MUMBAI : Social e-commerce startups, which allow users to leverage their social network to buy and sell products, are catching investors’ fancy, with a growing number of new internet users in India starting to transact online.

These startups have raised $157 million from venture investors this year, nearly double the amount raised in 2018, according to data from Venture Intelligence, a private equity and venture capital data tracker. Meesho, the most funded social commerce startup, has raised $190 million so far.

Graphic by Naveen Kumar Saini/Mint
Graphic by Naveen Kumar Saini/Mint

“Online retail has single-digit per cent penetration in India and, therefore, has massive headroom for growth, especially for categories such as grocery and home goods," said Gourav Bhattacharya, director, Matrix Partners India, an early-stage venture capital firm that led a Series A round in social commerce startup DealShare earlier this month.

“E-commerce and social commerce are not necessarily different. The recent ‘social’ commerce companies are creating a new distribution layer for certain ‘push’ or ‘impulse’ categories, but are still very much online retail. There will be significant new online penetration driven by these new distribution models and hopefully, value creation as well," he added.

While the retail market was expected to grow from $795 billion in 2017 to $1.2 trillion in 2021, the e-commerce space, at $24 billion, formed a mere 3% of the overall industry, according to a February report by Deloitte and Retailers’ Association of India. The e-commerce market is expected to reach $84 billion by 2021, driven by growing internet penetration and smartphone usage in the country, the report added.

According to Sajith Pai, director, Blume Ventures, the growth of social commerce is being driven by a surge of new internet users from small towns, who were still not well versed with the ways of traditional e-commerce.

“While there are multiple reasons why social e-commerce is attractive, it all boils down to one key factor, which is to do with getting non-traditional users to transact in a manner that is crafted for them," said Pai.

In May, a Google report, Year in Search: Insights for Brands Report, said over 70% of all smartphones-related searches come from small towns.

“We believe that for deeper penetration in the country, the e-commerce model has to be different from what it is for the first-generation internet users. The new internet users in tier-2, 3 and 4 cities and rural India need a vernacular, easy-to-use platform that offers the best price, along with an interface which is connected to their community or based on the recommendation of friends," said Vineet Rao, chief executive officer and head of technology, DealShare.

While investors look for interesting models within the space, the business-to-business (B2B) model attracted the most funding. Besides Meesho, other B2B companies in this space include Mumbai-based Shop101 and Bengaluru-based GlowRoad. Shop101 had raised $11 million from Kalaari Capital and Unilever Ventures in December. GlowRoad had raised $10 million in April in a round led by China’s CDH, with participation from existing investor Accel Partners.

“B2B has clearly worked better in the social e-commerce space in India. Investors are preferring companies that are trying to create a platform for small businesses and individual sellers in tier-2,3 cities and beyond, than investing in startups that are active in the business-to-consumer (B2C) space. That is mainly because B2B startups are adopting a platform-neutral approach that connects sellers to potential customers on social media platforms, unlike B2C startups which are creating a social media-led shopping destination that will eventually compete with bigger e-commerce firms such as Amazon and Flipkart" said Abinand Natarajan, assistant director, Rothschild and Co., who oversees technology investment banking in India.

“Even though Meesho has done very well, it is just one flavour of social commerce and there are many different types of models that are emerging within the space’, said Pai.

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