Is Ola's TaxiForSure buyout good or bad news for startups?

Nazim Khan
moneycontrol.com

Yesterday, Ola Cabs, reportedly India's second-largest taxicab aggregator behind Uber, announced it had bought out TaxiForSure, the third-largest, in a USD 200-million largely-stock deal .

The deal makes for a good story: the coming together of the second and third largest players, which will lend them strength, scale, synergies and whatnot to take on the largest (and according to one report, leaving the leader far behind).

But scratch beneath the surface and it quickly becomes obvious that the story is more about the struggle for survival rather than about the vagaries of growth – even as the USD 200 million figure doesn't seem to imply a distress sale.

A columnist at Your Story ¸ which closely tracks India's startup scene, too noticed it: when he pointed out that the "complete lack of hoopla around the acquisition… may seem intriguing."

It is a known fact that many of India's large startup companies have been valued very richly in the recent past, that in the absence of profits, have led some to believe that such companies are in a bubble.

The premise is simple. Cash-rich venture-capital investors have made a beeline into such firms, which offer the promise of rapid revenue growth rates and the untapped market potential of India.

Such companies, and their investors, can easily live with a few years of losses, so long as the business are setting the growth chart ablaze, either in the hope that they will figure out a way to make profits, or sell out to a bigger player.

But things appear to have gone from bad to worse for India's taxi operators. A Business Standard article in December last year pointed out that barring Meru -- which managed to eke out a small profit in fiscal year 2013-14 after piling a couple hundred crores of losses earlier -- every single company was bleeding.

Quoting figures from the Registrar of Companies (RoC), the piece said losses at Ola for FY14 had doubled to Rs 34 crore from a year earlier, while TaxiForSure swung to a loss of Rs 17 crore from a profit earlier.

The reasons aren't too hard to decipher. Despite their aggregator models (which lead to lower investment and overheads compared to a fleet operator), such companies have to spend aggressively on marketing and have to offer heavy discounts in order to sustain their growth rates.

After all, beyond the typical corporate executive, it would take some coercion to convince riders of traditional cabs (where the huge market lies) to switch over to a more comfortable, but usually pricier, Ola or TaxiForSure cab.

Further, the alleged rape of a passenger by a driver on the Uber network in September 2014 appears to have worsened the struggles of aggregators manifold.

One, it forced them to spend additional money on installing safety features, which were necessary but came at a cost.

And in the price-sensitive Indian market, as the Your Story columnist points out, increasing costs help "the highest-funded player in the market -- given that they can play the waiting game far longer than their less fortunate competitors -- but also render any other competitive dimension irrelevant".

Two, the Uber incident also brought into focus the lack of regulations that existed in India with respect to such business models. For instance, in Delhi, legal cab operators are only those that have a certain minimum number of cars in their fleet.

As a result, the writing on the wall was becoming clear: if you can't afford to play the game by the rules (as stifling as they are), bow out.

That is what TaxiForSure seems to have done.

An Economic Times report points out that the company had been struggling even with working capital cash and that after a failed attempt at fresh funding, stitched up a deal.

The question then is why didn't Ola let TaxiForSure continue in its struggles, in the hope to buy out the company at a lower price in future?

Two possible reasons could be: a weak player continues to distort the market by resorting to survival tactics such as under-pricing (as was evidenced in the aviation sector recently during SpiceJet's near-collapse).

This could harm the stronger players and it would be difficult to gauge how long the weaker firm is willing to battle it out.

Also, buying out a firm when it is in relatively better shape is better as the acquiring company can pick from where the acquirer left – rather than buy remnants of a long-struggling company with its customers gone, staff demoralized and reputation blown away.

Ola's buyout for TaxiForSure is both good and bad news for India's startup scene.

For one, it shows consolidating may be setting in at least some parts of it. This self-correcting market mechanism is what helps the market evolve, separates the winners from losers, and continues its growth in a more sustainable fashion.

But it could also herald the start of the age of more realistic growth thrusts when it comes to startups and the end of the age of easy capital.