After more than a one-year hiatus, big-ticket investments are back in the Indian e-commerce market with home-grown online retailer Flipkart raising $1.4 billion from China’s Tencent, eBay and Microsoft. Will this signal a revival of funding environment for the entire start-up ecosystem, which has gone through rough weather?
As part of the deal, eBay will sell its Indian business to Flipkart. The funding comes at a time when Jeff Bezos’s Amazon is expanding aggressively and plans to invest $5 billion in India in the next few years. Flipkart has gone through a top-level revamp, while key investors are pushing another home-grown online retailer Snapdeal for a potential sale to Flipkart or Alibaba-backed Paytm. Expectations are that it would be three-way fight in the Indian e-commerce market among Amazon, Alibaba and Flipkart, which is consolidating its position through mergers, with backing of strategic investors.
The years 2014 and 2015 saw billions of dollars being poured into the ecosystem. Then emerged the news of firms making huge losses and investors becoming cautious of putting in money and pushing firms towards sustainable business models. Hence, private equity and venture capital funding in Indian e-commerce fell to $1.94 billion in 2016 from a peak of $4.7 billion in 2015, data from Venture Intelligence show. According to the firm, there has been a notable shift away from consumer Internet and mobile deals.
There has been news of employee firings and start-ups shutting down, mainly because they could not find sustainable business models. According to data from start-up tracker Tracxn, 314 start-ups closed down in 2016.
Even with the latest round of funding seen in the space, some industry watchers are still sceptical about the discounting model of e-commerce firms which result in higher cash burn levels.
At a recent event at IIT Madras, ace banker Deepak Parekh said the valuation game may have run ahead of what fundamentals warrant in the e-commerce space.
‘Rein in cash burn’
“…. Time has come to caution and rein in the cash burn model. There has to be threshold level where the revenue stream and profitability have to become key considerations, rather than just focusing on gross merchandise value,” he said, immediately after the latest round of fund raising by Flipkart.
“Unless these companies post cash profits, how will they ever be self-sustaining? Otherwise, the model is just based on going from one private equity fund to another and at some stage someone will be left holding the baby and this can have a domino effect across the entire system,” he added.
However, he displayed faith in the e-commerce sector pointing out that India delivers about 2 million packages a day, when compared with an estimated 57 million in China and 35 million in US. “The growth of this sector hinges on sorting out logistics, warehousing and the transportation system.”
Kerry Rice, a senior analyst on Internet and digital media at New York-based investment bank Needham & Company, said that India’s consumer market is of a significant size. Indian e-commerce and financial services (which includes travel, digital payments, cab services, movie tickets, food delivery, online learning) is expected to reach $40-50 billion by 2020 from $15-20 billion, according to recent report by The Boston Consulting Group (BCG) along with The Indus Entrepreneurs (TIE).
‘No dominant leader’
“I believe investors are likely looking at India as a similar market to China, except no dominant leader exists yet,” Mr. Rice said in an email response. “Given that there is no dominant leader, we are seeing large global e-commerce companies, such as Alibaba, Amazon and eBay trying... to seize a leadership position. I expect more investments to come for India,” he added.
Anil Kumar, CEO at Redseer Consulting reckons that the e-commerce space can see profits being made. “The market is still at the nascent stage. Only 1% of Indian market is online. The current size is $15 billion. If that grows by 10-15 times in next 10 years, the customer acquisition cost as well as cash burn will come down and profits would be made.”
He also said one of the key issues would be how quickly the players can increase the user base from 15 million at present to 100-200 million.
One firm that has been successful in bringing down cash burns is online restaurant discovery and online food delivery firm Zomato, which has seen an 81% drop in annual operating burn for FY17 at $12 million, from $64 million in FY16, according to its recent blogpost. Last year, HSBC Securities and Capital Markets (India) had slashed the firm’s valuation by about half to $500 million.
The sharp reduction in Zomato’s burn is a significant positive, and if revenue growth momentum continues on this base, the concerns on $1-billion valuations will abate, particularly considering multiple valuation write-downs and business shutdowns over past year in the sector, Motilal Oswal said in a research note.
Flipkart’s fund raising (at a 24% lower valuation than its previous funding round) signals a positive sign for the entire ecosystem since it is seen as a barometer. With government approving the listing of IRCTC, one of the profitable e-commerce firms, things are looking good for the ecosystem,” Mr. Kumar added. “All in all, the current Flipkart deal at a reasonably rich valuation tells me there are still some takers for the Indian horizontal e-commerce story who believe that another large company can go profitably head-to-head with Amazon, notwithstanding the many who have closed down,” or look close to downing shutters, said entrepreneur-turned-investor Chandu Nair said. He pointed out that the consumer Internet story in India got overheated too soon and there was too much money from certain investors, which had what the industry calls FOMO (or fear of missing out) written all over it, chasing very few quality deals.
“The Flipkart deal comes as a major relief to the e-commerce ecosystem,” Arun Natarajan, MD, Venture Intelligence, said. “However, this deal is not likely to trigger the kind of frenzy in the Internet and mobile sector that we saw in 2015. The focus now is on whether Unicorns are able to walk the talk in terms of profitability and deliver real cash exits to investors,” he added.
Professor Thillai Rajan, Department of Management Studies, IIT-Madras, who closely tracks the start-up sector in India, said tepid interest in e-commerce and the consumer Internet space is unlikely to change while there could be “more interest towards deep innovation ventures.”
