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Niche start-ups awash with funds amid buzz of a bubble

Niche start-ups awash with funds amid buzz of a bubble
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First Published: Mon, Nov 21 2011. 11 28 PM IST

Updated: Mon, Nov 21 2011. 11 28 PM IST
Mumbai: HealthKart.com, the country’s first online health store, sells a range of products from infant accessories and dietary supplements to cosmetics and testing devices.
Launched in March by Gurgaon-based Bright Lifecare Pvt. Ltd, the start-up’s revenue and customer base is expanding at a month-on-month rate of 50%, says co-founder Prashant Tandon, who is in his early 30s.
“The average ticket size is about Rs 2,000,” says Tandon, who quit his job as a senior associate at McKinsey and Co., to venture into online retail, and is now working with diagnostic labs and hospital chains to offer services such as blood tests as he seeks to scale up. He also plans to retail over-the-counter medicines.
Prateek Agarwal, 24, an Indian Institute of Technology-Delhi graduate was a software development engineer with Amazon.com Inc. before he co-founded eSportsBuy.com in June. The online retail store offers sports goods, health and fitness products, sports shoes, apparel and accessories. It sells 900 products, which Agarwal hopes will increase to 10,000 in a year.
“It is a big and unexplored market,” says Agarwal, adding eSportsBuy.com is seeing an increase in sales of 25% month-on-month. “We are not making losses,” he said.
These are not isolated examples. A new generation of dotcom start-ups is invading the e-commerce space in India, where buying and selling online is expected to grow 47% and reach Rs 46,500 crore by year-end, according to the Internet and Mobile Association of India (IAMAI).
India has 3,311 e-commerce hubs, according to a study by Web shopping firm eBay India for its 2011 census. The numbers are set to increase in a trend led by professionals turning entrepreneurs and fuelled by private equity investment, despite concerns surfacing that it could be another bubble in the making.
Veggies online
R. Venkatesan, who is in his early 30s, was heading a country-wide marketing project at Hewlett Packard Co. before founding VeggiBazaar.com.
His start-up takes orders for vegetables until 10 pm and delivers them between 3pm and 9pm the next day, depending on the customer’s convenience. Today, it has 12,500 customers in Chennai and is entering Bangalore, Hyderabad, Mumbai, New Delhi and Coimbatore.
Every day, it makes 130-170 deliveries and does business worth Rs.45,000, with a 40% increase month-on-month.
“Cut vegetables are offered at a 10-15% premium, while regular vegetables are at par with what is available at Nilgiris, Reliance Fresh, More, Spencer’s,” says Venkatesan.
The company’s plans include adding salads, juices and groceries to its product portfolio. It is also looking at raising funding.
Some start-ups have already scaled up. Flipkart.com, which retails everything from books to mobile phones and accessories, personal and healthcare products to home appliances, sells over 15,000 units daily, earning Rs 1.1 crore in revenue. Online fashion retailer Myntra.com receives 2,000 orders a day at an average bill value of Rs 1,000. Offering thousands of products at discounted prices, along with payment options like cash on delivery, these specialized e-commerce sites are seeing revenue growth of 25-50% month-on-month. Non-e-commerce start-ups typically take three to five years to achieve 10-20% year-on-year growth.
Bubble concerns
The success of these firms is not lost on investors. Around 48 e-commerce firms have raised $427 million so far this year, compared with 11 deals worth $58 million last year, according to VCCEdge, which tracks venture capital and private equity transactions. Some firms have even raised multiple rounds of funding.
Is the investment euphoria justified? Contrarians say the renewed buzz around e-commerce is bringing back memories of the 1995-2002 dotcom bubble that went bust.
“I do believe we’re in the middle of a valuation bubble,” said Mahesh Murthy, a founding partner at Seedfund.
Investors are betting on fundamentals and will stick to their belief, he says.
Some are questioning the potential of start-ups to scale up and reach profitability.
E-commerce expert Ian Daniel, in his book, E-Commerce Get It Right, says 97% of e-commerce sites make $0 profit in their first three years.
Also, these companies tend to take long before they start making a profit.
“Much depends on how narrow the niche is. Does it have a big enough market to be scalable?,” asked Mukul Singhal, vice-president, SAIF Partners.
A stage-agnostic investment firm, SAIF Partners has backed firms such as firstcry.com, an online baby product store, and inkfruit.com, a retailer of fashion accessories.
“A single spectacular success can make up for a dozen flops,” Ashish Gupta, managing director of Helion Venture Partners, said.
Accel Partners India, one of the largest investors in the segment in India, doesn’t think the bet on e-commerce is too big, says Prashanth Prakash, partner at Accel. The firm has invested in seven e-commerce start-ups.
“Of the firms funded this year, 20 to 30 will not have any reason to exist but there would be at least five $100 million-plus revenue generating companies in next two years,” said Prakash “The bet is on those winners.”
E-commerce firms worldwide have taken seven to eight years to reach profitability, Prakash says. “Amazon took over a decade to become profitable. How can it be any different In India?” he asked. “If we don’t have patience like investors in the US, who gave the firm time to rise up, there would be issues.”
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First Published: Mon, Nov 21 2011. 11 28 PM IST
More Topics: Ecommerce | Start ups | Niche Verticals | PE | Funding |