Snapdeal: Rise and fall of an Indian unicorn

Bengaluru: In August 2015, Snapdeal founder and chief executive officer (CEO) Kunal Bahl claimed in an interview with an Indian newspaper that his company would topple arch-rival Flipkart from its perch at the top of the Indian e-commerce market. He gave Snapdeal seven months to do so.

“The one thing I am very, very clear about right now is that I think we’re going to be No. 1 (in terms of sales) by March 2016. I think we’re going to beat Flipkart by then,” Bahl said in an interview with The Economic Times. “I’m very confident that whatever their (Flipkart’s) numbers are, we will be ahead of them by March (2016).”

To say now that the tables have well and truly turned would be a vast understatement.

Flipkart—which this month raised a mammoth $1.4 billion in fresh funding from investors led by Tencent Holdings Ltd, eBay Inc. and Microsoft Corp.—is having the last laugh.

And Snapdeal is in a desperate fight to stay afloat as it battles a near-death situation; Bahl has changed his tune in recent weeks and months to indicate that the fate of the company is out of his control and is in the hands of Snapdeal’s investors.

And the online marketplace’s largest investors, led by SoftBank Corp., Kalaari Capital and Nexus Venture Partners, have virtually given up the fight and conceded defeat.

To top things off, Snapdeal’s largest investor, SoftBank (ironically) is now trying to engineer a sale of the e-commerce firm to Flipkart, amid a contentious boardroom battle against Kalaari and Nexus over the sale, according to at least four people aware of the current discussions.

Snapdeal’s board has also held talks with Paytm E-Commerce for the sale, which could be at a fraction of the company’s peak valuation of $6.5 billion, the people said. Snapdeal was among the first Indian unicorns, or start-ups valued at $1 billion or more.

An email sent to Snapdeal on Wednesday, 26 April, did not elicit a response as of press time. Snapdeal has previously declined to comment on the developments at the firm. Requests for comment sent to SoftBank, Kalaari and Nexus previously elicited no response.

The developments of the past few weeks and months at Snapdeal raise the inevitable question—how did things go so horribly wrong for Snapdeal so rapidly?

According to company insiders, investors and the people mentioned above, Snapdeal’s current predicament is entirely due to a culmination of a series of errors by its co-founders and its largest investors—SoftBank, Kalaari and Nexus.

It all started in September, when Snapdeal launched an expensive re-branding exercise to transform its image, as it looked to stay relevant in a bruising market share battle with larger rivals Flipkart and Amazon India.

This despite Snapdeal’s board members being aware at the time that the online marketplace could witness a rapid erosion in its valuation, in the event of a fund-raising or a potential sale—which, in turn, would trigger a boardroom fight between the investors over the valuation of Snapdeal.

For the re-branding campaign, Snapdeal forked out nearly Rs200 crore and held at least three heavily advertised sale events, in an attempt to stanch market share losses to Amazon and Flipkart.

In July 2016, Snapdeal, which had raised some $1.4 billion since October 2014, still had about $500 million left. Those cash reserves were wiped out by discounts and marketing, along with its daily expenses and those at its payments unit Freecharge, the people mentioned above said.

At the same time, it rejected at least two funding offers because of differences at the board between SoftBank on one hand, and Kalaari and Nexus on the other.

“It’s partly a case of brinkmanship by the investors and founders. Everyone expected the other to back off but no one has been willing to budge. SoftBank had assured Snapdeal that it would invest in Snapdeal in the worst-case scenario. But they obviously wanted the funding on their terms. This wasn’t agreeable to the others,” said one of the people cited above.

Even as late as January this year, Snapdeal was spending heavily, expecting funds from new investors or SoftBank, despite the differences between investors. But no such deal materialized. Sales crashed in February and March as it cut spending. It cut hundreds of jobs and shut Shopo, a consumer-to-consumer marketplace.

SoftBank is now keen to sell Snapdeal at a cut-price value, but that deal is being opposed by Kalaari and Nexus, since such a deal would value Snapdeal at a fraction of its peak valuation of $6.5 billion and severely reduce the value of the holdings of Kalaari and Nexus, which count Snapdeal as their largest investment. Such a deal would result in a huge blow to Kalaari and Nexus, as it would put the future of their India strategy in jeopardy, as both VCs placed such a huge bet on Snapdeal and their future is literally riding on the outcome of this deal.

The two VCs, along with the Snapdeal co-founders, have demanded that SoftBank buy out their stakes. At the last board meeting, SoftBank expressed interest in partially buying out the stakes of Nexus and Kalaari, but is yet to agree to those terms, the people mentioned above said.

SoftBank owns 33% in Snapdeal, while Nexus owns roughly 10% and Kalaari nearly 8%, according to documents with the Registrar of Companies. Snapdeal founders Bahl and Rohit Bansal together own less than 6.5% in Snapdeal after cashing out part of their stakes.

Much before the current boardroom battle at Snapdeal played out, signs of trouble and what was to come were starting to emerge in the middle of 2015 when Amazon India was increasing its market share by leaps and bounds at the expense mainly of Snapdeal.

During the go-go days of 2014 and 2015, India’s largest consumer Internet start-ups led by Flipkart, Snapdeal, cab-hailing company Ola and Paytm raised several billions of dollars from investors led by Tiger Global Management LLC, SoftBank, DST Global, Naspers Ltd and Accel Partners LP.

The mammoth funding rounds at the time were deemed necessary for the likes of Flipkart, Snapdeal and Ola to grow rapidly at the cost of near-term profits and keep deep-pocketed American rivals Amazon.com Inc. and Uber Technologies Inc. at bay.

