The Good

Walmart Flipkart Deal, Walmart Flipkart Deal | THE GOOD, THE BAD, & THE UGLY

Walmart Flipkart Deal

Going once, going twice, going thrice, SOLD! It is official. Wal-Mart will be acquiring a controlling stake of 77% in FLIPKART for a whopping $16 billion. That values FLIPKART at roughly $21 billion. This is the world’ largest e-commerce deal till date. Off late, poor exits & poor returns have marred the India startup story. This deal is being touted as coming of age for the Indian e-commerce.

The crorepati employees

Walmart Flipkart Deal, Walmart Flipkart Deal | THE GOOD, THE BAD, & THE UGLY

Besides one billionaire co-founder who walks away with about a billion dollar, several multi-millionaires would be born out of this deal. Over 100 Flipkart employees might become dollar millionaire after this deal.

The Wal-Mart deal has helped worker investment opportunity designs (ESOPs) of Flipkart to an aggregate of $2 billion or Rs 13,455 crores. This is, in any case, not the first run through Flipkart’s workers are profiting because of the liquidity of investment opportunities.

If we look at esops of all the employees then they are worth over Rs.5000 cr. This is not the first time that the Flipkart’s employees have benefitted by liquefying the stocks. Back in December, Flipkart bought back equity from its employees and had spent a total of $100 million.

This is also termed as the largest buyback of ESOPs by any private company in the country. An approximate of 3000 employees of different brands which are owned by Flipkart have benefitted from the offer.

The Indian ecommerce market

Walmart Flipkart Deal, Walmart Flipkart Deal | THE GOOD, THE BAD, & THE UGLY

FLIPKART claims to have sold $7.5 bn worth of Gross Merchandise Value annually. This is over 54mn customers, & 261mn products. That’s roughly 2.2 crore products handled monthly.

As per the Investors presentation shared by Walmart for the deal, they are estimating the retail ecommerce industry to grow by 36%, 4 times vis-à-vis Indian retail industry by 2023.

This will mean that the retail e-commerce will have a share of >6% in the Indian retail market. Indian retail market is expected to be $200 billion market by the year 2026. These are some huge numbers.

What it means for startups


Walmart Flipkart Deal, Walmart Flipkart Deal | THE GOOD, THE BAD, & THE UGLY

Flipkart’s founders, Sachin&Binny Bansal have already invested in startups. Electric-scooter maker Ather, artificial intelligence-driven health tech firm Sigtuple and biotech startup Pandorum are such examples.

The best part is that these ventures are unrelated to the venture they made money in. 80% of the ecommerce market is controlled by Amazon & Walmart-Flipkart combined. If someone to say he is launching ecommerce startup, people would laugh at him.

The message is clear – funds have started to flow in startups that are not cab-aggregation, fashion & hospitality. This deal will help Sachin, Binny& hundreds of ESOP holders who will have lots of money at their disposal to invest boldly into business ideas.

We can see super specialization building up. Education & Healthcare would also gain.

Already 200 startups are founded by former Flipkart employees. Over 50 ventures are backed by people who have been associated with Flipkart. This number is going to shoot up big time.

What are the investors doing

Walmart Flipkart Deal, Walmart Flipkart Deal | THE GOOD, THE BAD, & THE UGLY

Several funds including Sequoia, Accel Partners, Matrix Partners, Nexus Venture, Inventus Capital, &Saama Capital have raised fresh money to back Indian startups.

More than a dozen new India based & focused VCs have setup shop in the past 2 years including Stellaris, IAN fund etc. They had interest in India. Now with this kind of an exit, they would be thinking that they have come here in good time.

The Bad

The ex-employees

About 300 former employees of Flipkart, who held fully vested ESOPs, received an email recently that really shook their core.

The rumours were many, but the email with the subject line: “Liquidity opportunity of vested stock options for ex Flipkart employees” told them this was for real.

The email stated that only 30 percent of their stock options would vest with the company’s 77 percent stake sale to Walmart. There was no reference to the fate of the remaining 70 percent ESOPs.

So would it mean, the remaining 70% were to be liquidated at the time of, say an IPO? This would find hardly any takers. Of course this is unfair to ex-employees.

According to sources, current employees of Flipkart will be able to vest up to 50 percent of their stock options now, 25 percent next year, and the remainder the year after. But the ex-employees have not been treated with the same fur glove.

The stock options are an acknowledgement of exemplary work done & value brought in by the employees. Even if the employees move on, the vested stock options are for them to make use of.

When Flipkart completed a buyback last October, ex-employees could liquidate only 10 percent of their holdings; current employees could liquidate up to 25 percent. The net worth of the shares of ex-employees is currently estimated at $300 million, that is nearly a third of the total ESOPs.

The sale of Flipkart, in the world’s biggest e-commerce acquisition, is a reason to celebrate, a reason to be optimistic about the future of Indian startups. But did the management take a long-term view? Did someone standup for the rights of the ex-employees who contributed to the company?

Is the new management ready to live the culture they will propagate? Current and potential employees will closely observe Walmart’s approach to ESOPs.

ESOPs have real value; they have created real dollar-millionaires. In India however, startup ESOPs often don’t turn out to be the reward they are made out to be? Is this the wake-up call for Indian employees to better read the fine print &realise that ESOPs are high risk? The startups still need takent. Right? How then – is a point to ponder.

Make in India Drive

Walmart Flipkart Deal, Walmart Flipkart Deal | THE GOOD, THE BAD, & THE UGLY

What this deal has done is clearly dented the make in India drive. Ideally, local market opportunities should have been lapped up by domestic startups. But with the Indian government moving this slow always, foreign companies will now dominate.

