PhonePe raises $700 million, becomes a separate entity

PhonePe, the crown jewel in Flipkart's acquisition by Walmart, is partially" spinning off, the Bangalore-based financial services firm said on Thursday. To kick off its new journey, the firm said it has secured $700 million in a new financing round.

This round, the name of which was not disclosed, was led by Walmart with participation from some existing investors, PhonePe said. The new round gave PhonePe, which was founded by three former Flipkart employees, a post-money valuation of $5.5 billion.

Today's announcement is a big boost to the confidence investors are showing on PhonePe. The startup had been engaging with investors for new capital for several quarters and, in at least one instance, struggled to raise funds at a $3 billion valuation earlier this year, TechCrunch reported earlier. It had hoped to raise about $1 billion at a valuation as high as $10 billion last year, however, according to people familiar with the matter.

The partial spin-off, which had been in the works for more than a year, means that Flipkart's stake in PhonePe will reduce from 100% to 87%. This partial spin-off gives PhonePe access to dedicated long-term capital to pursue our vision of providing financial inclusion to a billion Indians," said Sameer Nigam, founder and chief executive of PhonePe, in a statement.

Flipkart will remain PhonePe's majority shareholder, and the two businesses will retain their close collaboration," PhonePe said.

PhonePe, which means on the phone" in Hindi, currently leads the mobile payments market in India, by some metrics. In October, it surpassed Google Pay to become the top UPI payments app. UPI is a four-year-old payments infrastructure built by India's largest banks. It is the most popular way people transact money digitally in India. PhonePe reported 835 million UPI transactions in October, ahead of Google Pay, which processed about 820 million transactions that month.

As Flipkart Commerce continues to grow strongly serving the needs of Indian customers, we are excited at the future prospects of the group. This move will help PhonePe maximize its potential as it moves to the next phase of its development, and it will also maximize value creation for Flipkart and our shareholders," said Kalyan Krishnamurthy, CEO of Flipkart Group, in a statement.

In a recent report to clients, analysts at Bernstein identified PhonePe as one of the startups in India that could file for an IPO in within three years. PhonePe's reliance on parent Flipkart has shrunk, from 50% of monthly transactions to less than 1% today. PhonePe was first to launch on UPI and has extended into new use cases including travel booking, bill payments, financial services etc. The company has also launched Switch which allows users to switch between PhonePe and other apps like food, grocery delivery etc. (Super App)," they wrote.

PhonePe, which has amassed over 100 million monthly active users, could look to expand outside of India, the analysts wrote in the report, which was obtained by TechCrunch.

PhonePe and Google Pay today also compete with Paytm, which is backed by SoftBank and Alibaba. Paytm, which was privately valued at $16 billion last year when it raised $1 billion, has shifted its attention to cater to merchants in recent quarters as UPI currently offers no way for companies to make any money on its platform.

At an event in Bangalore late last year, Sajith Sivanandan, managing director and business head of Google Pay and Next Billion User Initiatives, said current local rules in India have forced Google Pay to operate without a clear business model in the country.

If that wasn't a challenge enough, WhatsApp, which is the most popular smartphone app in India with over 400 million users in the world's second largest market, began rolling out its payments service in the country last month. At stake is India's mobile payments market, which is estimated to reach $1 trillion by 2023, according to Credit Suisse.