BigBasket raises $150 million in fresh funds5 min read . Updated: 23 Mar 2016, 12:10 AM IST
Investors include The Abraaj Group, Sands Capital and IFC; BigBasket can use the investment to fund expansion or growth in existing markets
Bengaluru: Online grocery BigBasket said on Tuesday that it had raised $150 million in fresh funds, giving it additional firepower against smaller rivals Grofers and PepperTap, both of which have shrunk operations after an expansion spree led to losses without yielding sufficient sales.
The latest round of funding, which has been in the works since July 2015, saw participation from new investors, such as private equity (PE) firm The Abraaj Group, venture capital firm Sands Capital Management Llc and International Finance Corp. (IFC), the private sector lending arm of the World Bank.
Existing investors Helion Ventures Partners Llc, Bessemer Venture Partners Lp and Ascent Capital Llc also participated in the round.
BigBasket’s fundraising comes at a time when investors have turned cautious about backing start-ups, after a two-year funding frenzy that lasted until the end of 2015. Large fundraises, such as BigBasket’s, are becoming increasingly rare as investors are forcing start-ups to focus on cutting losses and stop splurging on discounts and ads.
According to data provided by Tracxn, a start-up tracker, there were 15 funding rounds of more than $100 million in the whole of last year. So far this year, the number stands at three, including BigBasket’s latest.
Among the consumer Internet businesses, online grocery has turned out to be a particularly challenging niche. Several start-ups, including Grofers, Peppertap and ZopNow, have emerged with the so-called hyperlocal model.
Unlike BigBasket (Supermarket Grocery Supplies Pvt. Ltd), which holds inventory, the others simply allow shoppers to book products on their app from neighbourhood stores and then deliver them.
BigBasket, which claims to operate in 18 cities and deliver more than one million monthly orders, largely ships products directly from its warehouses.
While the inventory model helps BigBasket to extract significantly higher margins as it buys directly from brands and manufacturers, other hyperlocal start-ups operate on wafer-thin margins. These start-ups essentially source products from retailers and get paid 2-10% of the order value as commission.
Besides, BigBasket also has a significant private-label portfolio, which accounts for about one-third of its revenue. The company sells fruits, vegetables, meat and bread under the brand name Fresho and staples under the Popular and Royal brands.
According to industry experts, while an inventory model may make a business asset-heavy, the hyperlocal model may be constrained by lack of adequate supply. “Inventory-led models give you better control on the quality and, over a period of time, you can get bulk deals from manufacturers. You also get slightly better margins. But you cannot create too many inventory hubs. On the other hand, in hyperlocal model, you can source effectively, but they depend on the quality and variety of products available locally," said Ashish Basil, partner-technology, transaction advisory services at EY.
Experts said Grofers and PepperTap would now require more capital to survive a heavily funded business like BigBasket.
Grofers India Pvt. Ltd has so far raised about $165 million fromSoftBank Group Corp., Tiger Global Management Llc and Sequoia Capital. PepperTap, run by Nuvo Logistics Pvt. Ltd, has mopped up about $51 million from ru-Net Holdings Ltd, InnoVen Capital, Snapdeal (Jasper Infotech Pvt. Ltd) and SAIF Partners, among others. Grofers and PepperTap recently froze expansion plans and shut operations in tier II cities, to conserve cash amid a funding slowdown.
The experts added that the infusion of fresh funds will help expand the online grocery market if BigBasket chooses to grow to new cities. Deploying capital in the existing markets may hurt competitors, they said.
“Most businesses look at similar markets and there is a lot of overlap. If everyone is going to operate in the same market, then obviously, more money creates more competition. But, if it is used to go into new geographies and launch new verticals, then it helps expand market as well," said EY’s Basil.
BigBasket has been experimenting with hyperlocal delivery too. For instance, the company has tied up with about 1,800 grocery stores to sell its private label products across categories such as vegetables, staples and bakery. The firm, which acquired delivery start-up Delyver in June 2015, has launched the hyperlocal offering especially for categories such as meat, fish and savories. According to co-founder and chief executive Hari Menon, the hyperlocal business contributes only 5% of the company’s overall revenue. BigBasket also plans to expand to tier II cities, which have been shunned by its rivals.
“You cannot go to a tier II city with the value proposition of convenience. That is not what they (shoppers) want. The value there is to get them new products. Our whole approach to tier II cities is to get them stuff which is not otherwise available," said Menon. The fresh funds will be deployed to penetrate further into the existing markets, expand to tier II cities as well as scale up the hyperlocal business among others.
The grocery segment has witnessed interest from Amazon India, Ola, Flipkart Ltd and Alibaba-backed Paytm.
While Ola, Flipkart and Paytm have since shut down their grocery delivery businesses—Ola in March, Flipkart in February and Paytm in June last year—Amazon launched a full-fledged grocery delivery service in Bengaluru in February through a separate app called Amazon Now, after running a year-long pilot with neighbourhood grocery stores.
According to Tracxn, there are at least 490 grocery delivery start-ups in India that have together raised at least $486 million from investors.
The Abraaj Group led BigBasket’s latest round. Though BigBasket did not comment on the amount of money infused by The Abraaj Group, two people aware of the development said the firm contributed close to $50 million.
The Abraaj Group group manages $9.5 billion in assets across 140 investments in sectors such as consumer, energy, financials, healthcare and utilities. This round of funding marks Abraaj’s third investment in e-commerce, the earlier two being in Turkish online retailer Hepsiburada and Dubai-based mobile application taxi service Careem.
Documents available with the Registrar of Companies indicate that Sands Capital invested ₹ 124 crore, while Helion Ventures and Ascent Capital pumped in ₹ 46.5 crore and ₹ 40 crore respectively. Bessemer invested ₹ 155 crore in the latest fund raising by BigBasket. Prior to this, BigBasket had raised $61 million in three funding rounds from Ascent Capital, Helion Ventures, Zodius capital and Bessemer Venture Partners.