Bangalore: E-commerce start-ups are commanding high valuations faster than companies in any other sector, recent deal negotiations show.
While in sectors such as consumer services or information technology, start-ups hardly raise more than $10 million (Rs45 crore) in their second rounds of funding, group buying and shopping sites such as Snapdeal, Infibeam and Naaptol.com may be negotiating deals of Rs100-200 crore, valuing them at Rs650-1,000 crore.
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Investors say the valuations may be a tad high but they are ready to pay a premium due to growth potential, acquisition expectations and differentiated business models.
“Their valuation expectations are not at par with any other industry right now,” said Mukul Singhal, vice-president, SAIF Partners, a private equity (PE) firm that manages more than $3.5 billion.
Online shopping firm Naaptol.com is in talks with investors to raise $25 million through the sale of a minority stake, chief executive Manu Agarwal said in an earlier interview. The company plans to use the money to launch a private sales section on its website targeting regular customers, as well as a television shopping channel.
Shopping site Flipkart raised $20 million in its third round of funding last month, valuing it in excess of Rs1,000 crore. In total, the company has raised $31 million.
Shopping sites “are growing from $10 million to $100 million in a year’s time. The businesses are that scalable,” Singhal said. “Take the example of our portfolio company Makemytrip. From 2005 to 2011, it took only six years to take the company public... We believe some (e-commerce) companies would take only about three-four years to make the same journey.”
Makemytrip.com got listed on the Nasdaq stock exchange in 2010. SAIF is also invested in shopping sites Firstcry.com and Zovi.com.
Prashanth Prakash, partner at Accel Partners India, which has invested in shopping sites Flipkart and Myntra Designs, said there was no equivalent of e-commerce start-ups in terms of growth over the past decade except for the boom in mobile phones.
“Travel is about 30% of the overall e-commerce business in the US,” he said. “Still, we have many billion-dollar companies emerging in the travel space. It only makes sense that all the other categories together would help in establishing companies that would probably be many times larger than the online travel space.”
E-commerce start-ups say their appetite for capital is increasing as they are burning cash fast in a bid to scale up.
Ahmedabad-based online retailer Infibeam.com is in talks with investors for the first time to raise money to add new categories and make acquisitions. The company, which in April planned to raise up to Rs100 crore, could now raise up to Rs150 crore in exchange for a minority stake, chief executive Vishal Mehta said.
Online shopping firms are innovating and drawing a large number of customers to actually transact than just window shop, he said. “It’s not about valuations. The space is growing at a pace never seen before. India is a huge consumer-driven machinery and it has just started rolling,” said Mehta.
Jasper Infotech, which runs group buying site Snapdeal.com, is in advanced talks with at least three investment firms to raise $35-40 million in its third round of funding, which values the firm at Rs1,000 crore, said two people directly involved in the deal process. The three firms include Nexus Venture Partners and IndoUS Venture Partners that invested $12 million in Jasper in January.
“Every fast growing company needs to assess how the market is valuing them. One needs capital to propel them to the next level,” said an executive at Jasper asking not to be identified.
The company plans to use the money to add new products, including designer clothes, jewellery and expensive fragrances.
The executive said Snapdeal has 50,000 merchants in 50 cities in India and 7 million registered users.
While e-commerce businesses are lucrative by themselves, these start-ups also run some non-core business that add to the valuation, investors said.
For example, Infibeam offers online platforms that can be used by others to open online stores. Jasper has a marketing solutions arm for small and medium enterprises (SMEs) and a voucher offering called Money Saver for companies. It also runs the Jasper Marketing Innovation Fund that invests in other start-ups engaged in marketing innovations.
Jasper “is making marketing solutions for SMEs and we are very keen on that space,” Sandeep Singhal, managing partner, Nexus Venture Partners, had said in an earlier interview.
Meanwhile, investors are already beginning to see customer acquisition becoming difficult. It is already an issue for some companies as customer acquisition costs have gone up significantly, said Singhal of SAIF Partners.
About “18 months ago, it was 100 for acquiring a customer.Now, it’s Rs1,000 as competition has increased and companies have to burn a lot more cash,” he said, adding that it takes four-five purchases by a customer to make up for the acquisition cost.
Graphics by Yogesh Kumar/Mint