Trail of the Tiger

HE'S A 34-YEAR-OLD AMERICAN who takes the word ‘private’ in private equity very seriously. He’s one of the young ’uns at PE fund Tiger Global Management who sits in New York, and responds to e-mails from reporters around the world with the standard line, “Tiger Global has a policy of not speaking with the media”. Of late, that’s an “iron-clad policy”. He’s been quoted rarely. Once, at his behest, in a press release—but more on that later. Then, in December 2011, he gave an interview to Entrepreneur, when Tiger funded Warby Parker, an eyewear firm in the U.S. For now, understand that he’s one powerful PE guy who earned his stripes in Brazil, Turkey, Russia, and China. Between him and partner Scott Shleifer, they manage $7 billion (Rs 42,224 crore) in capital, invested over 11 years. Investments include Facebook and LinkedIn, Alibaba.com and its biggest rival JD.com in China, and NetShoes in Brazil. But the nation where Tiger’s reach and influence is unrivalled is India; and Fixel has long believed in its online consumption potential. You could say he’s the single-most important player in e-commerce here. He’s Lee Fixel, and he, predictably, hasn’t spoken to me.

In five years, Fixel has built up stakes in 15 Internet startups here and participated in more than 40 deals, either investing directly or shepherding other investors aboard. That translates into participating in deals to the tune of over $1 billion. According to Venture Intelligence, a research agency that tracks PE, while Tiger is not among the top five funds by number of Internet venture deals (Accel India, part of Accel Partners, famous for its early bet on Facebook, tops that list), it’s definitely No. 1 by the amount of money invested. Out of five publicly-listed Internet businesses—Rediff, Sify, Info Edge (of Naukri.com fame), MakeMyTrip, and JustDial—Tiger is the largest shareholder in two (MakeMyTrip and JustDial). Given that these are mostly privately held, it’s difficult to estimate the kind of capital Fixel has deployed or the returns he’s made. But here’s a sense: Tiger’s 13.3% stake in JustDial, bought for Rs 150 crore in 2009, is worth Rs 1,243 crore today.

And now, Fixel’s orchestrating the biggest merger in Indian e-commerce yet: between Flipkart, India’s leading e-retail company, and Myntra, the country’s largest fashion portal. Though it’s been in the air for a few months, the merger isn’t a done deal as Fortune India goes to press, and may not be for some weeks. But talks are definitely underway. Ultimately, if the merger breaks down, it won’t be for Fixel’s lack of trying or the logic underlying it. Few that Fortune India spoke with were willing to go on record on Fixel, or on the merger.

IT ALL BEGAN when Fixel was in Delhi in 2009 to meet Deep Kalra, CEO of travel booking site MakeMyTrip.com. Tiger Global in India, under Mohan Lakhamraju (he quit the same year), had invested in it in 2007. Fixel heard about Flipkart Internet Services, a fledgling book ordering site run by the Bansals, Sachin and Binny. He wanted to get in touch with Sachin Bansal, for which he connected with the fund backing Flipkart: Accel India. He called Subrata Mitra, a founding partner at Accel India. Over the next few weeks, their discussions were on Flipkart. Mitra mentioned another young company—Myntra.

Fixel followed up on Flipkart first hand. He first tried customer support. A Flipkart employee—one of five in customer support—told Sachin Bansal that “somebody called Lee from Tiger wants to speak with you”. He ignored this. Fixel then reached out via consultancy McKinsey & Company. That only got Bansal to make a phone call to Fixel, who then tapped Kalra. A meeting finally happened at Flipkart’s first office, a residential apartment of three rooms in Koramangala, Bangalore, which was being renovated. Sitting on the floor of their unfinished office, Fixel and the Flipkart founders discussed an investment by Tiger. Soon after, Tiger wrote out a $9 million cheque to Flipkart. A year later, Fixel backed Myntra.

