How to Spot the Leapfroggers By ALOK SAMA, President at SoftBank

July 13, 2017 Economic Times

Narration: Yogesh Mishra, MBA (E), SIMS 2017-19

Investing in India is mysteriously unexplainable but with the current conditions of the nation, there
can be a key to investment. India today holds ground of persistent growth with political stability. It is
the second largest consumer base in the world with 330 million internet users, tech-savvy young
populations and has a long history of entrepreneurship. The present government is committed
towards nurturing innovation.

There are mysterious challenges particularly when considering the market dominated by volatile day
traders, which eludes potential investors eyeing instant gratification in financial results. Broadly, there
are two reasons behind such approach.

1. Inherent Cyclicality of Capital Flow: This leads to volatility in periodic valuation. In 2014-15 an
overabundance of risk capital lead to unsustainable valuations. At SoftBank, one of the basic
tenets of technology investment is that for disruptive business models, entry valuations are
of limited relevance. The statistical variability of return are strongly valuated as per top-line
growth and market shares. The company looks beyond the quarterly mark-to-market volatility
in valuation as these marks can form good headlines but they are driven purely by the
mechanical application of accounting rules. MTM does not accurately portray the long-term
potential of the underlying business. For example, SoftBanks investment in Hike, Ola and Oyo
does more than counterbalance the losses on their investment in Snapdeal and Housing, but
they are only on-paper evaluations. In reality these are yet unrealised gains and losses on
investment and will take many years to reach their full potential.
2. Price Sensitivity of the localised Indian Consumers: Many investors fail to appreciate the price
sensitivity and sophistication of the Indian Consume, along with a balkanised market
frequently more local than national. The success mantra for business models would be to
localise, adapt and frequently re-invest themselves to create uniquely Indian product offering.
One of the SoftBanks investment, Hike is a perfect example of this mantra and is an ultimate
stealth unicorn. Hike is a unique messaging platform that has adapted vividly with localised
content to drive user engagement. Another of SoftBanks Indian investment portfolio includes
OYO Rooms, a uniquely disruptive model that acquires key elements from Airbnb model, but
adapted to suit Indian conditions, leading the 100-year old Indian Hotel Industry to see them
as potential threat. Ola cabs, another of SoftBanks investment, continues to grow and stay a
step ahead of Uber in the country, primarily because of its Indian adaptation of the ridesharing
model of Uber. Further Ola is also pioneering the e-vehicle project in India and continues to
outdo others potential competitors.

SoftBank continues to be optimistic with market conditions in India and their chairperson Mr Masa
Son committed to a goal of a minimum $10 billion investment in ten years. SoftBanks investment
criteria remained unchanged; it looks for disruptive business models targeting huge addressable
markets. The notion of leapfrogging is an essential part of its emerging market investment thesis.
There are few very good examples, which can essentially explain Leapfrogging in Indian market.

I. India never likely approaches car ownership thresholds experienced in West, but rather
migrates straight to a shared transportation model
II. India never likely will have scaled organized retail in the form of physical department stores,
but will gravitate directly towards mobile e-commerce.
 III. In finance, credit card penetration will likely never approach those seen in the West, but will
move straight to tech-enabled digital finance model.

The key in context to investing in India is patience. Investing in India as per SoftBank is more of a series
of 5-day Cricket Test Match rather than quick Twenty20 match. However, with a good penetration in
India, SoftBank still takes itself to be at the early stage of team selection process for long haul of play
in market.