Late last year, transportation platform Ola (ANI Technologies Pvt Ltd) began approaching investment firms for a new round of capital. It was seeking $500 million in what the company told investors would be its final fundraiser before an initial public offering (IPO), people familiar with the matter said.
Unlike most other Indian unicorns that showcased their high revenue growth numbers to attract investors, Ola positioned itself as a soon-to-be profitable startup with a stable core business of cabs in India. Fast growth would be supplied by lucrative international markets like the UK and Australia as well as newer transportation niches in India.
Asking for a valuation of $7-8 billion, Ola told the investors that they could expect to double their money within two or three years when the company would list its shares. Till March, Ola found few takers for its pitch, the people cited above said.
Then, the pandemic hit.
Post lockdown, Ola’s business collapsed, and like many of its unicorn brethren, the company rushed to conserve cash. Last month, Ola cut 1,400 jobs, about a third of its India workforce. Announcing the cuts to employees in an email, Ola CEO Bhavish Aggarwal warned that the company’s prospects were “very unclear and uncertain.”
“It is going to take a long time for people to go out and about like before. With more companies preferring to have a large number of employees work from home, air travel limited to essential trips and vacations being put off for better times, the impact of this crisis is definitely going to be long-drawn for us,” Aggarwal said.
Indeed, the COVID-19 crisis has battered the transportation space, and not just in India. Ola’s prototype and arch-rival Uber has slashed its workforce by 23% or 6,700 people globally, including 600 in India. Another ride-hailing firm Lyft has cut about 17% of its staff. Revenues and stock prices of the two American companies dipped before starting to recover in April.
Ola stands to absorb a far bigger hit than these companies. Not only are COVID-19 cases increasing rapidly in Mumbai, Delhi and Chennai, three among the company’s biggest markets, it could take up to two years for demand to return to pre-COVID levels, half a dozen former and current Ola executives said, on condition of anonymity. Remember, growth had slowed to a crawl in this business even before the pandemic. It goes without saying that any recovery is largely outside the company’s control.
The disruption caused by the pandemic will also make it even tougher for Aggarwal to realize his vision of transforming Ola from a cab company into an internet conglomerate that uses data and technology to offer innovative products and services in a wide range of sectors. This ambitious vision was already proving difficult to realize, as seen by Ola’s failure to challenge Swiggy and Zomato in food delivery and a so-so record in financial services where its expansion has been slow so far.
This year, Ola’s overall business will almost certainly shrink, denting its $6.5 billion valuation and delaying Aggarwal’s plans to take the company public by early 2022. A valuation drop will damage its investors including SoftBank Corp., Tiger Global Management, Matrix Partners and others that have together poured about $3 billion into Ola since 2012. It could also significantly reduce Aggarwal’s 7-7.5% stake in the company.
The crisis could also make the prospect of a merger with Uber India, which had been proposed by SoftBank in the past and shot down by Aggarwal, more attractive for Ola investors, the executives cited above said. Even so, Aggarwal will not give in unless it involves Ola buying Uber’s India operations, a prospect that is unlikely as the American firm sees the market here as a long-term bet.
Ola did not respond to an email seeking comment.
Ever since he started Ola in 2010 along with Ankit Bhati, his IIT Bombay friend and the company’s technology chief, Aggarwal has run the firm like his fiefdom. Over the years, Aggarwal has clashed with two of the company’s most powerful investors, Tiger Global and SoftBank.
From 2017 onwards, the Ola CEO refused to accept more capital from SoftBank for fear of losing control of the company, drawing smaller amounts from a bevy of other firms instead. This approach came at a steep cost: of all SoftBank’s portfolio firms in India (excluding the duds), Ola has seen the smallest increase in valuation. From its peak of $5 billion in 2015, Ola’s valuation has budged to just $6.5 billion—proof that no other investor offers SoftBank’s generous terms.
For Aggarwal that cost is negligible in light of the gains. In this period, he has strengthened his hold over Ola, partly through legal manoeuvres. SoftBank has been effectively side-lined with Aggarwal striking an informal alliance with one of his early investors Matrix Partners. The move away from SoftBank’s billions has been accompanied by a push to cut costs and move towards profitability in order to go public.
In his email to employees last month, Aggarwal issued a bleak outlook, but privately the 34-year-old is as optimistic as ever about Ola’s long-term future and uncompromisingly defiant about maintaining his hold over the company, according to the executives cited above.
Post-COVID, Aggarwal has set three broad priorities for the domestic cabs business: win share from Uber as the market contracts; expand faster in areas better suited to the new environment; and preserve cash by cutting costs like office rentals and marketing, the executives cited above said.
These tasks will prove difficult.
