The SoftBank Vision Fund, the largest technology investment fund in the world, has set its sights on India. In August, the fund added another Indian tech firm to its growing portfolio: It spent $2.5 billion to buy a 20% stake in Flipkart, India’s largest online retailer and its most valuable startup. The deal is the biggest private investment so far in India’s consumer technology sector — and the fund is just getting started. Indian firms will comprise “a big part” of its investments, said Vision Fund CEO Rajeev Misra in a recent media interview. “We are just beginning.”

SoftBank, best known for investing in Yahoo and backing China’s e-commerce giant Alibaba to stall Amazon’s foray there, is calling the shots for the fund. The $93 billion fund’s largest investor is the Saudi Arabia Public Investment Fund, followed by Softbank and the UAE’s Mubadala. Apple, China’s Foxconn, Qualcomm and Sharp are also investors. To date, the fund has invested more than $6 billion in India including stakes in four unicorns — Flipkart, Paytm (India’s largest digital payments startup), Ola (India’s largest ride-hailing app) and InMobi (mobile ad firm).

Other startups in its India portfolio include OYO Rooms (India’s largest online hotel aggregator), Hike (messaging app) and Grofers (online grocer). “India is a land of vast opportunities,” SoftBank founder and CEO Masayoshi Son said in a statement. The fund seeks leading innovative firms that use technology to improve people’s lives. “Flipkart is doing that every day.”

Previously, SoftBank had independently invested in Snapdeal, Flipkart’s smaller rival, but it has been pretty much of a washout. It began backing Snapdeal in 2014 and invested a total of $900 million for a 33% stake. But with Snapdeal struggling to make a mark in a market dominated by Flipkart and Amazon, SoftBank pushed for a merger between Snapdeal and Flipkart for months. Its $2.5 billion investment in Flipkart happened only when it was clear that the merger would not go through.

Will SoftBank be interested in investing in Uber as well to clean up the ride-hailing market in India? Misra said that if the fund decides to acquire a stake in Uber, the objective would be to “get the advantage of the economies of scale and the dominance” that comes with it. Misra is clear that SoftBank is investing to win: “In [the] internet, the winner takes all. You have to emerge as the winner or merge with the winner. There is no room for [a] third.”

“A fund like this backing India shows a high level of conviction in the market.” –Niren Shah

Vote of confidence

The Vision Fund’s investment in India is a big vote of confidence on its internet sector and provides a much-needed boost. The market is coming of age and strategic investors are moving in. Sudhir Sethi, founder and chairman of IDG Ventures India, a Flipkart investor, calls the Vision Fund’s investment a “game changer” that has “increased the confidence of every single investor in the investment supply chain in the internet space in the country and has hugely revved up the market.” It is already driving up investment levels in smaller companies.

K. Ganesh, serial entrepreneur and partner at entrepreneurship platform, calls these internet investments “the best news.” He says that online startups in India have huge potential for growth: “We have only scratched the surface with the first 30 million to 50 million serious users. The fact that the world’s leading investors are bullish and betting on this market means we will get to see world class service levels in the coming years in India for the consumer. It will mean more employment and better digital infrastructure to support these transactions.”

“The arrival of such a deep-pocketed investor is a sigh of relief.” –Arun Natarajan

Niren Shah, managing director of Norwest Venture Partners India, says that “a fund like this backing India shows a high level of conviction in the market. We all know that the market is there but it takes a lot of conviction to invest here knowing that the [cash] burns will still be high over the next few years and profitability is yet to come.” Adds Arun Natarajan, founder of information and analysis firm Venture Intelligence: “Given how the future of so many of the local internet and mobile unicorns was hanging in the balance in 2016, the arrival of such a deep-pocketed investor is a sigh of relief.”

