Worried about how some startups are scaling: SoftBank’s Arora

Nikesh Arora seems to be concerned that some of SoftBank’s investee firms in India are overspending as they scale up.

Arora, the Japanese internet conglomerate’s president and chief operating officer, wants early-stage companies to be prudent in their marketing spend.

“We invest in industry leaders or potential industry leaders with some trajectory. Having said that, I am a little worried about the way some of the companies are scaling now,” Arora said in a candid chat organised by IT industry group NASSCOM at its ongoing product conclave in Bangalore.

In India, SoftBank backs branded budget hotels marketplace OYO Rooms, online cab booking service Ola and realty portal Housing.com. Last month, it invested $500 million more in online marketplace Snapdeal along with other investors like iPhone contract manufacturer Foxconn and Chinese e-commerce giant Alibaba. In September, SoftBank participated in a $225 million (Rs 1,478 crore) funding round at Mumbai-based ANI Technologies Pvt Ltd, which runs Ola.

In an apparent reference to Housing.com reportedly spending about Rs 120 crore on marketing under former CEO Rahul Yadav, Arora said few companies spend $100 million on marketing in their early stages. “If we take the example of companies in the West, be it Google or Facebook, they spent many years perfecting the product,” he said. “You can’t take a bad product and spend a lot of money on marketing that. That is where people are getting confused.”

Housing.com went through several months of top-level turmoil that concluded with Yadav's unceremonious exit in June. Since then, Rishabh Gupta has been running the show as interim chief while a committee headed by Jonathan Bullock, a representative of the lead investor SoftBank, has been overseeing the company’s operations.

“You can’t take a bad product and spend a lot of money on marketing that. I think that is where people are getting confused”

The Housing.com episode has raised questions about SoftBank’s India strategy. But Arora is unperturbed. “Remember, we have a portfolio approach. VCs have a portfolio approach. They expect probably one or two out of 10 companies to succeed. In our case we come at a late stage, so we must do six out of 10. We want to do 10 out of 10 but that does not happen,” he said. “Some companies do not turn out to be the way we want them to be and we are prepared for that.”

From Arora’s perspective, Housing.com is still a good investment for SoftBank. “The idea of Housing.com is very relevant. They built a significant product. That product eventually turned into a business and that business needs to succeed,” he said. “I don’t think we have made a bad choice.”

SoftBank forayed into India as its founder and CEO Masayoshi Son believed the country would be a big market in 15 years and wanted to explore investment opportunities. Snapdeal was the first Indian firm to capture SoftBank's attention. It now has investments in five Indian companies.

Recounting SoftBank’s entry into India, Arora said he spent time with Snapdeal investors Vani Kola of Kalaari Capital and Suvir Sujan of Nexus Partners. “In the process, we understood a lot about the Indian startup ecosystem. It just turned out that time was ripe for making investments in India. We came back with a list of 14 startups and eventually invested in one or two.”

To a question on how the global economic situation would impact startup investments, Arora said that good ideas would always find funding. Asked about how SoftBank chooses firms to invest in, he quipped: “Don’t find me, I will find you.”

Arora joined SoftBank in September last year as vice chairman besides having direct responsibility of SoftBank Internet & Media Inc as CEO. He was recently elevated to COO and president of SoftBank, making him the de facto number two after Masayoshi Son. He is now one of four non-Japanese on the 14-member SoftBank board. Prior to joining SoftBank, he was senior vice president and chief business officer at Google.

In August, Arora said he would make a personal bet on the Japanese telecom and internet giant by investing JPY60 billion ($482.2 million, or Rs 3,147 crore) to buy the company's shares over six months.

SoftBank paid Arora about JPY16.5 billion, or $137.7 million, in compensation for the year ended March 31, 2015. It is arguably the highest sum raked in by an India-born professional ever in a single year and one of the highest globally for a listed firm last year.