Those days, the Internet user base was a bleak 72 million. Today, it has breached the 225 million mark and is growing, thanks to mobile Internet. After Lakhamraju quit, Tiger shut its Mumbai office; it uses local intelligence from the likes of Accel and SAIF Partners to cherry-pick companies.

Fixel has never missed a quarterly meeting of his investee companies. If he is not present at board meetings (usually in casual shirts and denims), he is on call. Founders of companies he has invested in call him “clear headed” with the ability to separate noise from information. “He will help a founder undergoing a temporary setback, but not one whose business is going through a structural setback,” says a co-founder of a Fixel-backed firm. If a founder writes him an e-mail, he responds within an hour.

His first meeting with entrepreneurs tends to be over Skype, and can end in 10 minutes and five sharp questions (unnerving?), but this is because he’s fully prepared with his homework on the venture and its category. If the meeting goes more than 20 minutes, the entrepreneur and Tiger are onto something special.

When Tiger studied MakeMyTrip for a late-stage investment in 2004, Feroz Dewan from Tiger New York came to meet Kalra at his tiny south Delhi office. While it was too small a business for Tiger to invest in, Dewan stayed in touch and introduced Kalra to Fixel around 2007. “We were raising a round of capital (Series C) and the speed at which Lee moved was impressive. We were delighted to have Tiger lead that round, and the next,” recalls Kalra. Tiger invested in MakeMyTrip out of its Growth Equity fund. “Lee is a strategic thinker but also does a lot of analysis before taking a decision. Once he decides, he moves extremely fast. Also, if the company shows good growth and market leadership potential, Tiger tends to back it in a big way,” adds Kalra. So in that sense, the company brings in value for companies that need large amounts of capital.

Tiger did not take a seat on the MakeMyTrip board, but managed to cause a disruption in a board decision when it, along with co-investor SAIF Partners, which had a seat on the board, recommended the travel portal list on Nasdaq in 2010. “The board was split down the middle, perhaps for the first time. In hindsight, they were right, so I’m glad I listened to Lee and Ravi Adusumalli [of SAIF],” Kalra recalls. Fixel pushed the listing through without even being on MakeMyTrip’s board. Kalra has been buying companies around the world after it listed on Nasdaq: six in the past three years. “With a large amount of capital at our disposal and being able to leverage our stock as currency, we were able to contemplate, consider, and consummate international M&A. Also, being compared and counted among global peers, you tend to focus more on strategic and bigger issues,” Kalra says.

Working with Fixel exposes entrepreneurs to how e-commerce works elsewhere. When Sachin Bansal and Binny Bansal started, they wanted to build the Amazon of India. Fixel sent them to China—and they realised India was closer to that country as an e-commerce market than the U.S., where Amazon made its name. Myntra co-founder and CEO Mukesh Bansal went to NetShoes in Brazil, and visited as many as three gargantuan Chinese e-commerce companies in 2010 to understand how scale works.

Every year Tiger hosts a three-day Tiger Global Internet Conference at the Mandarin Oriental in New York, where founders of Tiger-backed companies exchange notes. The fund also gets people such as author Malcolm Gladwell, business magnate and former New York mayor Michael Bloomberg, management guru Jim Collins, and Mary Meeker, partner at VC firm Kleiner Perkins Caufield & Byers, to talk to investee companies.

TODAY, TIGER OWNS nearly 30% of Flipkart, and, according to data available with the corporate affairs ministry, it owns 7% in common stock and 41% in preference shares in Myntra. That makes Tiger the largest shareholder in both. It has led investments worth more than $500 million in Flipkart, and $125 million in Myntra. Its own investment in Flipkart is estimated to be more than $150 million and in Myntra, around $40 million. An investment banker, who asked not to be named, says, “Tiger not only has deep pockets, but high credibility. It can get five more investors to raise a $100 million for its [investee] company.” He adds that Tiger typically believes in driving convergence of one or two players, because that company then can attract further investments from Tiger or its network of co-investors.

