Digital

Nikesh Arora’s Exit From SoftBank Will be a Blow to India’s Start-up Ecosystem

The former Google executive’s decision to leave the Japanese tech giant comes at a time when it has made a $10 billion investment foray in the country

Nikesh Arora and Masayoshi Son at the Start-Up India event in New Delhi. Credit: PTI

Nikesh Arora and Masayoshi Son at the Start-Up India event in New Delhi. Credit: PTI

New Delhi: Nikesh Arora, the man leading SoftBank’s investment foray in India, on Tuesday, announced that he would step down as president and chief operating officer of the company, just days after the Japanese tech giant cleared him of charges of alleged misconduct and poor performance.

“Masa [Masayoshi Son, current head of SoftBank] to continue to be CEO for 5-10 years, respect that. Learnt a lot. Clean chit from board after thorough review. Time for me to move on,” Arora tweeted.

Arora, an electrical engineering graduate from Banaras Hindu University, is perhaps best known for having been the highest paid employee at Google and certainly the most famous Indian executive at the search engine giant until Sundar Pichai was appointed as CEO.

After quitting Google in 2014 — which some say was prompted by the company’s impending corporate restructuring to Alphabet, after which Pichai was anointed as CEO of Google — Arora headed east to head SoftBank’s Internet and Media business. Within one year, Arora surprised the global corporate community by being promoted to to president and chief operating officer, with, with CEO Son announcing that the Arora was a “strong candidate” to succeed him.

“Yes. He’s [Arora] 10 years younger than me, and he has more abilities than me,” Son told reporters in a press conference at the time.

Over the last two years, Arora has led SoftBank’s global expansion – investing over $4 billion in start-ups around the world. In many ways, Arora’s investment strategy in key markets such as India is reminiscent of Son’s early investments in Chinese firms like Alibaba, although it’s far too early to say whether Arora’s bets prove to be equally successful.

SoftBank’s investments in India

“It’s a little amazing to think about it, but in the last two years, SoftBank has put its fingers in nearly every start-up pie in India. From the bigger unicorns of Snapdeal, Ola Cabs and InMobi to an investment vehicle with Bharti and Foxconn that will invest in renewable energy,” said the board member of a firm that recently picked up a multi-million dollar investment from SoftBank.

There is little doubt with Arora’s rise, SoftBank and Son’s attention have dramatically zoomed in on India. In 2014, after Arora joined, SoftBank’s investment in India crossed $1 billion. At Prime Minister Narendra Modi’s Start-up India event earlier this year, which both Son and Arora attended, the SoftBank CEO announced that the company’s investments in India would easily exceed $10 billion in the coming years.

While SoftBank was an early investor in InMobi (an Indian online advertising firm whose valuation has now exceeded $1 billion) Arora’s first plans of business were to place bets on two of India’s biggest technology companies: Ola Cabs and Snapdeal.

In October 2014, four months after Arora joined the company, SoftBank made its presence in India known to the global investor community when it lead a $200 million investment round in Ola Cabs. At the time, in a statement, Son announced his intentions in India. “We believe India is at a turning point in its development and have confidence that India will grow strongly over the next decade. As part of this belief, we intend to deploy significant capital in india over the next few years to support development of the market,” he said.

A less than a year later, SoftBank, Alibaba (which SoftBank has invested in the past and has close ties with) and Foxconn lead a $500 million investment in e-commerce firm Snapdeal.

“In some ways, you have to look at the e-commerce ecosystem here in India and see it as the the US versus China/Japan. So Uber comes here to India, backed by Western investment. Consequently, SoftBank puts in money in local competitor Ola Cabs. On similar lines, Amazon comes to India with a huge war chest and SoftBank/Alibaba choose to back Snapdeal,” a senior investment partner at Sequoia Capital India told The Wire.

Risky business

Not all of Arora and SoftBank’s investments have been bullet-proof or can even be described as billion-dollar opportunities. At least three of its investments – Housing.com ($90 million in 2014), Oyo Rooms (lead a $100 million round in late 2015) and Grofers ( lead a $120 million in 2015) – have been risky.

