Tech czar Azim Premji is boarding India's rapidly expanding e-commerce story

Premji may buy Myntra stake for e-commerce entry

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Tech czar Azim Premji is boarding India's rapidly expanding e-commerce story. His family office, PremjiInvest, is in discussions to lead a $50-million (or Rs 300-crore) fund-raise in fashion e-tailer Myntra, people familiar with the matter told TOI. PremjiInvest has a corpus of more than $1 billion for private equity-type investments in listed as well as privately-run growth companies. Premji's entry signals the trend of bulge bracket Indian investors beginning to place bets on the domestic e-commerce market, which has largely been riding on foreign investments so far.

PremjiInvest is likely to be a co-investor in the latest round of funding, which may also include British investor CDC, valuing Myntra at around $250 million (Rs 1,500 crore), said a source cited earlier in the report. "Premji's family office is in the reckoning but the transaction is not yet closed. There are a bunch of other investors putting in money as well," another source added on condition of anonymity since the talks are private. Existing investors Accel Partners and Tiger Global, two US investors who are prolific backers of the Indian e-commerce play, will also participate in latest fund-raise.

IITians Mukesh Bansal, Ashutosh Lawania, and Vineet Saxena founded Myntra in 2007, which has since changed its business model from being a portal offering personalized gifting options to a fashion and lifestyle retailer. It sells multi-brand fashion merchandise online with annual gross revenues nearing Rs 800 crore, or $120 million. When contacted, Bansal said that the e-tailer was in talks with various investors. "At an appropriate time, we may raise money with the right set of investors," he said without giving details on the fund-raise. Myntra has so far raised $75 million in funds from its existing investors.

US investment bank Pacific Crest is advising Myntra on the transaction. "We do not comment on our investments," Prakash Parthasarathy, chief investment officer, PremjiInvest, said in response to an emailed query. Wipro's chairman and billionaire Premji is India's fourth richest man with an estimated net worth of $14 billion.

Myntra, arguably India's largest standalone fashion e-tailer, has stayed ahead of an aggressive rival Jabong — backed by the German incubator Rocket Internet — in sales by gross merchandise value, analysts tracking the sector said. Myntra expects to close 2015 with revenues of around Rs 2,500 crore, Bansal had told this newspaper in an earlier interaction.

The fresh funding comes at a time when the poster-boy of Indian e-commerce and Myntra's cross-town rival Flipkart has expanded its fashion business, piling up pressure on specialized online rivals.

Last month, Flipkart raised a record $360 million from investors, including Morgan Stanley, indicating that industry leaders were attracting big bucks even as laggards continued to drop off without any funding. "Fashion is one of the largest categories in Indian e-commerce and a leader there will find backers. Myntra has also been collaborating with brands to create its own fashion lines fetching it better margins," said Deepak Srinath of Allegro Capital, which advises internet start-ups on fund raising. In-house private labels now account for 15% of Myntra sales and its share would increase substantially in the coming months, Bansal told TOI.

In the last three years, the Indian e-commerce industry has witnessed a 150% growth rate, increasing from $3.8 billion in 2009 to $9.5 billion in 2012, a recent report jointly released by KPMG and IAMAI said.

Flipkart and the fate of online retail in India Despite its potential, the online sector continues to underperform

The $160 million that Flipkart, India’s Amazon-to-be, has received in its latest round of funding is a big deal for the company, but for the e-commerce industry in the country, it is a proverbial drop in parched sands. With this, Flipkart has now raised $540 million from investors since it started operations in 2007. That’s more, of course, than any other Internet start-up in India and should allow the company to continue its growth momentum, though at what cost remains to be seen. That the private equity entities whose money is fuelling the company’s aspirations have such abiding faith in its future must bring great satisfaction to the founders as well as other aspiring entrepreneurs. It should also silence for a while naysayers of the e-commerce business in India. 

 

The funding holds significance for the sector as a whole. With this round of funding, a new set of investors—Dragoneer Investment Group, Morgan Stanley Investment Management, Sofina and Vulcan Capital are joining existing investors Tiger Global, Accel Partners and MIH, in making a play for online commerce in the country.