Beginning in mid-2018, Ola ruthlessly started cutting costs. Driver incentives, which had already reduced in 2016, were further brought down. Money-losing cab categories like Share were wound down. Ride prices were increased. The company cut its tech infrastructure expenses by shifting to Microsoft Azure from Amazon Web Services. Hundreds of jobs were removed, including one round of firings last year. Through such initiatives, Ola moved close to profitability. In two consecutive months in early 2019, the company eked out a profit on Ebitda basis in the domestic cabs business, according to the Ola executives. But the frugality was unsustainable. Ola ended up losing substantial market share to Uber. It had to raise spending, which tilted its bottom line back into the red.
Now in the post-COVID world, it has become clear that India’s $3-billion cab market will see a sharp contraction, at least in the ongoing financial year.
Ola has offered lease rental waivers, interest-free loans and other financial relief to drivers, but they still stand to lose much of their incomes. On the whole, up to 25% of drivers on Ola and Uber could leave over the coming months, according to the current and former Ola executives. These include drivers who are unable to make loan repayments on their cabs, migrant workers employed by fleet owners who have returned to their homes and other employed drivers.
Even the cabs left may be idle for long periods. Nearly 80% of the cab market is concentrated in the top eight cities, the executives cited above said. In many of these cities, demand will be depressed for months since office-goers and others avoid non-essential travel. In response, Ola is considering installing shields between drivers and passengers, it is disinfecting cabs frequently, supplying drivers with sanitizers and masks, among other measures, to convince customers that its cabs are safe. But many may still avoid taking cabs on a regular basis.
Ola has identified a few categories that it believes could be seen by customers as safer than cabs: autos, bike rentals and self-drive cabs. “These categories are likely to be considered safer than cabs by customers,” a senior Ola executive said on condition of anonymity. “Autos, because of their open structure. And the other two because people will prefer to be alone in a vehicle than go for ride sharing. Earlier, if someone didn’t own a vehicle, he would rather not buy even now. If there’s an option to rent, he’ll prefer that.”
As the domestic business declines, Ola could get a reprieve in its international markets. Since early 2018, it has established large operations in Australia, New Zealand and the UK. The company has had a mixed record in Australia and New Zealand where it has been able to challenge Uber in some cities while struggling in others. But both Ola and Uber are contending with the aggressive expansion of Didi Chuxing, the Chinese transportation giant and a small shareholder in Ola. Didi has been outspending its rivals in offering driver incentives and discounts and was increasing its market share before the pandemic.
Still, Australia and New Zealand have successfully contained the pandemic so far, and their economies seem to be rebounding, potentially providing a fillip to Ola.
The single market that could change Ola’s fortunes is London, where the company launched in February. Ola executives estimate that the London market by itself is as big as all of India. Ola could gain from the troubles of Uber, the market leader in London. In November, the city’s authorities said they would not renew Uber’s license, citing a “pattern of failures” related to the security of riders. Uber has appealed the order and continues to operate meanwhile.
Typically, Ola, which also plies in nearly 30 British cities, has already changed its UK leadership team once, replacing Ben Legg with Simon Smith, who heads the company’s international business.
Before the pandemic, Ola had got off to a good start in London, signing up tens of thousands of drivers. Though London was initially one of the worst-hit cities in the UK, the number of COVID-19 cases has dropped sharply and the city’s economy has started opening up. Ola executives said that the company will invest heavily to win in London, hoping that its early momentum continues. Despite the pandemic, the company may also launch in some other international markets over the next year, given the relatively large ticket sizes, two of the executives said.
Apart from ANI, the holding company, Ola has raised capital separately through two units: Ola Electric, a unicorn in its own right, and Ola Financial Services. It also runs a food brands business under ANI that sells on Swiggy and Zomato.
In these supplementary businesses, Aggarwal’s starting point has been to use Ola’s proprietary data to launch more effectively and efficiently than rivals in these spaces. For instance, Ola Electric is trying to use driving patterns, efficient transportation routes and other useful data from the core transportation business to plan its expansion strategy, including installations of battery charging stations.
In financial services, Ola’s focus is on offering credit products to customers in the cabs business who it refers to as “NTC” (new to credit). These customers, who do not have institutional credit scores, are not served by banks. Since 2018, Ola has slowly begun to offer post-paid services and credit cards to some of these and other customers. Over time, the company wants to expand the credit business to millions of its riders, offer insurance products and other financial services, the Ola executives cited above said. But for now, the jury is out on whether Ola can become an internet conglomerate.
On 31 March 2019, ANI’s cash and current investments came up to about ₹1,800 crore, according to its balance sheet with the Registrar of Companies. The company raised a further ₹2,500 crore during the last financial year.
A back-of-the-envelope calculation suggests that ANI still has at least ₹2,500 crore in cash, (excluding reserves at Ola Electric and Ola Financial Services). That gives the company breathing room to raise capital. But it will need additional funds at some point in the next year since an IPO by early 2022, its earlier timeline, looks unlikely. And to attract capital, Ola may be forced to accept a lower valuation.
“Ola will have to do a down round if it wants to raise money,” a venture capitalist said. “Globally, travel, transportation and hospitality have been the worst hit by COVID-19. There’s no reason why investors will make an exception for Ola.”
This article was first published on livemint.com.