This is excerpt by VivekWadhwa, a distinguished fellow at Harvard Law School’s Labor and Worklife Program. He further adds that the Walmart deal will intensify competition.

The elephants will battle each and this will, in the short term, benefit Indian consumers. However, Indian startups will be trampled in the melee.

Reading between the lines

The US market gave a thumbs down to this deal wherein Walmart shares lost $10 billion market cap in a single day after this announcement was made.

In the investors presentation too, Walmart had indicated an EPS loss of $0.60 but seems that the market estimated it even higher.

Walmart has paid a very hefty premium for gaining what – a 1% stake in the Indian retail market. Many stakeholders seemed confused.

Other Stakeholders

Walmart Flipkart Deal, Walmart Flipkart Deal | THE GOOD, THE BAD, & THE UGLY

The way SoftBank has entered India with its $10bn war chest, the smaller investors have already started to worry about their investments. Any backing by SoftBank clearly makes a player a behemoth & ring fences the sector in his favour.

SoftBank hasn’t decided on its 22.6% stake in Flipkart, in very major part, also driven by the fact that the short term capital gains tax would be too huge as they just had picked up the stake.

The sellers are not happy. Walmart is known for taking control of the entire supply chain end to end, and then push the costs down by squeezing out the margins.

The sellers clearly feel cheated as they were never taken into confidence for the deal and they believe that their concerns have not been addressed with this deal.

In an interesting development, eBay, a US ecommerce biggie has announced its plans to re-enter India.

The Ugly

Dominating Entrepreneurship

Walmart Flipkart Deal, Walmart Flipkart Deal | THE GOOD, THE BAD, & THE UGLY

Some experts say that this deal will mark a move by foreign companies to dominate entrepreneurship & innovation here.

It is quite possible that entrepreneurs may struggle to break into sectors ring-fenced by behemoths. Like we mentioned above that people would laugh on someone trying to enter ecommerce or I would say, even cab aggregation services. Just too much of foreign money ring fencing the sectors.

Timely bailout?

In 2007, Subhiksha Retail was on sale. Reliance group made an offer to them which they did not accept. Reliance never made a counter offer and we all know what happened to Subhiksha.

The way things were going, it was a lucky exit for the investors. In about 2-3 years, Amazon would have totally dominated the space. The competition pressure is written all over Flipkart. Flipkart has lost about 50% of the total $6 billion plus raised since inception till now.

Some critics also believe that Walmart could have spent $4bn in 3-4 years to come next to Amazon in India instead of spending $16bn on the deal. So are we saying that even after all this noise, the enterprise never added value. It would have died a natural death had it not been bailed out?

The largest Foreign Direct Investment?

Walmart Flipkart Deal, Walmart Flipkart Deal | THE GOOD, THE BAD, & THE UGLY

It is being touted as India’s largest FDI or Foreign Direct Investment. The claim has many holes to it. First, the investment is not into India. The asset being sold is a Singapore company & not an Indian company (we will read more about it later).

Second, the cash is not coming to the company but going to the shareholders so it is not direct. It is like, as RaghavBahl, puts it – a secondary market transaction. It is not an investment into the country as no new asset is being created but the existing shareholders are being replaced.

And last but not the least, lion’s share of this amount will not be coming to India. Estimated $13-14 billion will flow out to countries like US, China, South Africa, Japan. India, at best could get only about $2 billion.

The policy conundrum – the workaround& the web of lies!

When Flipkart was launched and they ended up getting their first million in funding, there was only a small regulatory hurdle. Indian laws didn’t allow FDI in online retail. Thus was born a workaround, W S Retail. An offline book seller, commerce without the ‘e’. While Flipkart was labelled a technology platform.

As the investors started queuing up, there were more ‘workarounds’ needed. In 2011, it was thought that it would be best to dump the Indianness and thus was born Flipkart Pvt Ltd in Singapore.

Just think of it – here was this budding asset building up on potential of India’s ecommerce industry but Indian capital could no longer be a part of this story. Remember how we mentioned the big funds ring fence not only the sectors, but the companies as well.

Any Indian resident putting money in Singapore holding company would be penalized by Indian laws here. Ridiculous, but this was happening.

Over the yearsFlipkart came up with 8 entities – 3 in Singapore, 5 in India. All in a pretty complex structure for managing various aspects of business. As ED sniffed something on it, in 2012 half of WS Retail was owned by couple of ex-employees.

The Bansals and their relatives resigned from the board. Technically, the entire setup was still selling 75% offline through WS retail. Can you believe it? The bureaucrats did.

The fight spilled over to the court. It was clear the FDI rules were being circumvented and the traditional trade associations sued the Govt over it. The Court ordered investigation into several e-commerce companies – Flipkart was the main target.

As usually happens, everybody got a clean chit; but the government came up with another workaround called an ‘online marketplace’, which continues to operate even today.

Do you realise that Flipkart and Amazon cannot sell anything directly to you. Do you believe that Amazon and Flipkart are banned from keeping any inventory. Yes, it is true!

Does India really want entrepreneurs?

Mark Zuckerberg, Jack Ma, Jeff Bezos – entrepreneurs from US & China. All have close to half a trillion worth of market cap. The Indian boys got mired in bureaucracy and sold every bit of equity they had. They managed to raise $6bn but ultimately sold off their dream for $21 bn, roughly about 3.5 times of what they raised.

TRAGEDY. Though we may clap for this $21bn, we should never forget it is just a drop in the big ocean of world capital. While the world’s big poster boys are running free to chase their dreams of trillion dollar valuations, see how cheap we, as a country, have sold nearly 40% of our online retail industry. All this while killing aspirations of brightest entrepreneurs.

I just hope that some policy maker sees the disappointment in the whole euphoria and does something about it.