How startup founders dictate the terms while taking money from big investors
Continuing its trend of aggressive investing in Indian startups this year, Tiger Global recently led the latest round of funding for the consumer-focused neobank Jupiter. But what’s worth noting is that the US-based fund has agreed to an exclusivity clause with Jupiter that legally requires it not to invest in a competing neobank aimed at consumers in India.
Tiger Global, which injected $ 2.2 billion into India in 2021, made a similar deal with Mohalla Tech, owner of social media platform ShareChat and short video app Moj, when it recently pledged $ 502 million with a valuation of $ 2.1 billion in ShareChat. . He has reportedly agreed not to back any of his competitors in the Indian short video and social media space.
Such agreements are unheard of. In fact, it’s common for these great global finance giants to use push-and-play tactics to decide the fate of the companies they fund. So, is this a trend that will increase over time in India? May be. But are there other ways for founders to guard against the risk that their investors support their competitors?
Calling the shots
Tiger Global, for example, is known for changing investment trends. Its strategy of supporting competing companies is well known. The fund has currently placed its money in three investment apps – Groww, Upstox and INDWealth, three electronics technology companies – Byju’s, Unacademy and Vedantu and two fantastic games apps – Dream11 and My11Circle, in addition to several fintech companies. .
(Scott Shleifer, Partner, Tiger Global Management)
Previously, Tiger Global had invested in both Flipkart and ShopClues. The latter was later acquired by Singapore-based Qoo10 as part of a stock purchase transaction while Flipkart continued to dominate the e-commerce space along with Amazon. Additionally, Tiger Global funded Letsbuy, then (2012) the nation’s second largest online electronics retailer. It was acquired by Flipkart. The deal was reportedly initiated by Tiger Global.
This long-standing but unofficial rule that investors should not fund multiple competitors in the same space is often flouted by another big investor, SoftBank. The Japanese fund is an investor in Uber, the US-based ridesharing app, and Ola, its Indian counterpart, and Uber and Ola are both direct competitors in India. It is also an investor in DiDi, the Chinese ridesharing giant, and Grab, one of the best ridesharing apps in Southeast Asia. These investments created a mess with its conflicts. Uber left Southeast Asia by selling its business to Grab for a 27.5% stake. Grab competes with DiDi in Thailand, China and a few other countries in Asia. By placing its bets in competing companies, SoftBank remains the winner regardless of who rules the markets in its investment regions.
The fund followed similar trends across all segments in India. He supported Snapdeal in 2014 while placing his bets on Flipkart later. Another US fund, Sequoia Capital, is also invested in CarDekho and CARS24, two online marketplaces for used cars.
(ShareChat CEO, Ankush Sachdeva)
But why should startups accept these biggies and their dominance? The answer is simple: money. No investor can issue checks larger than SoftBank or Tiger Global. If a late-stage startup refuses to take the big money, it only lessens the concerns of their rivals who are then more likely to accept such funding.
Set an example
Bhavish Aggarwal, co-founder and CEO of Ola, has taken a step ahead of other big entrepreneurs by preventing investors from taking control of his business. Aggarwal had prevented Tiger Global from partially selling its shares to SoftBank in 2018, a deal that could have resulted in SoftBank exercising greater control over Ola. Aided by a right that gives the founders of Ola the right to veto the transfer of shares between two investors, Aggarwal went ahead and blocked the transaction. He made sure to attract new investors with each new fundraiser, thus limiting the influence and power of any single investor.
(Bhavish Aggarwal, co-founder and CEO, Ola)
Aggarwal’s decision was to avoid a Flipkart-like situation when, after several slippages, the founders were excluded from the day-to-day management of the e-commerce major in 2017 by Tiger Global. A year later, Flipkart was sold to Walmart, a bummer for ambitious Flipkart founders who once wanted to beat the world. The exit of Flipkart from Bansals has sounded the alarm bells for entrepreneurs, forcing them to be vigilant about protecting their own rights in their businesses.
Only non-competition is not enough
While a shareholders’ agreement, a binding document between the founder and the outside investor, usually includes a competition for investment clause, it is narrowly defined in the case of large investors who have their money parked in several companies.
âA small investor will not have any problems, but the large ones will always invest in the category leader. It is also about the segment and its disruptive nature. At one point it was e-tail, now it’s fintech and edtech. In such a situation, prolific investors tend to bypass the non-compete clause, âsays Sandeep Aggarwal, CEO and founder of Droom. Founders have a problem with funds that invest in competing companies because they become insiders of a company after investing in it and can pass sensitive data to competing companies.
âIn fact, I was faced with a similar situation when one of the investors in my company, ShopClues (Aggarwal was one of the co-founders), also invested in one of the rival companies. I objected and the investor assured me that no information would be shared with either company, âsays Aggarwal, who is also an angel investor.
In such a scenario, small businesses are at a disadvantage as investors often take their USP and pass it on to the larger company to preserve its position as an investor. âThere must be a regulation that requires an investor to disclose one of its competing investments. After disclosure, it is up to the founder to decide whether to go ahead with the funding, âAggarwal adds.
It is, however, a double whammy for the founders, as it is difficult to raise funds. On top of that, if one is to deny an investment on the basis of an investor’s disclosure, the result can be suicidal. Investors indeed have an unfair advantage because the founders do not set up a business every year.
âTiger Global and SoftBank are known to invest in competing companies. Most of the others let you know upfront about their investments, âsays Prakhar Agarwal, COO, AngelList India. âBut that will change,â he adds. For companies, Agarwal suggests that the exclusivity clause be included in the shareholding document in addition to including the names of rival companies and their business activities. âIf an investor violates the clause, there is a mechanism to allow them to leave the business. For example, Hike was asked to leave WinZO because Hike himself was entering the gaming space, âsays Agarwal who hopes that the trend set by ShareChat and Jupiter will only accelerate in the days to come.
(Masayoshi Son, Founder, Softbank)
The reality, however, is that until more SWFs or large venture capitalists enter the growth finance market, SoftBank and Tiger Global will get away with their fundraising tactics. And even if a few of their bets go as planned, it can further prove that they can deliver desirable returns while putting huge sums of money to work.