Have Flipkart, Snapdeal hit a valuation wall?

Multiple investors approached by Flipkart and Snapdeal have refused to put up money at current valuations


The difficulty faced by Flipkart and Snapdeal in raising fresh funds indicates the companies may have to lower their expectations if they want to get new investors on board. Photo: Hemant Mishra/Mint
The difficulty faced by Flipkart and Snapdeal in raising fresh funds indicates the companies may have to lower their expectations if they want to get new investors on board. Photo: Hemant Mishra/Mint

Bengaluru/New Delhi: India’s most valuable e-commerce firm Flipkart Ltd has held funding talks with more than 15 investors over the past six months, all of whom have refused to invest in the company at its preferred valuation of $15 billion.

Rival Snapdeal (Jasper Infotech Pvt. Ltd), which is India’s second-most valuable Internet company, has also held talks with several new investors who have declined to put up money at Snapdeal’s asking price of $6.5 billion.

Flipkart approached investors including Alibaba Group, Foxconn, Ontario Teachers’ Pension Plan and Canada Pension Plan Investment Board but all of them have declined to invest in the company, two people familiar with the matter said.

That as many as three of these investors—Alibaba Group, Foxconn and Ontario Teachers’ Pension Plan—are also shareholders in Snapdeal highlights the upside-down change in Flipkart’s attitude toward fund raising.

From the beginning of 2014 until the middle of last year, Flipkart was setting terms of engagement with potential new investors, even demanding exclusivity in some cases. The company last raised $700 million from Tiger Global, Qatar Investment Authority and other existing investors in July.

Flipkart rival Snapdeal, too, is struggling to raise cash at its current valuation of $6.5 billion, two other people familiar with the matter said.

The online marketplace approached investors including the Abraaj Group and existing investors Alibaba and Ontario Teachers’ Pension Plan for more cash, but no deal has been agreed yet, the people cited above said. Snapdeal raised just $50 million in February from venture capital firm Iron Pillar, a tenth of its target of at least $500 million, the people said.

Snapdeal co-founders Kunal Bahl and Rohit Bansal were in San Francisco this month meeting multiple investors to try and secure new funds, the two people said.

“We closed and announced a round of investment in February 2016 and are not raising fresh funds,” a Snapdeal spokesperson said in an email.

On fund raising and being rejected by several investors, a Flipkart spokesperson said on email,

“This information is false and baseless. We are well capitalized for the long term and we are not looking to raise funds. We believe in raising funds when they are available and always at the right valuation.”

After pumping in more than $9 billion into Indian start-ups since the beginning of 2014, investors started pulling back late last year because of a mix of global macroeconomic factors such as a growth slowdown in China, as well as growing concerns over unproven business models.

This year, investor caution toward start-ups has increased manifold, resulting in an acute slowdown in funding, fall in valuations and even closures.

In late February, Morgan Stanley, an investor in Flipkart, disclosed in a regulatory filing that it slashed the value of its holding in the online retailer by as much as 27%. Morgan Stanley’s estimate implies that the mutual fund currently values Flipkart at $11 billion, down from Flipkart’s valuation of $15 billion when it last raised cash in the middle of last year.

Despite Morgan Stanley’s markdown in February, Flipkart is still approaching investors asking for a valuation of $15 billion, but it hasn’t had any takers yet, the first two people cited above said.

Two other mutual funds, T. Rowe Price and Baillie Gifford, are also investors in Flipkart and they will report the value of their stakes sometime this year.

The difficulty faced by Flipkart and Snapdeal in raising fresh funds indicates the companies may have to lower their expectations if they want to get new investors on board.

To be sure, both Flipkart and Snapdeal have enough cash to fund their current burn rates for 12-15 months. Flipkart has raised $2.6 billion since May 2014. Snapdeal has received nearly $2 billion since the start of 2014.

Still, both companies need to raise more money this year to compete effectively with the Indian unit of Amazon.com Inc., the world’s largest online retailer.

And just as Flipkart and Snapdeal are struggling to raise cash, Amazon is stepping up its pace of investment in India.

Amazon India nearly doubled its authorized capital to Rs.16,000 crore in February, exceeding its capital commitment of $2 billion made in July 2014 and indicating the company’s intent to spend whatever is needed to become the country’s largest e-commerce firm, Mint reported on 4 April.

Both Flipkart and Snapdeal have reported sluggish sales since the Diwali sales in October, the people cited above said.

Flipkart’s monthly sales were the same in March compared with November, the first two people said. They declined to disclose the exact sales numbers.

“Regarding your query on our sales, the information is untrue and baseless. Our sales have seen a steady growth,” the Flipkart spokesperson added.

Snapdeal’s revenue was lower in March compared with November, the other two people said. They, too, declined to disclose exact numbers.

“We are growing at over 200% year-over-year and are on a path of sustainable growth as a company,” the Snapdeal spokesperson said, without specifying the period for which Snapdeal grew at 200%.

Sales at Flipkart and Snapdeal are getting hit partly because both companies have cut discounts in order to conserve cash, the people cited above said. The two companies are under pressure to cut their burn rates at least until they are able to attract more cash.

Over the course of 2015, Amazon India, which launched in June 2013, several years after its local rivals, gained market share at the expense of Flipkart and Snapdeal. These market share gains accelerated over the past five months when the two Indian start-ups reduced spending on discounts and other expenses.

To make matters worse for Indian start-ups including Flipkart and Snapdeal, there is lack of clarity over the new regulations governing e-commerce.

The government on 29 March allowed 100% foreign direct investment in online retail of goods and services under the so-called marketplace model through the automatic route, which would legitimize existing businesses of e-commerce companies operating in India.

Three conditions attached to the government’s approval, however, could either hurt e-commerce companies or force them to find new ways to get around them.

One, no group company or seller on a marketplace can contribute more than 25% of the sales generated. Two, marketplaces cannot influence product prices. Three, small sellers will now have to take responsibility of quality of goods and after-sales support.

Flipkart, Snapdeal and Amazon India, as well as a majority of India’s e-commerce companies, stand to get affected by the new rules.

mihir.d@livemint.com

More From Livemint