Flipkart’s other big investors are Accel, and the South African media conglomerate Naspers. Myntra, too, has Accel, and others such as Kalaari Capital, IDG Ventures, Premji Invest, and Sofina—the last two buying into Myntra this February. (Sofina is also an investor in Flipkart.)

For the common investors, Tiger and Accel, being invested in Flipkart and Myntra meant somewhat de-risking their portfolio. The two companies represented two business models. Flipkart was, in e-commerce patois, a ‘horizontal’, an outfit that dealt across industries (books, electronics, etc). Myntra, conversely, was a ‘vertical’ with its deep focus on fashion. Five years ago, when e-commerce was still in its infancy, it was very difficult to predict which model would succeed: All that the two investors cared about, particularly after their experience in China, was that ultimately size mattered.

Flipkart and Myntra have turned out to be great bets. Consider that back in 2010 Flipkart had clocked revenues of $10 million. When Flipkart aimed for $30 million, Fixel pushed for twice that, recalls Sachin Bansal. It grossed $100 million (annualised revenue run rate) by December 2011. Thereon, Flipkart’s founders and Fixel felt they were firmly aligned in their high-risk approach to grow. This March, Flipkart’s annualised run rate breached the $1 billion mark. Meanwhile, by 2014, Myntra’s annualised run rate had hit $155 million. More important, it was on a clear road to make profits.

WHILE IT CAN'T be ruled out that the investors had never contemplated merging Flipkart and Myntra, the idea began taking shape 2013 onwards. Early that year, Flipkart’s management decided to harness its large customer base (approaching 10 million or so) for the fashion and apparel category. It’s much more profitable than books, electronics, and mobile phones. Since Myntra was already in apparel, the idea of a merger was born.

By all accounts, Accel India’s Mitra, who represents the fund in both companies, was in favour. Sachin Bansal was hesitant, as he wanted to build this part of the business. In 2012, two Accel-Tiger backed companies called LetsBuy (electronics) and Exclusively.in (private label) had been merged with their portfolio companies. Flipkart absorbed LetsBuy, and Myntra took Exclusively (known for its private label brand Sher Singh) into its fold. Flipkart had also embraced entrepreneur Sameer Nigam’s digital media business called MIME360 in October 2011, which became Flipkart’s music store, Flyte. While Nigam is now a vice president for engineering and his team is still part of the company, Flyte has been abandoned.

Sachin Bansal’s thinking was that if Flipkart had to buy out someone, it had to be a big player. Though Myntra was category leader at the time, it was embroiled in a war with Rocket Internet-funded Jabong. Jabong was better capitalised, and Myntra’s board and CEO Mukesh Bansal agreed that the focus had to be on cash conservation.

“There was a conscious decision taken at various points in Myntra that we should probably conserve capital,” recalls Mitra. “The board and Mukesh agreed. When a much better capitalised Jabong came at us, we didn’t have a lot of capital left, but we rode through that effectively.” Mukesh Bansal’s team ensured that Myntra continued to fetch 3,000 new customers every day. It focussed on efficiencies, and got the company as close to operating break even as possible. If Mukesh Bansal had to raise one more round, he may not have been able to do so since the environment was getting tougher, and there was reasonable competition, Mitra adds.

Tiger and Accel, however, left it to the Flipkart founders to consider and take the idea forward with Mukesh Bansal. Flipkart still wasn’t interested. The common investors (Accel and Tiger) didn’t want more information to be shared at that point, so they stopped pushing.

For almost all of 2013, the merger idea didn’t come up at Myntra’s board meetings, though all the investors in Myntra would have followed speculation on the merger. It is hard to ascertain whether Sachin Bansal and Mukesh Bansal discussed the idea privately. (When Fortune India approached Flipkart and Myntra, both refused to delve into any background of or details related to the merger.)

