Is Sachin Bansal pretty late to the party ?
Has Sachin Bansal made an illogical decision by investing in loss making Ola?
DKODING Newsline | Feb 26, 2019
- Sachin Bansal has invested US$ 92 million in Ola through his new venture BAC Acquisitions Pvt. Ltd.
- The investment has come at a stage when Bhavish is fighting hard to resist control of Ola by Softbank.
- Ola has burnt a lot of investor money in its growth-heavy model, and continues to post heavy losses.
- The company faces an uncertain future ahead, since its market share is based on heavy discounts as opposed to customer stickiness.
Backed by the US$ 1 billion bounty from Walmart’s acquisition of Flipkart, Sachin Bansal is making a reentry into the Indian startup space of late. Sachin registered a holding company named BAC Acquisitions Pvt Ltd. in Bengaluru in December 2018. BAC was launched with a mandate to focus on early to mid-stage startups. His first big ticket investment is in Bhavish Aggarwal’s cab hailing company Ola.
Sachin invested US$ 21 million in Ola last month. He then topped it up with an additional investment of US$ 71 million on February 19, taking his total investment to US$ 92 million. This funding is part of Ola’s Series J investment round, in which it expects to rake in US$ 1 billion. The company last raised US$ 1.1 billionin its Series I in January 2018.
Sachin Bansal’s comment on the investment is given below:
“I have known Bhavish as an entrepreneur and as a friend over these years and I have great respect for what he and the team at Ola have built in just eight years! I am personally thrilled to be part of the Ola journey and I look forward to contributing to their success.”
Bhavish Aggarwal’s official response on the investment is as follows:
“Sachin is an icon of entrepreneurship and his experience of building one of India’s most respected businesses ground up, is unparalleled. His investment is a huge encouragement for all of us at Ola and our mission to serve a billion people. I personally look forward to learning from Sachin’s journey, his mentorship and guidance, as we look to build one of the most impactful global businesses out of India.”
But why did Sachin Bansal make this particular choice? And is it a sensible decision?
The personal equation of Sachin and Bhavish is known to be pretty strong. Together, they have lobbied extensively against the entry of global firms Uber and Amazon into India, arguing for a level playing field. They even started an industry body named Indiatech.org to represent the interests of local internet companies.
Besides foreign competition, Sachin and Bhavish also seem to have a common grouse against the ‘control freak’ tendencies of foreign investors.
Bhavish Aggarwal faces this problem with Softbank, which has around 26% stake in Ola and is ready to invest US$ 1 billion. He fears losing control to Softbank, which has prompted him to look for other investors. Moreover, Softbank has stakes in Uber as well, and has been pushing for a mergerof the two companies.
It could be a sense of déjà vu for Sachin, who was ousted from operational responsibilities of Flipkart due to the influence of Tiger Global on the Board. When Sachin made a second attempt to regain control during the Walmart acquisition, he was thwarted by Tiger Global once again.
A company on borrowed time
But personal equations and grudges apart, does Ola make for a sensible investment at this juncture? Founded in 2011, Ola has been one of the growth-obsessed Indian startups that continue to make heavy losses. In its last results announced for FY 2017-18, the company posted revenues of Rs 2,222.6 crore, growing by 60.9%yoy.
Ola’s consolidated losses were down by a half, but still stood at a massive Rs 2,842.2 crore. In comparison, Uber had revenues of Rs 21.5 crore and profit of Rs 19.6 lakh in 2017-18. Ola has the first mover advantage and a wider reach, but competition has increased since Uber exited China and Southeast Asia to focus on India.
The year 2018 saw the two companies focus on improving operational efficiencies, cutting customer discounts and reducing driver incentives. But as a result, growth in the number of daily rides for Ola and Uber dropped sharply to an average of 20% during the year to 3.5 million. This includes taxis, auto-rickshaws and shared cabs. In comparison, growth was 57% in 2017 and 90% in 2016. The increase in fares led many customers to move back to modes like buses and metros.
The two companies also cut driver incentives by up to 40%, which has impacted their supply negatively. This has increased surge pricingand further driven customers away.
Ola’s business model is characterised by heavy discounts and incentives, poor customer stickiness and huge cash burn for way too long. That’s why the ongoing investor party at Ola is fast approaching its expiry date.
- Sachin Bansal’s investment in Ola will be a boost for Bhavish in his fight against Softbank.
- From an operational perspective, Ola’s growth-heavy model hinges heavily on discounts & incentives.
- This model is now unraveling, as Ola’s attempts to cut losses are impacting growth.
- It’s only a matter of time before investor patience runs out on Ola’s business model, and Sachin is pretty late to the party.