Founders at India’s foremost e-commerce start-ups were given the licence to spend heavily to fund deep discounts to attract more online shoppers and focus on one thing and one thing alone—gaining market share at the expense of Amazon India.

In Snapdeal’s case, it enjoyed the blessing of its largest backer, SoftBank, which till date has pumped in $900 million into the online marketplace.

From the time it pumped $627 million into Snapdeal in October 2014, SoftBank—represented on Snapdeal’s board by Nikesh Arora at the time—encouraged the online marketplace to go all out and spend heavily on marketing, discounts, logistics and warehouses, without caring about cash burn rates.

Snapdeal, which had originally been started as a daily deals site in 2009 by Wharton graduate Bahl and Indian Institute of Technology-Delhi alumni Rohit Bansal, duly obliged.

But even as it expanded rapidly, it lagged Flipkart and Amazon on key parameters—most importantly, customer satisfaction and brand trust. Snapdeal also hired thousands of employees in an unplanned manner rapidly over a short period of time.

These shortcomings in Snapdeal’s arsenal were brutally exposed during key discount-driven festive sale months, when Flipkart and Amazon pulled away comfortably ahead of the rest.

More worryingly for Snapdeal, sales growth started to stagnate during late 2015 and early 2016, despite an increase in the number of Internet shoppers. According to a 2015 report by Silicon Valley-based VC firm Kleiner Perkins Caufield Byers, the number of Internet users in India grew by 40% in 2015 to 277 million.

While rival Flipkart at the time was struggling to grow sales, Snapdeal’s plight was worse. From November 2015 to April 2016, Snapdeal in fact witnessed a decline in monthly revenue. To compound matters for Snapdeal, existing and new investors promptly refused to pour fresh funds into an e-commerce firm that was already starting to be seen as an also-ran against Flipkart and Amazon.

New foreign direct investment rules introduced in March 2016 prohibited online marketplaces from influencing product prices and forced online retailers to put sales events on hold. Snapdeal was thus forced to cut discounts and curb advertising spending in order to preserve its dwindling cash reserves. That lasted till SoftBank again urged Snapdeal to undertake the rebranding exercise in September 2016, amid worries over further market share losses to Amazon and Flipkart.

The events of the past 6-12 months culminated in an email to all employees from Bahl and Bansal earlier in April, where the founders indicated that the fate of the company is out of their hands with its investors “driving the discussions around the way forward”.

The email marked a startling confession of the mistakes Bahl and Bansal (and also the investors) made over the past few years that have culminated in Snapdeal’s current predicament.

“There has been a lot of media reporting and speculation around Snapdeal recently. While our investors are driving the discussions around the way forward, I am reaching out to let you know that the well-being of the entire team is mine and Rohit’s top and only priority. We will do all that we can, and more, in working with our investors to ensure that there is no disruption in employment and that there are positive professional as well as financial outcomes for the team as the way forward becomes clear,” Bahl and Bansal wrote in the email, a copy of which has been seen by MintAsia.

The email was sent to Snapdeal employees with the intention of boosting the morale of the company, which has been hurt by large-scale layoffs, falling monthly sales and shutdowns of under-performing business units such as Shopo.

At the core of Snapdeal’s current troubles lies SoftBank’s desire to undo the mistakes it has made in India over the past three years. Unlike other venture-capital rivals such as Accel Partners and Tiger Global Management that have backed local market leaders such as Flipkart and Ola, SoftBank has failed to pick any category winners in India’s booming consumer Internet economy.

A sale of Snapdeal to Flipkart, along with an infusion of funds in the buyer, and a sizable investment in India’s largest digital payments start-up Paytm—in which SoftBank is currently in talks to invest up to $1.5 billion for a significant stake—would go a long way in negating some of the mistakes that the Japanese firm has made in India.

For SoftBank, the world’s biggest investor in start-ups, an investment in Paytm means an entry into India’s big financial services market. The proposed deal with Paytm is another instance of SoftBank trying to get it right the second time. SoftBank initially considered investing in Paytm in late 2014 but passed on the opportunity. It instead bet on online marketplace Snapdeal. At that time, Paytm was rapidly expanding its nascent commerce business, which SoftBank was opposed to because of its Snapdeal investment.

Another of its portfolio companies, Grofers, is in initial talks with larger hyperlocal groceries delivery rival BigBasket for a potential merger.

SoftBank is eager to sell Snapdeal to Flipkart even in a cut-price all-stock deal and then invest more cash in the buyer, according to three people aware of the discussions. That may well be the best deal on offer, with Snapdeal being valued at around $1 billion, they added. However, a buyout of by Flipkart may yield more immediate benefits to Tiger Global Management, Flipkart’s largest investor, than to the buyer or to Indian consumers.

The buyout is being arranged by Tiger Global managing director Lee Fixel and SoftBank, respectively. The deal may see SoftBank buy some of Tiger’s holdings in Flipkart and put additional cash into the company, said the people mentioned above.

According to these people, if the sale of Snapdeal to Flipkart goes through, SoftBank may invest anywhere between $500 million and $1 billion in Flipkart.

The proposed deal seems like a desperate attempt at financial engineering by the country’s two most influential start-up investors, which have seen their bets falter to differing degrees over the past 15 months (SoftBank’s a lot more so than Tiger’s).

Whatever be the outcome of the current round of talks with Snapdeal, one thing is clear—in the ruthless world of Indian e-commerce, there is no prize for a distant second player. More so in the case of Snapdeal, which has now slipped to fourth position after being overtaken by Flipkart-owned Myntra in terms of monthly sales—a far cry from the days when its proud founders dreamt of toppling Flipkart.