PE investors give early-stage funding to e-commerce firms

PE investors give early-stage funding to e-commerce firms

Bangalore: In two weeks, private equity (PE) firm SAIF Partners will make its fifth investment in an e-commerce company, putting in $4-5 million (Rs 18-22 crore) in an unnamed start-up it began incubating seven months earlier.

For a start-up, graduating from incubation to PE funding is at least a three-step hop and usually takes years. Investors look for customer traction and revenue before writing the cheques, which means start-ups often get their initial institutional funding at 18-24 months.

In India’s fast-growing e-commerce industry, investors are increasingly backing firms at a very early stage to limit competition from rivals as a lot of funds are chasing few quality companies and reduce risks related to execution of the businesses by inducting managers with experience in e-commerce ventures.

“There is no pipeline of companies that are 18-24 months old. If one has to take bets, they need to make it early," said Kanwaljit Singh, managing director, Helion Venture Partners, which is in talks with a couple of e-commerce start-ups for incubation. “Frankly, we don’t want to be left behind."

In a nation where there are only a few successful e-commerce businesses so far, getting the right team to manage the business is critical at an early stage.

“We thought of incubating a start-up on our own because when we went to the market, we did not get credible teams who could execute," said Mukul Singhal, senior associate at SAIF Partners.

The PE firm recently invested $4 million in eight-month-old BrainBees Solutions Pvt. Ltd, which runs an online store called that sells baby products and toys. Eleven-month-old, an online shop for new parents, recently got its first round of investment of $2.5 million from Accel Partners and Tiger Global.

While e-commerce industry may be at an early stage in the world’s second fastest growing major economy, there are plenty of proven models globally, according to investors. With the number of Internet users in the country having increased to 77 million in 2010 from 61.3 million in the previous year, there’s even less risk associated with these start-ups, they said.

India’s e-commerce market is expected to grow to 46,520 crore by the end of this year from 31,598 crore in 2010, according to industry body Internet and mobile Association of India.

E-commerce companies that raised capital early have been able to scale up fast.

Online shopping firm, which raised nearly 40 crore from venture capital firm Canaan Partners in August, after it started operations in 2009, has a customer base of about 10 million doing 6,000 transactions a day, its chief executive Manu Agarwal had said in an earlier interview.

Naaptol is now in talks with investors to raise $25 million in a couple of months. It expects to end this year with a revenue of at least 100 crore.

Investors also want to pre-empt the steep rise in valuation expectations as the e-commerce firms grow. “We have realized that for these firms when it comes to series B and C (second and third round of investments), valuations would be high ranging anywhere between $100 million and $200 million," said Singhal.

E-commerce firms tend to scale up fast and can grow as much as 100% month-on-month, said Deepak Srinath, director of Bangalore-based boutique investment bank Viedea Capital Advisors Pvt. Ltd. “Valuations are based on topline, so if one is making 50 lakh a month, it (valuation) would be done on annual turnover estimates with multiples of 6-8."

But investors are beginning to realize the constraints in dealing with e-commerce firms. “The challenge is that each of these companies needs a significant amount of capital and, therefore, we have to ensure we’re able to keep up with the companies that do well in our invested set," said Subrata Mitra, partner at Accel Partners.

For returns, investors such as Helion’s Singh are banking on consolidation in two-three years to provide them opportunities to sell their investments. Singh expects niche business models will be acquired by larger e-commerce firms aspiring to be industry leaders.

“Some companies may get acquired by global firms wanting to enter India through an exciting platform," he said. “The real super achievers, in over five years, will look at going public or large acquisitions."