Mixed track record

However, SoftBank’s investment choices in India evoke mixed views. Some experts believe that unlike in China, SoftBank’s Son has found himself on the wrong side in India. They cite (online real estate) and Snapdeal, SoftBank’s two failed investments, as prime examples. They also say that unlike China’s Alibaba, Son’s biggest proposed bets in India are all late-stage companies, which are too expensive at current valuations.

“SoftBank’s record in India is weak relative to its record in China. They were a bit too aggressive with some of their early investments like Housing and Snapdeal. The valuations they gave and the funding provided were premature in these cases,” says Kartik Hosanagar, Wharton professor of operations, information and decisions. “In my opinion, the investments in Flipkart and Ola will be defining investments for SoftBank. If they work out, India could well be an excellent new market for SoftBank. If not, India will prove to be a costly experiment.”

“In my opinion, the investments in Flipkart and Ola will be defining investments for SoftBank.” –Kartik Hosanagar

Indian e-commerce pioneer K. Vaitheeswaran and author of Failing to Succeed, describes SoftBank’s track record in India as “modest and disappointing.” He says that “Housing, Ola, Oyo, Snapdeal and Paytm have all sucked in huge amounts of cash from SoftBank and other investors and none of them have established clear market leadership or put themselves on a clear path to sustainability. Two have imploded spectacularly.” Neil Shah, research director at technology market research firm Counterpoint Research, notes that “Softbank has been a bit aggressive and short-sighted with its investments, unfortunately betting on big names rather than backing the dark horses.”

But others think it is too early to judge SoftBank’s performance in the country. Ganesh notes that typically, funds have a long tenure of around nine to 10 years before their performance could be judged adequately. “One or two big wins can change the picture completely. That’s the nature of venture capital/private equity fund economics. Given its track record globally, long term thinking and size of the fund, SoftBank is in a unique position to be able to take positions in the Indian market, which is still nascent in the internet, e-commerce sector.”

While Ganesh concedes that “there might have been some wrong calls or over-paying during the euphoric 2014 to 2015 timeframe,” given that “more than 90% of the market cap in internet and e-commerce is yet to be created,” SoftBank’s investments in India could not be considered as late stage. Moreover, “just one exit in Flipkart or Ola will compensate for all the other losses,” he adds. Natarajan agrees. He points out that other than the 2011 investment in InMobi, SoftBank really started to invest in the Indian market directly only in late 2014.

“The less than three-year period is too early to pronounce a verdict on their ‘track record’,” Natarajan says. He also notes that the “sheer mathematics” of the Vision Fund means that it needs to find and invest in “dozens of companies” that can absorb $1 billion, if not more, each. “Which naturally means that these companies should have already achieved significant scale — at least in their home markets. And if high valuation is part of that bargain, so be it. One of the bets SoftBank is making as part of the new fund is that its network and reach will help its investee companies replicate their success in other markets internationally and that will enhance their value quite significantly.”

Flipkart vs. Amazon

Meanwhile, the immediate impact of SoftBank’s investment in Flipkart is to give the e-tailer much needed ammunition to compete with U.S. e-commerce giant Amazon as they battle for supremacy in India. Amazon launched, its online marketplace in India, in June 2013 and has committed $5 billion for the India business. Flipkart, including the funding from the Vision Fund, has raised $6 billion since its inception in 2007 and currently has cash reserves of more than $4 billion. In April, Flipkart raised $1.4 billion from China’s Tencent Holdings and America’s eBay and Microsoft.

“For Flipkart, the SoftBank investment is crucial,” says Wharton’s Hosanagar. “With Amazon’s deep pockets and commitment to India, it is clear that any company that competes with Amazon has to be prepared to lose a lot of money over the next few years. Softbank’s investment gives Flipkart a chance to compete for the long run.” Adds Venture Intelligence’s Natarajan: “2016 clearly was a great time for Amazon in India with Flipkart reeling from a variety of problems. Ganesh notes that investors with a large appetite and abundant financial resources are crucial for sectors like horizontal e-commerce. SoftBank’s success with Alibaba, he notes, will ensure that it will further back Flipkart.

