Fighting the ecommerce froth

That Indian ecommerce firms are highly-valued is no longer even up for debate. But to call the situation a bubble is not only premature, it is incorrect, say experts

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n September this year, veteran investor Vinod Khosla, who had backed Google in its earlier days, said 85 percent of Indian ecommerce firms (including Flipkart and Snapdeal) were over-valued. Harsh as his words may have sounded, they were based on trends he had noticed in the American market. And these have continued to play out. In November, fund manager Fidelity marked down its stake in image-based messaging service Snapchat, a unicorn (loosely defined as a startup that has crossed $1 billion in valuation), by 25 percent to $34.5 million. BlackRock had marked down the value of its investment in file hosting service provider Dropbox, another unicorn, by 24 percent, while Square, a financial and merchant services aggregator and mobile payment company, factored in 33 percent discount in its pre-initial public offering (IPO) price to $11–$13 ($4 billion) from the last private funding valuation of $15.46 ($6 billion). 

These three are among the most highly valued tech startups in the US and their devaluations have sent tremors of concern through the industry. India is obviously not untouched by the implications. Consider that almost 90 percent of the investments in the Indian ecommerce story comes from the US.
The sunshine industry seems to have found its clouds. 

So much has changed in the last year-and-a-half: From 2014 to early 2015, it was a buoyant period for the ecommerce industry; investors were trying to enter or stay in India’s consumer internet space. It was the party you were willing to buy a very expensive ticket to.

   Cut to 2015, and it seems that every one, from veteran investors like Khosla to venture capitalists and hedge fund investors, is beginning to question the business model of ecommerce firms and if they can sustain the high valuations they have garnered so far. It doesn’t help that a few firms saw flat to negligibly higher valuations compared to last year.

Homegrown ecommerce numero uno Flipkart had a small increase of 1.3-6.7 percent in its valuation in its latest round of funding in July, from $15 billion to $15.2-16 billion. In the round prior to this one, in May, Flipkart’s valuation rose by 36.7 percent. Last year, its valuation saw a 57 percent jump across two rounds, according to CB Insights data. Snapdeal also saw a similar trend. In 2014, its valuation tripled across its two rounds of funding. This year, in its latest round, its valuation remained flat to marginally higher, said sources.

While valuations are a way to gauge a company’s worth, they tend to go through cycles, sometimes swayed heavily by investor sentiment. The appetite for the Indian ecommerce industry was so strong last year that Japan’s telecom giant SoftBank Group Corp invested nearly $1 billion in India in less than 30 days. This, for instance, explains Snapdeal’s spiralling valuation during that time.

It isn’t that money has suddenly dried up. It still needs to be deployed. But what has changed is the filter employed by investors.

“Today, it’s not about growth; it’s about profitable and sustainable growth. The cash burning scenario is gone. Investors want to know if businesses can scale up in a sustainable manner showing a clear path to profitability and exit for them. As a consequence, valuations have taken a hit because multiples have come down,” says Sanjith Kumar, director at advisory firm Ambit Holdings.

 Growing Caution
The amount of new capital coming into the ecommerce industry is less than what it was six months ago and is reflected in the dwindling number of Series B and C deals in India. According to estimates by investors, if 75 companies are trying to raise funds in the range of $20 million to $40 million today, only about five will succeed. Also, hedge funds, the deep-pocketed alpha-returns-seeking set of investors world over, are in a difficult spot. According to Bloomberg, 417 hedge funds closed down in the first half of 2015 alone, indicating uncertain markets. And the Indian ecommerce industry has been powered by several hedge funds including Steadview Capital and LionRock Capital, both from Hong Kong. 

The capital flow from those who were once very bullish on India is also slowing down. SoftBank invested nearly $1 billion across three deals in India last year. This year so far, it has invested $150.2 million across five transactions here. While Tiger Global’s number of transactions are on a rise, according to VCCEdge’s estimates, its investment value has gone down this year. It has invested in 37 deals worth $229.3 million so far this year compared to 17 deals worth $512.4 million last year.