 

India is one of the top retailing markets in the world and among the fastest growing. Coupled with that is its online penetration, which is nearly 60% now, according to a research report by Comscore for Assocham—State of e-commerce in India. India’s Internet base, already the third highest in the world after China and the US, is growing by nearly 40% every year. Yet despite the potential and the platform, the sector continues to underperform with all the major companies bleeding. Operational break-even for most of India’s e-commerce start-ups is at least five years away with even market leaders such as Flipkart, HomeShop18, Jabong, Myntra and Snapdeal yet to make a mark. Consequently, in the $500 billion retail sector, the online segment’s contribution is less than 0.50%. 

 

What’s worse, even the business they have built at a huge cost is rendering most of the new entrants bankrupt. Part of the problem is that the online customer today demands sweet deals including freebies such as no shipping charges and flexible payment options, besides, of course, newer and newer inventory. In what is a vicious cycle, companies report high rejection rates on top of enormous logistic costs. Online retailers, much like their offline counterparts, make money when transactions happen. Currently, far too many users browse sites for information about prices or styles or even to read reviews. As a result transaction sizes for most such firms are in the low band of Rs200-300.

 

But the companies too have brought it upon themselves by their inability to innovate and break new ground. Far too many companies have been interested in the low-hanging fruits that B2C offers. The supply chain needed to complete the cycle has found few backers. Yet it is the lack of an efficient back-end that has been the bane of most such firms. Just how important fulfilling real needs for customers is can be judged by the fact that one out of five online users in India visits the Indian Railways site, despite it being among the most clunky and difficult to access.

 

India’s e-commerce companies have far too often concentrated on the bells and whistles instead of focusing on deploying and customizing technology to serve customer needs. Contrast that with Amazon which competes not only with a Wal-Mart for retail business but also with Apple for technological horsepower. On the evidence of its latest Kindle, its tablet computers or its set-top box for television, it could well pass muster as a top tech company. 

 

Flipkart, which switched to a marketplace model earlier this year, allowing third parties use of its platform to sell products, is making some belated efforts with its launch of PayZippy, a kind of digital wallet. But this too is a me-too product (modelled obviously on PayPal) and the company’s switch of business model aims at accessing foreign direct investment, which is banned in direct online retail. With such limited objectives, long-term investments in technology of the kind Amazon and even Wal-Mart are making, are not possible.

Flipkart’s sales of Rs2,000 crore should give its market valuation of nearly Rs10,000 crore some justification. But the true test for the company will come when and if it goes public. Amazon went public after just two years of operations. As private equity darlings from WebVan to Facebook have found out, there is a wide gap between the way early investors value a company and the price the market sets on it.

Why funding seems elusive to start-ups Only 10% of the 800 start-ups that enter the Indian market each year survive to make it to the next level

Fifty-two e-commerce companies have raised close to $700 million in venture capital in the last three years.

 I have an idea, but no money”—that’s the commonest refrain among aspiring entrepreneurs. Investors say there are only a few good ideas they can back.

Only 10% of the approximately 800 start-ups that enter the Indian market each year survive to make it to the next level, experts say. On average, start-ups in India have received 52 angel and 155 Series A investments in the past three years, according to Venture Intelligence, a research service that focuses on private equity and mergers and acquisition. Only 22 angel and 86 Series A investments have been made in the first seven months of 2013.

While the number of start-ups that have entered the market in the last two years has doubled, the number of early-stage investors in India has remained fairly constant at less than 10, widening the mismatch in expectations between the two groups.

In addition, run-of-the-mill business ideas such as websites to sell handicrafts are unlikely to receive serious consideration from investors.

“If you are just another e-commerce website and want to sell handicrafts, then you will think there is a Series A crunch,” said Bala Parthasarathy, managing partner, AngelPrime.

