Karan Sharma and Ranu Vohra
One of the central ideas of American scholar Nassim Nicholas Taleb’s Antifragile is that embracing change and disruption is an integral part of life. This has been consistently reinforced in the past few months. There are some businesses that thrive on rapid environmental changes and grow stronger on the back of those. Nowhere is that demonstrated more than in the Silicon Valleyish models which have an affinity for such disruption. Closer home, nowhere in recent times is that seen better than in what Reliance Jio has achieved.
Raising capital carries much significance for technology companies. Better if it comes from a credible source. Better still if it is revalidated by another genre of investors. It insulates these companies from market vagaries in an ironical way, gives them an ability to build and create, and allows them to make the occasional mistake and pivot, only natural in this business.
Leadership in capital raising is equivalent to a longer runway in growth. It is a prerequisite on the path of a digital company as it proceeds to garner larger market share and an even larger part of the profit pool. That’s the reason why the word unicorn carries a special significance, and why we coin the term plunicorns, a pluralised version which signifies multiple unicorns in value, which the likes of Amazon and Reliance Jio have come to signify today.
Some facts need to sink in. The investment in Reliance Jio by Facebook, Silver Lake and Vista Equity Partners, within weeks, totals $8 billion, and is more than 50 percent of the aggregate amount raised by digital companies in CY 2019. A lot of this will find its way into the ecosystem, helping other companies build their digital businesses, strengthening the small and medium-sized businesses (SMB) infrastructure and generating much-needed jobs.
At some level, it is a grand entry for Facebook in the Indian digital retail space, dominated thus far by Amazon, Walmart, Alibaba and Tencent. For Facebook, with no presence in China, it is an opportunity to participate in one of the largest markets in the world, with a partner reputed for its execution prowess. While it is hard to imagine all the possibilities, it would, in all likelihood, play out for Jio like it did for Alibaba in China. It would help JioMart’s aspiration of connecting SMBs where WhatsApp has a stronghold.
The network effect will impact all spaces — payments, content, distribution, currency and, of course, commerce. India’s domestic consumption -- which powers 60 percent of the GDP (gross domestic product) -- is set to turn into a $6 trillion opportunity by 2030. Expect it to usher in an era of more confidence in the digital ecosystem in India, more private equity and strategic investments, and higher growth once the clouds of uncertainty over lockdowns have passed.
Let’s evaluate the possibilities in three large spaces — digital payments, B2B commerce, and food and grocery commerce.
Digital payments have grown exponentially, driven by demonetisation, and are up 3x from 2018. Almost 10 percent of the GDP flows through UPI (unified payment interface) now. The UPI is already 2x the debit and credit card volume with 1.2 billion transactions in March, and $30 billion settled through the platform. This number could see a big jump once WhatsApp becomes a direct payment platform integrated with Jio’s merchant and consumer offerings. This could meaningfully alter the industry structure of today where 90 percent of the approximately 1.3 billion transactions are controlled by PhonePe (Walmart), Paytm and Google Pay.
Some fintech (financial technology) mavens are worried that this deal might upend the digital payments sector, crowding out smaller players. However, we believe that the sector is already at an inflection point of growth and the aggregation of smaller traders through JioMart-WhatsApp will allow fintech companies to come out with new business models and product designs, and the resultant churn will be constructive. This is against a backdrop of an expected five-fold rise in the digital payments space to hit $1 trillion by 2023.
For B2B commerce, the likely outcomes of this partnership include the provision of digital solutions for 60 million MSMEs (micro, small and medium enterprises), 120 million farmers and 30 million small merchants. It is a fertile territory — there is a big opportunity across 12 million family-run shops of which 80 percent-plus are data dark for FMCG giants. It is as game-changing for the consumer product companies as it is for the digital distributors.
Additionally, we must consider the impact on India’s retail and e-commerce landscape. Currently, only about 5 percent of the $1.1 trillion in retail sales is conducted online. A convergence of higher digital usage, increased digital payments and better infrastructure will help accelerate e-commerce in general. India could potentially lead the way in e-commerce penetration given the low percentage (15-20 percent) of organised offline retail. In groceries, which is a $700 billion industry, e-commerce only forms 1 percent of the sector, and the expectations are that this number will be 20-30 percent in the not-so-distant future. This partnership has the potential to change the landscape, much in the same way as Tencent has done for China.
It is, by all means, a marquee deal, which will echo for a long time not just in India, but also in the Hall of Fame of Silicon Valley. An Indian company has emerged as the torchbearer of our nation’s digital opportunity. Its shareholders, many of whom are Indian retail and institutional investors, stand to gain over the next decade. No wonder, then, the private equity funds want a piece of this, and fast.
Karan Sharma is Executive Director & Co-Head, Digital & Technology Investment Banking, Avendus Capital, and Ranu Vohra is Co-founder, MD & CEO, Avendus Capital. Views are personal.
Disclaimer: Reliance Industries Ltd. is the sole beneficiary of Independent Media Trust which controls Network18 Media & Investments Ltd.
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