The riskiest of these three has been Housing.com – whose controversial, 26-year-old CEO was forced to resign from the company in mid 2015. The online housing company has since pivoted, fired a substantial chunk of its employees and seen its valuation fall from $250 million in November, 2015 to $50 million in October, 2015. In an interview around that time, Arora admitted that they hadn’t bargained that “Rahul Yadav [Housing’s CEO] could be erratic at times” and yet felt that the company still had sound foundations and a bright future; as evidenced by SoftBank’s further investment of $20 million in Housing in early 2016.

As for Grofers and Oyo Rooms – both companies have seen a certain amount of turmoil over the last six months. Last month, Sumanth Raghavendra, a well-known entrepreneur, pointed towards holes in Oyo Room’s fundamental business model in a widely read piece – charges that the company is yet to successfully refute.

Delivery app Grofers, on the other hand, is still yet to find its feet. Two months after it picked up funding from SoftBank, the company ended up shutting its services in nine cities; though the company’s weakness is representative of the overall uncertainty in India’s food delivery and technology business.

Investor letter

Some of these Indian investments figured prominently in a letter that a group of unidentified SoftBank shareholders wrote to the company’s board in January this year. The letter accused Arora of having conflicts of interest when it came to some of the companies that SoftBank has invested in, and also criticized him for “poor investments” that he had made on behalf of SoftBank.

The letter specifically highlights SoftBank’s investment in Housing.com, describing it as “turning sour” and quotes media articles that state SoftBank is looking to exit the online housing firm. “Mr. Arora’s investment strategy… appears to be nothing more than throwing a dart at a dartboard,” the letter reads.

One particular conflict of interest the shareholder letter identifies is SoftBank’s Snapdeal investment.  In October 2014, while SoftBank was leading an investment of over $500 million in Snapdal, Economic Times had reported that Arora had also picked up a personal (5%) stake in Snapdeal. While this may not break any rules per se, as the shareholder letter points out, the “rushed transaction [Snapdeal investment]” raises concerns because of Arora’s personal interests.

The letter prompted SoftBank to constitute a special committee of independent board members to review the shareholders’ allegations and came to a conclusion just yesterday that they were “without merit”. “As I said when these allegations first became public, I have complete trust in Nikesh and I am pleased the special committee has looked into these claims thoroughly and concluded that they are without merit,” Son said in a public statement.

Why then, is Arora departing from SoftBank after only two years? SoftBank’s official statement, quite surprisingly, states that it is because Son and Arora had different expectations over when Arora would be able to become CEO of the group.

“Masayoshi Son, Chairman and CEO, had been considering Arora as a strong candidate for succession. Son’s intention was to keep leading the group in various aspects for the time being, while Arora wished to start taking over the lead in a few years’ time. The difference of expected timelines…leads to Arora’s resignation,” the company’s statement reads.

This explanation is very plausible: one of the reasons why Arora left Google, according to published accounts at the time, was that he wanted the top job and after realizing he wouldn’t get it, he quit. If Son, who may or may not have been influenced by the shareholder letter earlier this year, wanted to stay on as CEO for a long period, it is possible that Arora could have decided to move on.

What is clear though is that it will impact India’s start-up ecosystem, according to a number of investors, start-up CEOs and industry insiders The Wire spoke to. Paytm CEO Vijay Shekhar Sharma tweeted out that Arora’s resignation would be a “big setback for the Indian start-up ecosystem”.

Arora, according to people with knowledge of the matter, spent almost a third of his time keeping track of SoftBank’s India investments, offering advice, and even mentoring some of India’s start-up stalwarts.

“SoftBank, and Alibaba, represent Asian capital in India.They are very much the second building block of investment in India’s start-up ecosystem after the first wave of American private equity firms such as Tiger Global. This is not to say, obviously, that SoftBank will pull out from India or that Son will shy away from future investments. But Nikesh was a staunch supporter of India’s start-up ecosystem,” said the senior partner of an investment fund that worked along with SoftBank in India.

While SoftBank’s Indian investments may be in no danger, Son’s relationship with and knowledge of the Indian start-up ecosystem will be put to test. “He’s not a total outsider of course, but considering the quantum of SoftBank’s India investments, will they need a new local face? That remains to be seen,” an experienced venture capital fund manager said.

As for Arora, what next? He insists that there is no bad blood and that “Masa [Son] and I are still in love with each other.” India may not be his next destination, but he will continue to support his India investments and the larger ecosystem.