Tata Group: Indian Giant Can Buy its Cake and Eat it Too
By: Rushil Khare
The Ivey Business Review is a student publication conceived, designed and managed by Honors Business Administration students at the Ivey Business School.
India's Startup Ecosystem: Can Tata Group Fill the Void
Over the past five years, the Indian startup ecosystem has become a major growth thesis in emerging markets. With the increasing adoption of the “China plus one” strategy and favourable demographic trends, India has gradually become one of the fastest-growing economies in the world. As India aims to become a fully mature market in the coming decades, it would depend significantly on the current startup class from the late 2010s. These companies represent the new wave of corporations that would significantly influence India’s economic growth. India rapidly grew to become home to the third-largest startup ecosystem in the world. At the start of 2020, there were 27 “unicorns”, which grew to 103 by early 2022.
American investors have been at the forefront of the influx of capital fueling startups and their cash runways in India so far. According to Pitchbook, four of the top seven funds, ranked by the number of investments in companies made in India, have been backed by larger investment funds based outside India since 2019. Silicon Valley investors alone accounted for over 50 percent of total VC investments in Indian startups in 2020.
It is uncertain whether this was another manifestation of the world’s “zero interest rate phenomenon.” As economic forecasts weaken, valuations are beginning to crater to fundamentally innovative and value-additive businesses to the subcontinental society. This presents an opportunity for Venture Capital (VC) firms to secure a larger share of the pie compared to previous years, as companies resort to down-rounds for funding. Simultaneously, as foreign investors begin to look elsewhere for better returns due to the increased cost of capital, a window for opportunity has opened for local investors to capture value from these startups and bring them to fruition.
Although local investors have been playing a supportive role in Silicon Valley so far, Tata Group, as a leading player in Indian commerce, is well positioned to step into the shoes of the American investor.
Intro: Tata Group
The Tata Group is the second largest employer in India and has been a cornerstone of the Indian economy since 1868. Tata Group has a long history of innovation and entrepreneurship, having successfully launched and grown multiple businesses over the years. This experience and expertise would be valuable in selecting and supporting startups with high growth potential. The group's vast resources, including capital, networks, and expertise, would enable it to provide startups with the support they need to succeed. Moreover, Tata Group’s diverse portfolio of holdings provides a unique perspective on emerging technologies and industries, making it well-positioned to identify investment opportunities.
Tata Group has already established a presence in the startup ecosystem through its incubator program, Tata Group Innovation Forum (TGIF). Launching a VC arm would build on this foundation and further enhance the group's involvement in the startup ecosystem. While Tata does have a capital arm, it primarily invests in later-stage firms. Since 2019, Tata has only invested in five early and late-stage companies. With a liquid asset balance of $7.6 billion, Tata is well-positioned to boost its returns by investing in early-stage firms, and a VC arm would allow the company to remain exposed to innovation and integrate it at a lower cost. Tata has a plethora of investment options to choose from, which could in turn boost the portfolio company’s returns. VC also exposes Tata to constant innovation, which is especially important for Tata to remain relevant as it becomes more mature.
Potential Models
Google Ventures
The Google Venture (GV) fund currently manages $8 billion in assets. Since its launch in 2008, GV has invested in over 650 companies. GV has the reputation of being one of the most selective venture funds and is considered to be a top-tier investor due to the valuable connections it brings through its C-Suite network. The fund’s investment model is particularly successful when it leads to exits in the form of IPOs (10 percent of investments) or M&As (30 percent), and secondaries are also an option that could be beneficial for growing companies.
While Google’s follow-on rate of 67 percent is not an outlier in Silicon Valley, it is a straightforward model to replicate because it is also a subsidiary of a larger consumer-facing conglomerate. Alphabet is GV's sole limited partner, and replicating this model would require Tata to scale up its investment in the fund and bring in the technical and operational expertise of managers and founders capable of supporting ventures. However, GV’s mandate drives its returns as a pure VC player rather than one that strategically aligns with Alphabet’s organizational goals.
Amazon Alexa Fund
Amazon’s venture model, specifically through the Alexa Fund, specializes in early-stage investments in fields with high growth potential that align with the company values, such as the Internet of Things and Artificial Intelligence/Machine Learning. Tata could consider adopting this model in integrating B2B SaaS businesses emerging from the new wave, as this vertical has been the fastest growing in the ecosystem in recent years. Tata already has a robust SaaS offering that it could use to enhance its product offering and integrate upstream to reduce upfront and annual customer costs.
Convivialite Ventures
Founded in 1975, Convivalite Ventures is a prime example of a company that recognized its position in the business life cycle and the potential benefits of an expansion through venture integration in improving its industry footprint. Founded by Pernod Ricard, the maker of Absolut Vodka and Chivas Regal scotch, the fund launched in San Francisco in 2017, and a second fund launched in India in 2021. The thesis was to allow for geographic and product diversification, especially given the limited innovation in the industry and declining market share in 2020. Corporate venture funds are not a new concept, as evidenced by companies such as Unilever, Nestle, Danone, and Diageo. Convivalite Ventures is also expanding its foothold in India after first expanding operations in the country in 2001. The company is aligning with the federal government’s push to promote locally made products by launching an innovation center to foster wine and spirits industry expertise. Of the investments made by Convivialite Ventures, almost thirty percent have been in a vertical related to their core operations, while the company made over five percent in India.
Microsoft Ventures – M12
Microsoft’s independent corporate VC arm, M12, recently pivoted its venture strategy. The fund previously focused on financial returns but underwent a pivot in mid-2021 after hiring a new global head who aimed to strategically align M12 with Microsoft by connecting startups with the tech giant’s ecosystem and customer networks. The fund began focusing more on connecting startups with the tech giant’s ecosystem of divisions and customer networks. As a result, of the 96 VC deals M12 made since August 2021, 84 percent were in technology or software-related industries, with just over five percent in hardware. This marks a significant shift from the 163 deals made pre-August 2021, where 75 percent were in software and around seven percent were in hardware. This intentional investing mandate reflects the company's longer-term vision and may yield results in the form of IRR and exits in the coming years for the 2016 vintage.
Conclusion
Tata has a unique opportunity to double down on VC in India due to a shortage of capital and operational expertise to best capitalize on underlying assets. By replicating the Microsoft model, Tata could strategically align itself with the tech giant's ecosystem of divisions and customer networks to focus more on connecting startups with its own business units. This shift in focus could help Tata innovate and respond to its dynamic industry involvement and create a sustainable source of growth.
Tata could also consider taking inspiration from Convivialite Ventures by initially acquiring to expand geographically and extending VC investments to establish a stronghold abroad. With a robust SaaS offering, Tata could leverage its expertise to bolster its product offerings and upstream integration, lowering upfront and annual costs for customers. The B2B SaaS vertical is the fastest-growing in the ecosystem, making it a promising area for investment.
This would build on Tata’s existing legacy of being the most valuable Indian brand as a pillar of commerce, which forms the foundation of its goodwill and strong federal relations. By innovating in-house early on, Tata could save significant cash in the long run by no longer needing to acquire the largest competing company to stay ahead.
