VCs park their cash in Indian taxi firms

Picture the scene. You work until midnight to close a deal and when you leave the office, you find your car has broken down. You then have to wait 45 minutes before you're able to hail a cab.

This kind of frustration had occurred on more than one occasion to Fazal Ahad, director of Merisis Capital Advisors, and so was already at the forefront of his mind when Ola Cabs, a Mumbai-based online car rental start-up, approached the corporate finance adviser for on a Series A funding round last year.

Ola runs a platform that connects customers with small-scale taxi operators, allowing the former to book services online or using a mobile device. The need for an alternative to the Indian habit of hailing taxis on the street - and waiting for up to an hour in the process - appeared all too evident to Ahad. Merisis was happy to act as the exclusive adviser to the firm, which raised INR10 million ($180,000) from Tiger Global in April 2011.

Ola Cabs is one of several Indian companies offering taxi-related services to have attracted investment from venture capital firms of late. Last month, Accel Partners, Helion Venture Partners and seed investor Blume Ventures backed a Series A round for Serendipity Infolabs, which runs online taxi booking site Taxiforsure.com. Also in May, Anand Prasanna, an angel investor and investment director at Squadron Capital, injected INR2.5 million in car rental booking portal Taxiguide.in, while in April, Inventus Capital Partners made a sub $1 million investment in online chauffeur rental service Savaari Car Rental.

"This is a space which offers huge potential," says Merisis' Ahad, who had to turn down two other taxi-related companies seeking assistance in fundraising due to potential conflicts of interest. "Whether it is a taxi or a rental car, people need it all the time. So depending on who you believe, the market size is $2.5-4 billion."

Taxi! Taxi!

VC interest in the automobile services segment isn't a new phenomenon, however. Two of the sector's largest players - Meru Cabs and Easy Cabs - were both backed by venture investors several years ago, when they were the first entrants into the Indian radio taxi sector. The breakthrough was enabling Indian consumers to telephone for a cab for the very first time.

In 2007, Meru's parent company, V-Link Group, launched a fleet of cabs that has since grown to 5,600 with the support of India Value Fund, which became a majority owner of the brand. Meanwhile, Carzonrent - the owner of Easy Cabs, which itself owns 6,500 vehicles - received its first round of VC investment from SIDBI Ventures in 2005. The following year, Westbridge Capital Partners entered the capital structure, with BTS Investment Advisors following suit last year. Easy Cabs is now looking to raise INR400 million in new funding.

The major difference between these two sector heavyweights and the more recent start-ups is that the former own and operate their fleets while the latter are online platforms that simply work with firms and individuals who have their own vehicles. This makes their business model highly asset-light and frees them from the burden of having to bid for permits in certain states, such as Mumbai. "It's also easy for someone to scale up if they have the technology," says Ahad.

With Ola, the technology is clearly one of the factors that attracted Tiger Global. Presenting a stark contrast to hailing a cab at the road-side, their platform allows users to see exactly where vehicle they have booked is located via GPS tracking to their phone, as well as specifying what car will arrive, who the driver is and the driver's cell phone number. Each Ola car's tracking device also doubles up as a meter, run by the company rather than the driver, which reduces the likelihood of meter tampering taking place.

Ola is one of several companies to have introduced technology to this space, and with organized players holding a mere 10% of the market, it is clear that consolidation will need to take place over the coming 2-3 years. Will superior technology be what separates the wheat from the chaff? According to Parag Dhol, a managing director who co-led Inventus' investment in Savaari Car Rentals, the ability to ensure a uniform standard of quality across a range of operators could prove to be more of a differentiator.

"I wouldn't say that optimizing the website and the customer experience online aren't problems to be solved, but they are secondary problems," he says. "The principal game is to create word of mouth for yourself as a uniform quality provider. It's not an easy business. Savaari goes to [taxi operators] whose standards of service aren't generally very high and convinces them to try out the company, giving them some volume and ensuring that they perform to our standards."

Those standards include providing newspapers in the cars, having uniformed drivers and opening doors for passengers.

Multiple exit options

The companies that manage to instill more of a service culture, as well as fully optimizing their technology platform, could find themselves with an array of options when the time comes to exit their stakes in 4-5 years time. The biggest opportunity for VC firms is likely to come in the form of a strategic sale to a global corporate: Hertz (of which Carzonrent was formerly a franchisee), Avis and Enterprise Rent-A-Car are all interested in expanding their foothold in India, while Japan's Orix Corporation recently executed a share purchase agreement with IL&FS to enable it to start car rental business Orix India.

An online travel company such as MakeMyTrip - which already offers airport pick-up and drop-off and car rental services - could also be the instigator of a future buyout. Meru and Easy Cabs represent yet another alternative as the services offered by a number of these aggregators are complementary to the point-to-point transportation to which these firms are currently restricted.

Says K. Srinivas, managing partner at BTS Investment Advisors, backers of Easy Cabs: "We would like to look at how to enhance the value-add of Carzonrent. We will look at ancillary or related services to the cab business but would like to look at it as a value-add - a forward or backward-integration for Carzonrent."

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• Topics
• South Asia
• Investments
• Consumer
• automobiles
• India
• SIDBI Venture Capital
• WestBridge Capital Partners
• Tiger Global Management