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Global investors woo Indian startups with cold, hard cash

Promising tech firms locked in battle for customers with big overseas rivals

An Ola customer uses the company's app to hail a ride on a Mumbai street. Three-wheeled motorcycle taxis, as well as cars, are available with the service.

MUMBAI -- India is the arena for a fierce battle between homegrown startups and global tech leaders. With a market of 1.3 billion increasingly prosperous consumers, the stakes are high indeed.

Investors from the U.S., China and elsewhere are also jumping into the fray by providing funds to the startups. Investment in unlisted Indian companies in 2015 hit a record 775 deals, worth $17.3 billion, according to Venture Intelligence, a unit of India's TSJ Media. This year, the pace has picked up. As of September, the average transaction value was 60% higher than in 2015.

Mumbai, India's commercial capital, is thronged with three-wheeled taxis. "I use Ola (a ride-hailing service) when I need a ride," said an 18-year-old woman. Ola offers a number of advantages over conventional taxis. There is no waiting at a taxi stand or struggling to hail a cab on the street, and no worries about being ripped off by the driver. The fare is set before the trip.

Ola, owned by startup company ANI Technologies, operates in around 110 cities across India. It is fast becoming an essential tool for people in both urban areas and the countryside.

In October, ANI raised $1.1 billion in a funding round led by Chinese internet services company Tencent Holdings, along with U.S. investors. "We look forward to learning and benefiting from [Tencent's] global perspective and ecosystem," said ANI's co-founder and CEO Bhavish Aggarwal in a statement.

Launched in 2011, Ola has grown into one of India's "unicorns," as unlisted startups with an estimated value of $1 billion or more are called. 

Us versus them

The ride-hailing market in India is dominated by two players: Ola, with a 52% share, and Uber Technologies of the U.S. at 44%. Uber moved into India in 2013, but at first it struggled to gain a foothold. As it got acclimated to the Indian market, cutting fares and accepting cash payments, ridership took off.

A 16-year-old college student in Mumbai uses Uber several times a week to go to cram school and guitar lessons. "I have never used Ola," the student said. 

Ola is said to have had a market share of more than 60% at one time, but Uber is making inroads. The Indian startup is under pressure to improve its service. It plans to use the money it has raised to hire more drivers and expand into more cities, as well as making technological enhancements to its app-based service.

Flipkart's headquarters in Bangalore, southern India   © AP

Similar battles are heating up in web retailing between and local startup Flipkart. Before partnering with Ola, Tencent decided to pump a substantial sum into Flipkart. The Indian company raised a total of $1.4 billion from investors that also included Microsoft and U.S. auction site eBay. 

"I use either Flipkart or Amazon when I'm looking to buy something online," said a woman in her 20s who works at a Mumbai cafe. "I chose whichever is cheaper." The struggle to win over price-sensitive Indian shoppers is intense.

In October, Flipkart launched a home appliance brand called MarQ by Flipkart that offers flat-screen TVs, microwaves and other products at lower prices than established brands. The company appears eager to sell a wider variety of goods and services. Possible plans include buying stakes in a listed apparel maker and an online ticket shop.

Amazon, by contrast, is exploring the offline world. In September it bought a stake in Shoppers Stop, an Indian retailer that runs 80 or so brick-and-mortar stores. The U.S. online retailer is trying to find synergies between its web business and conventional stores. In August, Amazon bought Whole Foods Market, an upscale U.S. supermarket operator. It is also putting more money into plugging its premium service, Amazon Prime.

Rich pickings

Japanese internet giant SoftBank Group is pouring even more money into Indian tech startups than its U.S. and Chinese counterparts. SoftBank is a previous investor in Ola, and this year put more money into the company. The Japanese tech conglomerate also owns a stake in Flipkart through its $93 billion "Vision Fund."

Masayoshi Son, SoftBank's chairman and CEO, sees India not just as a huge market, but as a regional hub set for explosive population growth. "Even Amazon has not yet gained enough presence in the market, and there are opportunities for everybody," said one person familiar with Son's thinking.

India is the world's second-most populous nation, after China, but is expected to take the top spot by 2024, according to the United Nations. While China's population, currently just above 1.4 billion, will soon begin shrinking, India's will likely continue growing, reaching 1.6 billion by 2050.

Some 40 million people in 77 countries use Uber each month, but the number of smartphone users in India is expected to exceed that of the U.S. by the end of 2017, nearing 300 million. Winning the business of one-sixth of the country's smartphone users would be enough to dethrone Uber as the world's biggest ride-hailing service. India's vast potential for Uber, meanwhile, helps take the sting out of its painful decision to pull out of China in 2016. 

In short, success in the Indian market could be the cornerstone of global dominance for many businesses.  

SoftBank is keeping its options open. It is currently in negotiations with Uber, although "no final agreement at this stage" has been reached, according to a statement from the Japanese company on Nov. 14. The bigger surprise was SoftBank's decision last spring to invest $1.4 billion in One97 Communications, the Indian startup that operates the country's largest mobile payment platform, Paytm.

A growing number of retailers in India let customers make purchases using Paytm's mobile payment service.   © AP

Indian consumers are rapidly shifting to mobile payments, particularly in the past year or so. In November 2016, in a crackdown on black market dealing, the government announced it was pulling 500-rupee and 1,000-rupee bank notes from circulation, 86% of all notes in use at the time. As of May, the value of mobile payments had reached 2.1 trillion rupees ($32.5 billion), a 90% jump compared with the period before the bank notes were pulped.

SoftBank jumped at the chance to partner with Paytm. Google is also active in India's mobile payments market, while Facebook is said to be getting ready to jump in with its WhatsApp messaging app. The Japanese company chose to bet on a homegrown startup instead.

Lei Jun, CEO of Chinese smartphone maker Xiaomi, earlier in November said the company hopes to invest up to $1 billion in 100 Indian startups over the next five years. Despite Chinese and U.S. investors' excitement about India, other than SoftBank, Japanese companies appear to be holding back, still fixated on Silicon Valley.

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