So does Amazon need to worry? Not really, says Vaitheeswaran. “Amazon will get worried if there is any local competitor — Flipkart, Snapdeal, BigBasket (e-grocer), Paytm, etc. — who is executing better than them as far as customer experience is concerned. So far, they have seen nothing to worry them except huge competitive fundraises, which will not faze them at all. I am sure they have a clear timeline and strategy to execute and a billion here or there will make no difference.”

Counterpoint’s Shah says that it will take more than a shot of $2.5 billion for Flipkart to fend off Amazon. “Though Flipkart’s the biggest e-commerce player in India, it is still not operationally as strong as Amazon. For Amazon, this only means it has to continue to invest in India operationally as well as in terms of building an ecosystem of content, cloud and commerce and impeccable service and value proposition with its Prime program. India is going to be their biggest market after the U.S. and building a scale-driven Amazon ecosystem would be the biggest differentiator for Amazon compared to Flipkart or others.”

Norwest’s Shah says SoftBank’s move will not significantly impact Amazon’s strategy. Shah, who used to run eBay’s strategy and venture group globally and tracked Amazon regularly, adds that “Amazon is fixated on two things — how their customers react and how they can make themselves better. And while they, of course, would realize that competition has got a bit more intense, my sense is that they will continue to play out their playbook, with of course making changes in the playbook as they learn.”

“The reality is that returns on investments so far have been very poor.” –K. Vaitheeswaran

Exits and new investments

Meanwhile, SoftBank’s $2.5 billion investment in Flipkart has also brought cheer to the investing party in India. New York-based Tiger Global, one the early investors in Flipkart, gets to exit partially at an estimated $800 million — the biggest exit for any investor in the Indian startup ecosystem. The New York-based hedge fund would be left with about an 18% stake in Flipkart worth around $2 billion at the current valuation. Tiger Global was once the largest investor in Indian startups, with more than $2 billion spread across more than 30 firms, including $1 billion in Flipkart alone. After selling part of its stake in Flipkart, industry watchers say Tiger Global could now make new investments in the country.

The SoftBank investment in Flipkart should also provide partial exits to venture funds Accel Partners and IDG Ventures. Its investment in Paytm has provided an exit for SAIF Partners. “This is the best thing that could have happened to investors,” says Ganesh. That these investments have paid off serves to silence critics who had reservations about whether Indians would buy online due to lack of trust, low PC penetration, large non-English speaking population, and other factors. “This validates other investors’ belief in the Indian internet space.”

IDG’s Sethi points to another positive outcome. India’s online sector has primarily attracted foreign investors. While his firm has seen some traction with Indian investors overall — of their nearly $500 million assets under management, close to $110 million is from India — they have been rather conservative. However, “when international investors see domestic investors investing in India, it increases their confidence in the country. More importantly, big international investors like SoftBank putting in big money in India will have a huge positive impact on domestic investors. They will start to believe that Indian entrepreneurs can actually take on strong global competition.”

Shah of Norwest has a different view. He notes that foreign investors have the conviction to invest in the internet space in India because of what they have seen in markets like the U.S. and China. Indian investors, he thinks, don’t have the same level of understanding of the market. “In India, it is standard to look at cash flows or EBITDA (earnings before interest, tax, depreciation and amortization) etc. and Indian investors like quick profits. This space is not built that way.”

Vaitheeswaran offers another note of caution. Investments in the Indian internet space, he says, have so far been marked by “wild hope and unrealistic future potential than any solid insights.” According to him, while investors will claim that SoftBank’s move is a vindication of the India startup story, “the reality is that returns on investments so far have been very poor.” The SoftBank investment in Flipkart, he believes “increases the pressure and makes things worse.” He adds that “startups that have burnt so much money must quickly start delivering serious financial returns, otherwise the India story will actually go sour if big investors start losing large sums in India.”