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Business News/ Opinion / Online-views/  Amazon-Flipkart: the much needed blockbuster exit?

The autumn of 2007 was a special one for India’s start-up ecosystem. Two computer science graduates from the Indian Institute of Technology Delhi, Sachin Bansal and Binny Bansal, had just quit their jobs with Amazon Inc.’s software development centre in Bengaluru to start an online bookstore out of a two-bedroom apartment in the city. The big dream was to create the Amazon of India.

A little over eight years later, Bansal and Bansal helm a home-grown Internet powerhouse that has put India on the global e-commerce map. But it isn’t the Amazon of India. That’s because the Amazon of India is well, Amazon. The world’s largest online retailer entered the Indian market with an online marketplace just about three years ago and already owns 12% of the market in terms of gross merchandise value (GMV), according to 2015 data released in February by Morgan Stanley. Flipkart, though, remains streets ahead with a 45% share of the market in GMV terms.

Amazon now wants to close that gap, and quickly. At least that’s what a report in The Economic Times from last week suggests. In the last quarter of 2015, the report quoting multiple anonymous people says, Amazon made a play for Flipkart, offering to buy it for $8 billion. That’s nearly half the $15.2 billion valuation that Flipkart claimed when it had last raised funds. The report also includes a quote from Binny Bansal, who recently took over as CEO from Sachin Bansal. “All rumours of potential sale and down rounds are false and baseless," he said.

It could be all fiction. Talk of Amazon buying Flipkart pops up every now and then and, usually when the external environment turns a bit adverse. Like it is now. There’s a valuation correction underway in India’s start-up market and both early- and late-stage investors have turned extremely selective about fresh capital commitments, especially in later stage start-ups.

But let’s consider for a moment that Amazon does buy Flipkart for $8 billion. There’s speculation that it could be lower, maybe even as low as $6 billion. Still, even at that price, would that be such a bad outcome for all stakeholders concerned? Take Accel Partners, for instance, which reportedly owns about 20% of the company and seeded the company with $1 million in 2009 (it has invested more money in subsequent funding rounds). Even at $6 billion, Accel stands to make supernormal returns that will probably exceed any that the Indian venture capital market has delivered so far. Then there are the Bansals themselves who own about 7% each.

More importantly, it could be a better- than-good outcome for India’s nascent venture capital industry, which is getting into the next decade of early-stage investing.

Let’s face it. The venture capital market here is yet to deliver a blockbuster exit and that’s becoming a matter of some concern for limited partners (investors in venture capital funds). The last big exit recorded was the $400 million acquisition of online recharge service provider Freecharge by Delhi-based e-commerce company Snapdeal. Freecharge had raised a total of $117 million from multiple investors, including Sequoia Capital. Overall, more than 2,000 start-ups have raised over $15 billion over the last decade. The exit numbers, in comparison, aren’t so robust. Since 2007, venture capitalists have closed just 238 exit deals worth $4.1 billion, according to data compiled by New York research firm Preqin.

If Amazon buys Flipkart, it will do a couple of things for the local venture capital market and in turn for start-ups. One, it will be a big validation of the Indian market’s ability to churn out scalable technology start-ups that are capable of competing globally. That means the next generation of technology start-ups that are being created right now will have access to capital in the future when the ongoing downturn ends. Two, the deal would be the first major liquidity event involving an Indian unicorn, venture capital parlance for start-ups valued privately at a billion dollars or more.

Early-stage investors have already booked profitable returns on some of their unicorn bets. In March last year, Helion Venture Partners and IDG Ventures India sold stakes in Flipkart through secondary transactions. IDG Ventures sold a portion of its 1% stake in the company (which it had acquired through Myntra-Flipkart merger in 2014) for a reported $140 million. The sale enabled it to return its $150 million first India-focused fund to its investors. Helion reportedly sold its 0.2% stake in Flipkart for $23.5 million. It got a stake in the e-commerce company when Flipkart acquired Helion portfolio company Letsbuy in a stock-and-cash deal.

More recently, e-commerce marketplace Snapdeal also delivered profitable exits to its early investors. When the company raised a $500 million fresh round of funds led by Chinese e-commerce giant Alibaba, eBay Inc. sold a 1.16% stake worth $50 million. Later, Saama Capital sold its entire stake, the size of which it has not disclosed, to Ontario Teachers’ Pension Plan for an undisclosed sum. The sale, however, enabled Saama to return its second fund, which had a corpus of $26 million, to its limited partners.

Those exits are already playing their part in bringing more money back into the ecosystem. Both IDG Ventures and Saama, for instance, are raising new India-dedicated funds. So are several others. A blockbuster exit at this stage could help accelerate those fund-raising campaigns and reverse some of the negative impact of the valuation bubble that was created over the last couple of years.

Snigdha Sengupta is a freelance journalist based in Mumbai and founder of StartupCentral. She writes on private equity and venture capital for Mint.

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Updated: 26 Mar 2016, 01:28 AM IST
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