Meanwhile, both e-retail players were busy raising capital. India’s $3 billion online retail industry is based on two laws—the law of power and the law of burn. One feeds the other. They play out in a continuous loop of raising capital in large tranches; building fast to be lord of the ring while burning boatloads of cash; and raising more money again. It’s a vicious cycle, but investors and entrepreneurs believe that the last company standing will make outsize gains. So it all boils down to staying power. Flipkart is an example of these laws at work. Since 2009, the top five online retailers—Flipkart, Snapdeal, Myntra, Jabong, and Yebhi—have raised more than $1 billion in capital. More than half of this went to Flipkart.

Despite it being a bruising year for the Indian economy, Flipkart raised money in two rounds. In July last year, Tiger was instrumental in getting Naspers to take a stake. This fourth round of fund raising was worth $200 million, in which both Tiger and Accel participated. Soon thereafter, in October, Flipkart raised money again. A battery of foreign investors such as Morgan Stanley Investment Management, Dragoneer Investment Group, and Vulcan Capital backed the megastore. Predictably, Tiger participated again. The fifth round saw Flipkart raise another $160 million. By now, it was closing in on Jabong in the clothing category because of its existing customer base. Though there are no figures available, Myntra was seeing Flipkart as a competitor by July, when it calculated its monthly revenue run rate.

Myntra needed capital too. By December 2013, it had raised $75 million in five rounds. But its oldest investors, IDG and Kalaari, were approaching the end of their fund cycles. As early-stage investors, they would have been stretched to finance a fast-growing company. Myntra’s efforts at raising money ended with a bunch of funds led by Premji Invest pumping in $50 million in February.

Here’s another way of looking at all this. In four months, Tiger had participated in a total capital infusion of $360 million in Flipkart. But when Tiger and Accel led a round of raising capital in Myntra, it was to the tune of $16 million in 2013; Tiger led $8 million early that year, and another $8 million in December from Tiger, Accel, and IDG Ventures as the first tranche of the Premji Invest-led round. It wasn’t like the co-investors didn’t have the money. Tiger and Accel put $10 million in CommonFloor, a real estate website in August.

Even as Tiger pumped more cash into Flipkart between July and October and suggested that it buy out Myntra, Tiger and Accel were on the board that advised Myntra’s management to slow down in early 2013. Mitra defends the board: “All investors were aligned in their discussions with Myntra. The message was to get closer to operating breakeven as soon as possible.”

But Myntra needed more capital. After the Premji Invest round, Mukesh Bansal publicly stated that his company needed at least another $100 million sometime soon. A public listing, as Fortune India reported (‘Myntra: Merger or IPO?’, March 2014) was very much a possibility. Indeed, internally, the company had begun talking of a primary issue with its key employees, but by then the idea of aligning with Flipkart was already in the air. The Myntra investors who were not on Flipkart’s board—IDG and Kalaari—had decided to go with Mukesh Bansal’s call on whether an IPO or merger made more sense. But it was also felt that Myntra needed another $150 million to get the critical mass before going public. Indeed, two Myntra investors hint that Premji Invest knew about the merger plans before it agreed to raise funds for Myntra.

While these deliberations were on, Flipkart formally approached Myntra. That was perhaps around February. And, by end March, Mukesh Bansal had warmed up to the idea.

Since he’s unwilling to talk about it, it’s not clear if his hand was forced. “It would be most unfair to assume coercion,” says Vani Kola, MD, Kalaari Capital and Myntra board member. “It would be disrespectful to the entrepreneur and CEO who has worked very hard to build a great company to have investors show anything but appreciation for any transaction he supports and recommends.” IDG wasn’t available for comment.

Another Myntra board member declined to discuss the merger, but says, “There was no pressure. There is no conspiracy. It is just the founders and investors seeking the best return on investments.” All of which is true, except Flipkart had a headstart of more than a year to prepare for a foreseeable merger with Myntra. Much of what has transpired since March gives us insights into how Tiger focusses on building strong and scalable businesses. And the influence it has on founders.

