Flipkart raises $200 million amid e-commerce fund drought

Investment comes from existing investors Tiger Global, Naspers, Accel Partners and Iconiq Capital 

 

Flipkart changed its business model in February, moving from online retail to the marketplace model, where third-party sellers sell products to shoppers.

Flipkart.com has secured a fresh infusion of $200 million (around Rs.1,200 crore) from existing investors in one of the largest fund-raisings by an Indian online retailer, as it looks to invest more in technology, allay doubts over its business model and pursue a strategy of chasing revenue at the expense of profits.

Depending on how you look at it and who you speak to, the deal is either proof that there is an Indian e-commerce story or a case of investors throwing more money at an existing investment in the hope that it will pay off.

The move sets the stage for a battle between Flipkart and the company it is modelled on, Amazon.com Inc., which launched its India site in June, although it is not clear whether the company has incorporated a subsidiary in India.

The new infusion of funds may make it difficult for rivals such as Myntra, Snapdeal and Jabong to close the gap with Flipkart, experts said. Funding has dried up for smaller e-commerce firms over the past 18 months. Out of the 53 e-commerce companies that raised $853 million in venture capital over the past three years, only 11 companies have managed to raise further rounds, according to a May report by Allegro Capital Advisors, an investment bank.

“It’s a big validation of Flipkart and Indian e-commerce,” chief executive officer Sachin Bansal told reporters on Wednesday. “There have recently been a lot of sceptics in the media and in business circles who have questioned— rightly so—whether e-commerce is healthy and whether Flipkart is running the way it should be, whether it has the right strategy. This event should put those questions to rest.”

Flipkart’s existing investors, private equity firms Tiger Global Management LLC, Accel Partners and Iconiq Capital, and MIH (a part of South African media company Naspers Group) together invested the $200 million in the company.

Bansal refused to comment on Flipkart’s valuation, but repeated an earlier statement that the company would eventually look at an initial public offering (IPO). Flipkart was valued at $850-900 million when it raised $150 million from the same investors last year, according to a person familiar with the matter.

“E-commerce tends to behave in a winner-takes-all fashion the world over. Take Amazon in the US, for instance. Flipkart is a winner in India and this round of funding will help extend its leadership position,” said Rutvik Doshi, an investor with Inventus Capital Partners, a venture capital firm.

“It would be a scary situation for someone competing directly with Flipkart, especially after this funding. Amazon of course has billions of dollars, but the question is: are they willing to pump in money in India? We don’t know yet,” he added.

Although Flipkart will likely need more money—some analysts say within the year—to sustain its growth, the sheer size of the latest fund infusion should give it more time before its needs to sell shares to the public.

“You will see big players like Flipkart, Snapdeal, Jabong raise huge amounts of money. All of them will require anywhere between $200 million and $500 million in capital till they can even think about profitability. Flipkart, too, will need another round of money within a year or two,” said Deepak Srinath, who leads the technology and emerging sectors practice at Allegro Capital.

An IPO will probably be pursued by Flipkart at an “appropriate stage” to provide an exit to investors, said Aashish Bhinde, executive director at Avendus Capital Pvt. Ltd.

India’s online retail market has the potential to grow to as much as $76 billion by 2021 from just $0.6 billion currently, according to a report published by retail consultancy Technopak Advisors Pvt. Ltd this year.

Flipkart was started in 2007 by Sachin Bansal and Binny Bansal—they are not related— as an online bookseller. Since then, it has raised more than $400 million in capital and expanded its product range to electronics, footwear, accessories and apparel, a category in which it expects to be the largest online firm by October.

Both Bansals previously worked at Amazon, which experts say provides the template being followed by Flipkart.

Amazon, launched in 1995, reported its first annual profit only in 2003. As with Amazon then, becoming profitable is not a priority for the company at this stage, Sachin Bansal said.

“If we become profitable, we will be a small profitable company and when the market becomes $76 billion, we will remain a small profitable company, but that is not what is exciting to us. We want to be a market leader and that is what we are playing for,” he said.

Flipkart doesn’t have an option but to scale up its presence at the cost of profits, Allegro’s Srinath said.

“You’re either a dominant leader or you’re dead. You can’t make a switch overnight and forgo growth and suddenly become profitable. The way to play this game is: big money, winner takes all,” he said.

Flipkart changed its business model in February, moving from pure online retail to the marketplace model, in which third parties use its platform to sell products to shoppers.

The marketplace model allows e-commerce companies to save on storage and other inventory-related costs as the products are held by the merchants.

Importantly, companies following the marketplace model get access to foreign direct investment (FDI). FDI is banned in direct online retail.

Sachin Bansal said Flipkart would use the money from its latest fund-raising to scale up its investments in technology and build its supply chain.

He said the company was on course to beating its target of generating $1 billion in gross merchandise value, or the total value of products sold on the site, by 2015.

“In 2011 we set a goal of reaching $1 billion in gross merchandise value by 2015. We are more than halfway there already, and we should be able to reach the target before 2015,” Bansal said.

Some experts still doubt the soundness of Flipkart’s business strategy as well as the attractiveness of Indian e-commerce firms to investors.

Private equity investors are not too enthusiastic about e-commerce in India because they want to see profitable exits before committing large amounts of capital, said Praveen Chakravarty, chief executive (investment banking) at Anand Rathi Financial Services Ltd.

“It’s illogical to compare Amazon and Flipkart. It’s like comparing Sachin Tendulkar and Sunil Gavaskar,” he said, giving the examples of two cricketers from different eras to make his point. “Amazon was founded in a different era. It had a first-mover advantage and hence its investors were ready to wait longer for profitability. For Google there is Google India, for Yahoo there is Yahoo India, what stops Amazon from having Amazon India?”

Going by the June launch of Amazon’s India site, nothing at all.