How ShopClues got it right after a nervous start

New Delhi: Sanjay Sethi, now the chief executive of ShopClues.com is unlikely to forget that evening.

It was 2 August 2011. He was at the Elephant Bar in San Jose, California, in the middle of his farewell speech to colleagues at eBay Inc. when he received a call from his friend and business partner Radhika Aggarwal—an investor who had promised the duo $5 million for their new venture had pulled out.

Sethi, Aggarwal and their respective families were to move to India later that same week to start ShopClues, a marketplace for the masses, as the founders like to describe their company.

“Our stuff was all packed, parked outside our houses and ready to be shipped,” remembers Sethi. The founding team of ShopClues—Sethi, Radhika Aggarwal and her husband Sandeep Aggarwal, and Mrinal Chatterjee decided to have a few beers that evening and start afresh the following day. “The next morning we woke up and called everyone we knew in the community and within three days we had $1.8 million in our bank from 12 angel investors,” Aggarwal recalls. One of the early investors included Siddharth Talwar, venture capitalist at Lightbox. The founders did not wish to reveal the names of other angels.

More than three years later, on the night of 19 January, the founding team and key team member Devesh Rai were downing Don Julio tequila shots—a tradition for any celebration in the company—in Gurgaon. Tiger Global Management, the investment firm that backs India’s largest online firm Flipkart.com and China’s Alibaba Group Holding Ltd, led a $100 million funding round in Clues Network Inc., the company behind ShopClues.com.

It has taken ShopClues, an online marketplace that largely focuses on unstructured categories, a year to raise a large round of fresh capital from new investors. The fund raising is expected to value the company at post money (or after investment) valuation of close to $500 million, according to people familiar with the development who asked not to be identified.

Indeed, 2014 was a fairly difficult year for ShopClues.

On the one hand, it was dealing with nervous investors who were not ready to invest in another e-commerce marketplace given that competitors such as Flipkart, Snapdeal and Amazon had already built formidable war chests. On the other, the company was coping with the shock of one of its co-founders and chief executive Sandeep Aggarwal being arrested for insider trading in the US in mid-2013.

Back then, the company had promising orders and a large seller base, but hardly any money in the bank. “It (2014) was a bump in the company’s growth trajectory. Our priorities and roles were changing,” said Sanjay Sethi, co-founder ShopClues who took over as chief executive after Sandeep Aggarwal’s departure.

“Even though our investors stood by us, there was this uncertainty about the company’s future,” he added. Capital was the biggest stress point. “Growth slowed and we were busy managing our business for cash-flow.”

But Sethi and co-founder Radhika Aggarwal refused to give up. They chased investors, put in whatever money they had, and finally, in the middle of 2014 raised an undisclosed amount from existing shareholders.

Since it started operations in 2011, ShopClues has received $130-150 million largely from Nexus Venture Partners, Helion Venture Partners and Tiger Global Management. With Tiger on board, the company knows it is in the game for the long-run.

Analysts say the Tiger investment may allow for the possibility of an eventual merger of ShopClues with Flipkart. The company, however, dismisses the suggestion. “We have Nexus, an investor in Snapdeal but that does not indicate anything,” said Sethi.

“Tiger is a strong follow-on investor,” said Gaurav Deepak, managing director of Avendus Capital, explaining why ShopClues chose Tiger over other two investors it had term-sheets from. The company said it had offers from a strategic investor and another large hedge fund, without disclosing the names of the investors.

“There was a very strong chemistry between the founders and Lee Fixel (a partner at Tiger),” added Deepak, who advised ShopClues on the deal. It took ShopClues two months to close the deal from the time it officially went out looking for money. The company was however engaged in initial talks for almost 8-9 months.

“We had few but long meetings with Tiger Global and the round closed very quickly,” said Radhika Aggarwal. The deal was sealed after meetings held in Gurgaon and New York.

What worked for Tiger Global was the fact that ShopClues’s business model was different from that of Flipkart and Snapdeal and that the company was largely focused on taking unstructured categories online.

Companies such as Flipkart, Snapdeal and Amazon get a large chunk of their business from selling goods that can be listed under the organized retail channel. For instance, companies such as Flipkart get 30-35% of their business from selling branded mobile phones. For ShopClues, it is small brands and categories such as home and kitchen ware, fashion, and mobile and electronics accessories that do really well. Out of the 7,500 brands that it sells, 6500 are regional, according to the company. Its top-selling products last month were rechargeable mosquito insect killer rackets and a set of two doormats.

“Our focus is the true Indian middle class consumer for whom shopping for branded goods is only a luxury but on any given day he or she will pick up a Topware lunch box over a Tupperware,” said Aggarwal. According to her, 70% of her customers are from Tier2-3 markets with an average age of 26 years and household income anywhere between ₹ 2 lakh and ₹ 9 lakh.

ShopClues currently does 70,000 orders on a good day with a basket size of ₹ 1,200. By end of calendar year 2015, it expects to touch 250,000-300,000 orders on good days. The company, which touched a gross merchandise value (GMV, or value of goods sold) of $220 million in December, aims to touch $3 billion in next three years.

In 2015, ShopClues plans to grow regional and local brands in the home, kitchen, and fashion categories.

The money that the company receives will be invested in increasing its merchant base and building technology and service capabilities to help small and medium businesses participate in the e-commerce revolution in the country, the company said. It also plans to double its headcount from current employee strength of 550.

Nearly 20% of the $100 million will go towards marketing initiatives over a span of next two years, according to the company which will soon start advertising on television and in print. The ads will be aimed at getting more sellers on board, explained Aggarwal. The company plans to increase its merchant base to 10 million up from 100,000 currently.

Marketplaces such as Flipkart, Snapdeal, Amazon, and ShopClues link customers to merchants, and offer store fronts, and delivery and payment services. Most spend heavily on marketing, and also subsidise merchant discounts.

The idea of ShopClues was born in March 2011 in California when Radhika and Sandeep Aggarwal and Sethi met. Aggarwal’s son and Sethi’s daughter went to the same school in Fremont. Sethi was employed with eBay, while Radhika Aggarwal worked for American fashion retailer Nordstrom. “Back then everybody in India was doing an inventory model and given how fragmented the India market was; we saw a huge opportunity in a marketplace for masses,” said Aggarwal.

“eBay was the only one with a marketplace model but nobody was taking it seriously,” said Sethi. Sethi remembers the day he first landed in Delhi only to be welcomed by Snapdeal branding all around the airport and Jabong and Myntra advertisements on television. “I still remember the Myntra ad, it was lovely,” smiles Sethi, who is not shy of admitting that the aggressive campaigns made him nervous at first. “I only wish we could have believed more in ourselves,” said Sethi.

“If we had to do it all over again we will do it harder and faster.”