Myntra’s investors privately acknowledge that Fixel is primus inter pares. One says that if it came down to votes in the boardroom, Fixel’s position would hold sway. But equally, they respect Fixel’s abilities. They say it is, after all, about investors focussing on returns once they’ve explored all available options. And, neither the Flipkart story nor the Myntra story would have even been possible without the capital, networks, and targets set by Fixel.

To understand how far Tiger Global is able to extend its influence, sample what it has done in China. This February, it bought a stake in Alibaba.com, the nation’s largest e-commerce company. Tiger’s hedge fund (Tiger Technology) also has a 10% stake in Yahoo, which in turn has a 24% stake in Alibaba. The Internet business aside, Tiger Global also owns a 22% stake in Alibaba’s competition, JD.com, earlier known as Jingdong, and 360Buy. Both Chinese companies have applied for a listing in the U.S.

What has also helped Fixel is his rapport with Accel. In some senses, they had complementary skills. Tiger had insights from around the globe, while Accel, by virtue of its history (its Indian arm is the product of Bangalore-based Erasmic Venture Fund merging with Accel Partners) and sheer number of deals done locally, understood India well.

What makes the merger decision easy for Myntra investors is that both companies can synergise warehousing, bids for brands, advertising money, and customer base. Sharing costs are imperative to the marriage, especially with Amazon in the reckoning. Myntra, however, should retain its identity—Mukesh Bansal’s knowledge and networks in the trade are important. “Flipkart and Myntra have to be run independently for the brand identities to remain distinct. Without Mukesh Bansal, Myntra runs the danger of commoditising fashion,” says an investor.

THE LIKELY CONTOURS of the Flipkart-Myntra merger are thus: It’ll be an all-stock deal valuing Myntra between $350 million and $400 million, and Myntra will probably function as an independent division. At the time of going to press, legal teams were stitching up the deal involving 10 investors. Flipkart has gone with international law firm Gunderson Dettmer, and Myntra with Bangalore-based IndusLaw.

Two scenarios emerge. First, a primary issue for Flipkart after it has merged with Myntra. Flipkart has already registered its headquarters in Singapore, usually the first step for a Nasdaq listing. The Myntra merger will bring more muscle and a stronger fashion brand identity to that cause. That will also make Myntra’s investors happy, as they will be able to cash out hopefully with a big bang valuation.

The second scenario is trickier, a little far-fetched, and really depends on how far Fixel wants to take Flipkart: Amazon India buying out Flipkart. It’s inconceivable right now, because Amazon follows the marketplace model of helping sellers on its platform find customers. Also, it wants organic growth. But consider this: Fixel already has the ears of Seattle-headquartered Amazon’s second-largest institutional shareholder, T. Rowe Price, which is co-investor with Tiger across markets and ventures; it is the largest shareholder in MakeMyTrip after Tiger. Last November, T. Rowe Price and Tiger also invested $50 million in a real estate brokerage portal, RedFin. And this is where Fixel made a public statement via a press release on the venture. Fixel must value T. Rowe Price if he offers a public comment for a $50 million joint investment.

These days, there are urban legends in Bangalore about Fixel—how he writes million dollar cheques in a flash for capital-starved entrepreneurs, or how he shows up at people’s houses when he hears of a good idea. But these stories miss key insights. While Tiger—and Fixel—is founder friendly and backs entrepreneurs to the hilt, it never takes its eye off the ball of overall return on investments. While it didn’t make sense for Fixel to stop Flipkart from leveraging its customer base and entering Myntra’s territory, it didn’t make sense for him to see Flipkart and Myntra battle each other either. In some senses, it wasn’t that Fixel liked Myntra less—it was just that he had invested in Flipkart more. Also, as any investor sees it, between entrepreneurial prowess and business sense, business must win.