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Business News/ Companies / Investors bet big on e-commerce ancillaries
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Investors bet big on e-commerce ancillaries

Investors bet big on e-commerce ancillaries

By BloomebrgPremium

By Bloomebrg

Mumbai: Investors in e-commerce ventures are shifting their attention to providers of support services for online retailers to ensure their capital reaps sufficient returns in a crowded market.

By Bloomebrg

Investors pumped at least $500 million (around 2,550 crore) into the online shopping space across 68 firms in 2011. At the same time, there’s a growing sense of unease among investors about the tendency of e-commerce companies to burn cash due to procurement, warehousing, logistics and delivery costs associated with every transaction.

At least four e-commerce start-ups have shut shop recently, including Taggle.com, Nammagroceries.com, Harisabzi.com and Subzimandi.in. Aware of the frailties of online retail, investors are now focusing on developing an ecosystem that can support the day-to-day operations of e-commerce firms. Investors still harbour painful memories of the dotcom boom and bust of 1995-2000.

Since November, there has been a surge in investments for start-ups that attend to e-commerce companies’ characteristic pain points such as logistics and warehousing, courier services that could handle cash on delivery, website creators for online stores and payment platforms that can ensure safe online transactions.

In its first investment in such a company, Bangalore-based Footprint Ventures and Intel Capital, the investment arm of the world’s largest chipmaker, invested $5 million in payment solutions provider enStage Software Pvt. Ltd.

Josh Bornstein, founding partner of Footprint Ventures, said with its payment solutions that facilitate e-commerce transactions among others, enStage is “riding a very strong trend in the market".

New Delhi-based online payments solutions provider ZaakPay has raised money from a global venture capital fund, said its co-founder and chief executive Upasana Taku, without disclosing the amount.

Gharpay, a Hyderabad-based start-up with a cash collection solution for e-commerce companies, too, has raised an undisclosed amount of funding from Sequoia Capital India. Another ancillary, Bangalore-based e-commerce platform for online stores, BigRaja (of Adodis Technologies Pvt. Ltd), is nearing closure of a fresh round of funding from angel investors.

Typically, e-commerce firms across categories—whether they sell books, apparel, electronics or lifestyle products—face similar logistical hurdles. And as these companies scale up, such issues become more critical.

“No one would have invested in these enablers had e-commerce not evolved as a business on its own," said Prashanth Prakash, partner, Accel Partners India, an early-stage investor. It has invested in e-commerce firms including Flipkart, babyoye.com and LetsBuy.com.

With e-commerce pegged to only grow in the country, companies that are facilitating these businesses have become an obvious choice for investors. The e-commerce market in India had been estimated to be worth 19,688 crore in 2009 and expected to grow to nearly 50,000 crore by the end of 2011, according to a report by First Data Corp. and ICICI Merchant Services Pvt. Ltd.

“There is enough space for these companies to evolve as e-commerce business is on the rise," Prakash said.

Investors typically bet on ancillaries when the sector these cater to has matured enough to offer a significant, discerning market opportunity. Private equity investors, for example, like to invest in ancillaries for ports, railway projects and education sector.

The huge interest in ancillaries for e-commerce is a bit surprising at this point as the industry is yet to establish itself.

Investors say they are betting on the best ancillary firms available in a relatively weak support system and it will take a while for the scenario to change. “If not today, given the trajectory of e-commerce growth, it will become a big business in four to five years. It’s a gut call. The pain points will continue to exist and become bigger," said Mohanjit Jolly, managing director at DFJ India, who is scouting for investment opportunities in this space.

While there are a lot of opportunities to invest in these firms, funding will not come easily. “The question is: can they become big enough on their own?" asked Sasha Mirchandani, managing partner at Kae Capital.

For entrepreneurs, the interest and support of investors are timely as they seek to expand into new markets. EnStage, which is growing at 40% year-on-year, is looking to use the funds raised for infrastructure development, among other things. “We want to keep the momentum of growth not only in India, but also in global markets like South-East Asia, the Middle East and the US," said Govind Setlur, founder and chief executive of enStage, which gets up to 50% of its revenue from e-commerce businesses.

ZaakPay is planning to go live with its online payment solution by the end of January. Taku hit on the business idea when she was helping her friends who had started an e-commerce business of their own and were grappling with issues such as payments dropping off mid-way.

“Most existing payment gateways have invested little in transaction platforms to keep up with the growth that is happening," she said.

Online transaction platforms are turning out to be a good alternative for investors keen on financial services, too. Footprint Ventures has been looking for investment opportunities in financial services such as mutual funds and insurance, but regulations have made it difficult to earn fee income, said Bornstein.

“As more transactions happen online, such companies will have good business opportunities," he said. Footprint Ventures has seven portfolio companies.

deepti.c@livemint.com

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Published: 25 Jan 2012, 09:54 PM IST
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