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China's Tencent may put $400 million in Ola to fight Uber

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by July 27, 2017 General

Chinese internet major Tencent is likely to lay one of its most significant bets in India as it closes in on a $400-million (over Rs 2,500crore) investment in the homegrown ride-hailing startup Ola, two people close to the matter said. The capital from Tencent will give much-needed firepower to Ola, which has been on a fund-raising trail since last year and been wanting to get on board a heavyweight investor to offset SoftBank‘s dominance as the largest shareholder in the Bengaluru-based company.

This will be Ola’s largest fund raise in about two years, since it mopped up $500 million from the likes of Singapore’s sovereign wealth fund GIC, China’s largest taxi aggregator Didi Chuxing and Scottish investment fund Baillie Gifford, among others, in 2015.

Tencent, an investor in Didi Chuxing which in turn holds a small stake in Ola, has been the most active late-stage investor in India this year after it took a wager on Flipkart in a $1.4 billion financing round, backed Hike a messaging app and online education platform Byju’s recently.

“The deal with Tencent is an extension of the funding round which kicked off last year. Ola wanted to get a more strategic investor with a long-term view of the market which is where Tencent fits in,” said a person familiar with the development on the condition of anonymity.

In 2016, SoftBank had offered $1 billion cash to Ola valuing it at $3.5 billion, which was far lower than its previous round valuation of $4.5 billion.

While Ola went on to talk to other investors and said no to the $1 billion offer at the time, it finally did take a $250 million cheque from SoftBank at a reduced $3 billion value last year in November. The way the round was constructed let Ola engage with investors and kept the round open for about six-seven months from the first time SoftBank put in the $250 million, sources said. Since then the taxi hailing app has racked up further capital at an increased valuation of $3.5 billion from the likes of Tekne Capital Management, a hedge fund, Falcon Edge, an existing investor and Rata Tata’s RNT Capital Advisors totalling up to $400 million. With Tencent’s money coming in the entire round totals up to $800 million, the largest sum it has raised. ”

Ola did not want more of SoftBank’s capital at the reduced valuation and since it had the option of getting other investors on board and shore up the valuation it did so with some of the smaller investors till Tencent came along,” another person said who did not want to be named as the deal talks were private.

We could not ascertain the exact valuation at which Tencent has ploughed the fresh funds in the company.

This deal, if done, will come at a time when Ola’s investor SoftBank is banding together all the anti-Uber entities like Didi Chuxing and Grab Taxi, both of which have received funds from the Masayoshi Son-led Japanese group recently. Grab raised $2.5 billion from SoftBank and Didi to muscle out Uber from south east Asia. This grouping is evidently posing a huge threat to the already troubled San Francisco-based transportation company which saw its go-for-broke founder & CEO Travis Kalanick step down amid a string of sexual harassment and workplace issues engulfed the startup since the beginning of the year. Uber is also battling Google’s parent Alphabet’s lawsuit which alleges that Uber stole the search giant’s proprietary trade secrets around self-driving technology.

Bhavish Aggarwal, co-founder & CEO, Ola did not respond to an emaiedl query till the time of going to press, a Tencent spokesperson also did not comment on the matter.

While Ola and Uber are fiercely fighting against each other in India both these players have been cutting down on driver incentives and discounting for riders to spruce up their unit economics. For the fiscal year 2016, Ola’s standalone losses stood at Rs 1,760 crore while revenues for the same year grew to Rs 664 crore. ANI Technologies, which runs Ola, recorded expenses for advertising and sales promotion at Rs 385 crore, a jump of almost four-fold compared to year ago. These expenses were primarily towards brand building and costs incurred on customer acquisition that builds and enhances the market share of the company, Ola had said.

Ola, which has maintained its market leadership in the local market and been regularly launching new products like a membership programme ‘Select’ and ‘Ola Credit’ which lets customers take a ride and pay later, claims to be clocking an average 1 million rides per day. While Uber publicly said it is registered 5.5 million rides weekly making India its second largest market. Consultancy firm RedSeer estimates that app-based cab companies together clock about 1.5 million rides per day where bulk of the rides are accredited to Uber and Ola.

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