing start-ups themselves. “They are all very interested in new emerging businesses and trends, but they have done only a handful of investments because it is just the beginning and this space is evolving. While few have directly invested, the others have invested through us for now,” says Singh.

Future ready

The trend of start-up-shopping to stay relevant is true in auto industry too, globally. A case in point is Toyota Motors investing in Uber in 2016. The partnership gave Uber drivers easier financing deals while buying cars and Toyota an entry into driverless-car technology, which the taxi-aggregator was working on. The Japanese MNC has invested $4 billion to augment its own AI, robotics, and material science capabilities. They have even started a research institute, in Los Altos, California, to come up with automated driving solutions. The tie-up with Uber offers Toyota an opportunity to extensively test its innovations in the real world, and eventually commercialise them.

The taxi-aggregator’s CEO, Dara Khosrowshahi, in early 2018, said driverless cars will hit the road in 18 months. In August 2018, Toyota topped up the investment by a staggering $500 million. Uber has thus far raised $24.2 billion.

Two-wheeler major, Hero MotoCorp, has tried a similar tie-up in India. The world’s largest two-wheeler maker doesn’t have electric two-wheelers in its portfolio. Expecting an imminent EV transition in India, it made a bet on Bengaluru-based Ather Energy in 2016 with an investment of Rs.2.05 billion. It recently topped up the investment with another Rs.1.3 billion, and holds above 30% in Ather. “We are looking at mobility solutions for the future,” says Rajat Bhargava, head of strategy and performance.

Hero MotoCorp is pursuing its own internal electric vehicle (EV) project as well at its Jaipur facility. Ather’s IP rights are protected because the two companies operate as separate entities, with separate engineering teams. The incubation centre, HeroHatch, functions like a start-up with mentors from within and outside of Hero. So, why invest in an external innovator? All two-wheeler original equipment manufacturers, or OEMs, including Hero, have been running internal EV divisions for some time. Sadly, their efforts have not gone beyond the regular R&D. Spry start-ups, on the other hand, have come up with products and commercialised them too.

Ather Energy’s co-founder Tarun Mehta is confident that the bulk of the market will be EV 10-15 years later. The public infrastructure is yet to catch up, with few charging points available. Ather, which gives an option of installing a charging unit at home, plans to build 6,500 charging points across 30 cities by 2022. For now, they have 25 such points in Bengaluru.

The start-up launched its first two EV scooters — priced at Rs.109,000 and Rs.124,000 — in Bengaluru in June 2018. “Hero does not have an EV portfolio and I think Ather has significant lead over other players in this segment,” feels Mehta. As of today, Hero and Ather operate with their own marketing and distribution channels because their customers are different. The younger company’s target market includes millennials in metros, who are hooked on to the internet. Therefore, it marketed its product solely online and took bookings for the first two products through this channel. Besides, it has just one store in Bengaluru. “We are targeting early adopters of EV technology and first-time buyers,” says Mehta. “Our production is booked out till March 2019.” Ather’s facility can produce 10,000 bikes a year.

The start-up’s team has benefitted from the partnership on the supply side. “Suddenly many suppliers — be it in casting, plastic, sliding, or frame — were giving us more options,” says Mehta. The suppliers, 150 in all, seem confident about Ather’s plans.

Much like Hero MotoCorp, TVS Motor has also backed a start-up in the EV space. Founded in 2015, it is called Ultraviolette. The legacy company invested Rs.50 million in December 2017 and topped up with another Rs.60 million in 2018. Unlike Ather Energy, which launched scooters, Ultraviolette is going to target the motorcycle space. It is testing multiple prototypes and plans to launch the vehicle in the second half of 2019. It will target the 200-250cc segment.

The co-founder of Ultraviolette, Niraj Rajmohan, says, “The trial-and-error (cycle) is much faster at a start-up than an OEM. There is freedom in decision making and engineering experiments. We prototype faster at a software and hardware level,” he says. Unlike TVS, where teams have to work on multiple models and areas, Ultraviolette has a highly focused team, working on one specific idea. 

It, too, has benefitted from the OEM association on the supply side. “Suppliers also have to invest a lot of time and resources. They do it happily if there is an OEM backing you,” says Rajmohan.

Missing aggression

The likes of Hero MotoCorp and TVS Motor have rightly made strategic investments in disruptive start-ups to secure their lead position in the coming years. But the number of start-ups directly backed by market leaders is still a handful in India, when compared to markets such as China (See: Vigour and verve).

BII’s Makkar says, “These activities are not happening to a level that we have seen in other countries. Indian tech giants can do a lot more acquisitions to build tech capabilities.” He believes that the Chinese counterparts have been way more acquisitive in their country and even in India — for example, in 2017, Alibaba invested $21.45 billion to make 32 acquisitions across segments such as grocery, offline retail, food delivery, logistics and bike sharing. Tencent poured in $16.98 billion to make 34 acquisitions the same year in electric cars, online fashion, food delivery and car retail, and bike sharing, among others.

But industry veterans, such as Fireside Ventures’ Singh, say that it is not too late for dominant businesses in India. Singh says, “The game has just begun. Leaders would like to back companies but start-ups have to be relevant and strategic to them.”