Chinese Startups are From Mars, Indian Startups are From Venus

What Happened?

After a take noprisoners, spare no expense, two year battle in China, the world's two largestride hailing app companies, Uberand Didi Chuxing decided to cease hostilities and merge theiroperations in the country. This is somewhat of an anti-climactic end to araging battle between the two companies. Both companies had recently raisedsignificant money (Uber $8-9 billion; Didi $8 billion, as per data from venture capital research firm CB Insights ) to compete with eachother and Uber was believed to be losing as much as a billion dollars a year inChina.

Uberwill hold 20 percent (actually 17.7 percent, Baidu/other shareholders in UberChina will hold 2.3 percent) of the combined operation and in turn Didi willinvest $1 billion in Uber. Both founders, Travis Kalanick and Chang Wei, willjoin each other's boards. Uber is perhaps the world's most valuable privatestartup valued at $68 billion; Didi is no shrinking violet either, it is valuedat $35 billion.

Didi's President, JeanLiu, 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 globaland local, are out in full force. The comments are wide ranging and veryinteresting. Some conclude that yet another U.S. company has given up on China while others believe it to be amasterstroke planned by Travis all along. One insists that it is a win-windeal, only for others to call it a hasty retreat by Uber. Recently imposedregulations on taxi hailing companies are blamed by some, even the long armof the Chinese government is spied.

Meanwhile local experts arebemoaning the lack of protection offered by the Indian government to domestic start-ups and how India is thelargest open internet market in the world left. Folks are concerned that nowUber will train its sights on India and hence, Ola will be toast, just likeAmazon is hurting Flipkart. Others are drawing lessons that the focus now willbe 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 lotof what the pundits are saying is right, this deal infact marks the continuation of atrend in China and is not a one-off event. I have often wondered why Chinesecompanies, despite the significant capital that they have raised, are willing tobe 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 twostrong players come together to create a stronger entity and capture a greaterportion of the profit pool. Let me explain this a bit more.

In almost everysegment, Chinese companies have been relatively pragmatic about merging tocreate 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 groupbuying company in China. Subsequently, Alibaba sold its stake to focus on itsin-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.-backedshare-swap deal giving the two companies an estimated 80 percent of the Chinesehotel 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 importantmove, Didi Dache and Kuaidi Dache (backed byTencent and Alibaba respectively) merged to form Didi Chuxingand become the clear leader in China.
  

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

The Indian Scenario

In India, we haverarely 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 exitsfor early investors. My experience has been that founders and investors talkand explore several opportunities but rarely ever pull the trigger. Perhaps, because it is too earlyor 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 asprofitability and sustainability are not Chinese concerns alone! The following are clearsegments 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 GoIbibohas the backing (Naspers) to act as consolidators.
  
• Classifieds:Long rumored but with no tangible progress, OLX and Quikr should merge. Bothare spending significant amounts of money to create a peer to peer classifiedsmarket. 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, consumerto consumer market. In this particular case, from a consumer perspective thetwo brands are indistinguishable (sorry Vinay and Amit!) so no one will be anywiser if they merge.
  
• E-commerce:Finally, to come to the big one, if they really have to fight Amazon (andAlibaba eventually), the so-called ‘domestic' companies have no option but toband together. Perhaps, there needs to be a big bang merger ofFlipkart/Snapdeal with ShopClues and/or BigBasket.
  

Again, one could go onbut the key point here is that Indian companies faced with relatively smallprofit pools and significant penetration opportunities must be pragmatic andcome together to form sustainable businesses. The battle in most cases involvesconsumer education, change in habits and serious logistical challenges. This needs money and resources all of whichcan'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, somergers could be an effective way to maintain the fig leaf around theirvaluations 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.

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