The Indian e-commerce wave is far from over
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Sachin Bansal, co-founder and chairman of Flipkart, India’s largest e-commerce firm, cut a rather sorry figure last week when he sought government protection at a public forum to stave off competition from foreign players.
Bansal and Flipkart have had a rather tough year. It has been more than 12 months since the Bengaluru-based firm raised any kind of capital after gobbling up nearly $3 billion over the past few years.
For Flipkart and the gaggle of local companies that make up India’s e-commerce sector, not having capital available on tap is a new, even alien, feeling.
For nearly two years, investors of every hue—from venture capital firms to hedge funds to strategic investors—scrambled to outdo each other in bankrolling the country’s e-commerce wave, very often at valuations that are looking less and less defensible today.
Last year, e-commerce companies raised a record $3.9 billion in fresh funding from investors. Flipkart and its New Delhi-based rival Snapdeal alone cornered $1.7 billion.
This year, with a correction underway in the start-up funding market, the story for e-commerce has played out very differently.
In the nine months to September, the sector pulled in just $1.4 billion in fresh funding. Big-ticket deals have become a thing of the past. Grocery e-tailer BigBasket, ticketing platform Bookmyshow and eyewear e-tailer Lenskart were the only three firms that pulled in serious money. BigBasket raised $150 million in March from an investor consortium led by Dubai’s Abraaj Group; Bookmyshow closed a $81.5 million growth round in May from a group of investors led by New York-based private equity firm Stripes Group, and Lenskart raised $60 million from International Finance Corp., TPG Growth and other investors. Another potentially large deal this year was e-commerce marketplace Shopclues’ growth round in January. The company didn’t disclose the size of the round, but it is estimated at between $100 million and $140 million.
There haven’t been very many more deals over the last two months, and it is unlikely that the e-commerce sector will muster much in what’s left of the current quarter. There’s an outside chance that Flipkart may still score a funding round before December ends. The company, Mint reported in October, is currently in the market to raise anywhere between $500 million and $1 billion.
Talks were reportedly initiated with Wal-Mart Stores Inc., the world’s largest retailer, but they don’t seem to have headed anywhere productive yet. Last month, Mint reported that the e-commerce company may now seek the assistance of investment banks, something it has not done in years, to muster the next round of funds.
It may be argued that Flipkart alone doesn’t represent the e-commerce sector. However, given that it accounts for nearly 20% of the $15-odd billion that India’s start-ups across sectors have raised over the past decade, its ups and downs do have a bearing on the market and, especially, the e-commerce sector. The frequent valuation markdowns it has had to take over the past 11 months by mutual fund stakeholders, for instance, have impacted valuations across the consumer Internet sector, not just e-commerce. And, the fact that the biggest investor in the company, New York-based hedge fund Tiger Global Management, seems to have taken a back seat in its ongoing fund-raising campaign doesn’t inspire much confidence either. In the past, Tiger Global, easily the most aggressive investor in India’s consumer Internet market until late last year, has usually taken a lead in pumping fresh capital into Flipkart.
A lot of Flipkart’s and the e-commerce sector’s woes are due to Tiger Global and the posse of hedge funds that dominated the e-commerce funding market for the past two years. When China devalued the yuan last year, leading to a turmoil in the global financial markets, hedge funds quickly beat a retreat from India’s start-up market. Suddenly, the abundant supply of later-stage private capital that was available to the e-commerce sector, often at inordinately high valuations, vanished. For market leaders such as Flipkart and Snapdeal, this meant they now had to battle the biggest threat to their turfs, Seattle-based Amazon, on the basis of execution and unit economics rather than capital. Capital, of course, isn’t a constraint for Amazon. It announced a $2 billion outlay for the Indian e-commerce market in 2014 and added another $3 billion in June this year.
For venture capitalists, who were largely driven to the sidelines of the e-commerce sweepstakes by hedge funds, the market correction hasn’t turned out to be such a bad thing. While funding in the e-commerce sector has slowed, early-stage and some later-stage investors continue to back companies. Niches or verticals have emerged as a theme for investments this year. At least three business-to-business marketplaces—Udaan, Bizongo and Ninjacart—have raised funding worth $16 million from early-stage investors such as Accel Partners, Inventus Capital Partners, Lightspeed Venture Partners and IDG Ventures India. Power2Sme also raised fresh capital but hasn’t disclosed the size of the round. Another recurring theme is marketplaces for rentals of used products. Three start-ups—Zefo, Furlenco and Rentomojo—raised a combined $26 million from investors such as Lightbox Ventures, Sequoia Capital and Helion Venture Partners.
Based on a rough survey of e-commerce deals done this year, we found about 26 deals that have some kind of venture capital backing. Series A deals, the first round of venture capital in a start-up, account for 11 of those deals, indicating that early-stage investors are back to seeking out the next generation of e-commerce companies. While the verdict is out on whether the earlier generation of companies—the Flipkarts and the Snapdeals—will ride out the prevailing downturn in fortunes, India’s e-commerce wave is far from over.
Snigdha Sengupta is a consulting writer with Mint. She contributes stories on venture capital and private equity.