Has Softbank’s Vision fund lost sight as it invests in PayTM $1 Bn raise despite mounting losses?

They lost $4.6 Billion with the WeWork deal. They have struggled to raise fund-2. They are now focused on profitability rather than growth.

Yet, Softbank fund joined by Alibaba’s Ant Financial pooled in $600 Million for PayTM’s recent $1 Billion fund raise. PayTM is valued at $16 Billion at the end of this funding round. They were valued at $10 Billion just last year when Warren Buffet’s Berkshire Hathaway invested in them.

The recent IPO fiascos that Softbank’s portfolio firms have been involved in, have forced their hand to take a profitability focused investment strategy.

Softbank’s Masayoshi Son has mandated that his portfolio companies need to demonstrate a few years of profits before they can plan for IPOs.  However, the new investment into PayTM is in stark contrast to their new position on profitability.

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The India payments market has been a fairy tale ride since 2016. I have discussed this several times in the past, and perhaps the biggest contributor and beneficiary of this boom has been PayTM, and its Chinese investors.

However, the market is no longer completely dominated by PayTM. Their payments growth has slowed down. Walmart’s PhonePe have grown from 26% market share to 47% in about a year, and at the same time PayTM only grew from 51% to 52%.

Their losses have doubled in this time. In the financial year ending March 2019, they reported a loss of $549 Million, which is more than double their previous FY loss of $206 Million.

PayTM claim that they have cut down their costs by more than 33% in the last six months, with a view to doing an IPO in 2-3 years. The payments market is still growing in India, and it is expected to be $1 Trillion by 2023. But there are more takers now than there were a couple of years ago.

Google pay has also upped its game, and have about 67 Million daily users. Whatsapp is planning to roll out its payments app to its 400 Million users in India. PayTM really needs to find new revenue lines, with good margins – before they start trailing in the payments game.

The new funding round is primarily to grow their base of merchants from its current 15 Million to 35 Million. Vijay Shekhar Sharma, the CEO, mentioned that they would be spending $2.7 Billion in the next couple of years to grow their merchant base further. It looks like atleast another 24 months of further growth and loss making lies ahead.

PayTM have started to focus on improving their margins. They are moving from Peer to Peer payments to online and offline merchant transactions. Vikas Garg, the firm’s CFO, mentioned that in Q2 and Q3 2019, PayTM have reduced costs by 10%. Vijay wants to take back 66% of the payments market, and improve cashflows before any IPO plans.

From a Softbank perspective, they have got a stake of over 20% in the firm, and as per the deal, they can’t sell their stake in the firm for another 5 years, except when its via an IPO.

The way forward is a bit murky to me. On the one hand, they want to grow, invest $2.7 Billion into tier 2 and 3 cities in India. On the other hand they are cutting costs with a view to going public. With Google Pay, Phonepe and Whatsapp payments breathing fire, Vijay may need to grow some extra hands and heads to tackle the next few months.

The question still remains though, growth or profitability?

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