Bad startup investments are par for the course. There’s even a commonly used term for them: lemons. Thus the VC adage, “lemons ripen faster”. Meaning, bad investments tend to become apparent faster than good ones.
Last week, Paytm*, the $7 billion payments and e-commerce giant, figured out a way to get rid of a particularly pesky lemon it had ended up with—Little Internet, a two-year-old hyperlocal deals startup.
In a clever bit of financial engineering (followed by strategic posturing), it engineered a merger between Little Internet and Nearbuy, coincidentally another two-year-old hyperlocal deals startup, and ended up controlling over 50% of the merged entity.
The logic behind the acquisition is simple, in hindsight. Paytm believes good deals can lure people to spend more on its offline network of merchants. More spends mean more transactions on Paytm. And India is too large a market for deals to become completely irrelevant.
Plus the offline deals space had only these two—Little Internet and Nearbuy—still left standing.
Deals and couponing companies in India have not changed lives or made themselves indispensable to users and merchants. In the last seven years, no such company has been able to achieve scale. Even Groupon, which was the North Star for all the lemmings that followed it to the cliffs, exited India in 2015 after four forgettable years.
“Fundamentally, there is a problem with the business model because couponing is the worst funnel to retain users,” said the founder of a Gurugram-based couponing startup who has sold his business. Finding a loyal customer base is so difficult in this space that merchants too leave these platforms. So the companies are in constant acquisition mode—of both users and merchants. As a result, after a few years, companies run out of steam and end up selling or shutting down.
But as with all things Paytm, whose motto has been ‘what Alibaba can do, we can too’, it wants to have a bigger presence offline just like its parent Alibaba does in China. Which is why it invested into Little in the first place in 2015. But that investment came to nought as the company struggled to scale.
So last week, it decided to put some good money after bad.
Regardless of how the merged entity ends up, Paytm has been shrewd about this deal. It gets a network of over 33,000 merchants and 350 employees from Nearbuy and Little for just over $5 million in net additional cash. The Ken understands that Paytm achieved this through a two-part transaction.
In part 1, it bought out Little Internet’s remaining investors – VC firm SAIF (also one of Paytm’s investors) and Singapore sovereign wealth fund, GIC. This buyout was understood to be worth roughly $30 million in Paytm stock.