It took Y Combinator, a start-up accelerator that provides money, advice and a networking platform to founders, nine months to make Airbnb, an accommodation search website, ready for the market in the US, while it took eight years to bring Stayzilla, a hotel bookings website, to reach the same stage in India.
“The pace of doing business in India is much slower, which means India needs longer gestation periods,” said Sharad Sharma, executive council member of Nasscom, a lobby group for Indian software services companies.

Also, some experts feel that the surge in the number of e-commerce start-ups in India has made it more difficult for them to raise funds. Fifty-two e-commerce companies have raised close to $700 million (around Rs.4,500 crore today) in venture capital in the last three years.

“You can count with your fingers how many companies got funded,” said Sharat Potharaju, chief executive and co-founder of Mobstac, a mobile technology company founded in 2009.

There might be a lot more entrepreneurial participation today, but the quality of entrepreneurs entering the ecosystem plays a pivotal role in funding.

“We look for founders who are passionate and motivated. They must know that their market target is large enough and their product distinctive. It is important to invest behind people and not ideas,” said Sandeep Singhal, managing director, Nexus Venture Partners, a venture capital fund.

“Sometimes we see companies with incomplete teams, no prototype and no monetization plan. Plus the product sucks—not even their families use their products or they are clones of other companies. Will they get funded? No way,” said Ravi Gururaj, chairman of Nasscom Product Council.

When an idea works in one part of the world, entrepreneurs hope to replicate the success in another part. These are called reflection ideas, according to some experts. Microsoft Accelerator, now renamed Microsoft Ventures, received about 22 travel planning ideas in 2012 and 36 car sharing ideas in 2013.

Though Google Inc. and Intuit Inc. are great examples of copycat companies, their successes came from the “secret recipes” they embraced to make it possible.

Nasscom sees more than 5,000 start-up applications every year, out of which many are only aspirational ideas and do not make for great business plans, said Gururaj.

“There are no bad ideas, only half-baked ideas. The way to get from a zero idea to a hero idea is the iterative method,” said Sharad Sharma.

Angel investors in India avoid taking blind risks because any irrational funding sends out a wrong message to the market. Some early-stage investors decline to fund mobile apps, education and data analytics because the sectors are overcrowded. Entrepreneurs disagree.

“VCs (venture capitalists) have to loosen up a little more. Education research and development, transport and bio-tech are chaotic sectors, not crowded sectors. There is development scope, but nobody wants it. They would rather invest in known things that are already in the market,” said Gowdhaman Margabandu, chief executive and co-founder of Digital Future of Education, a company that provides electronic classroom solutions for students.

The best way to describe the Indian ecosystem is that entrepreneurs have ready-to-cook ideas, but investors want ready-to-eat products, said Sharma.

Some experts say that VCs, including Nexus Ventures and Accel Partners, operating in India have raised significant capital in the last year, but have avoided expanding their portfolio.
There are two ways to beat this evident non-availability of funds, according to experts—create more funds and accept whatever is offered.

“Unlock more high net-worth individuals. Encourage large companies to do alternative investments-to-early-stage funding. Create smaller exits, so that entrepreneurs can exit and become investors,” said Sharma.

Any change in the ecosystem will take time, so “if you want $2 million and get only $0.5 million, take it, tweak the product and try raising funds over and over again. Raising money is not a one-time occurrence,” said Abhishek Rungta, who holds the title of chief gardener at Seeders Venture Capital Pvt. Ltd. “And the very best companies always get funded. So you figure.”

Manmohan Agarwal of Yebhi.com on challenges for e-commerce

Manmohan Agarwal, CEO of Yebhi.com, talks about how smaller towns are opening up to e-commerce, but says there is still a long way to go as logistics remains a big issue

Yahoo snaps up e-commerce app start-up Lexity

 

Yahoo Inc. on Wednesday said it bought e-commerce platform start-up Lexity, racking up its 20th acquisition since Marissa Mayer became chief last year.

Yahoo did not disclose the financial terms of the deal to buy Lexity, a four-year-old company specializing in software applications that help small businesses attract and service customers.

Lexity, founded by former Yahoo employee Amit Kumar, boasts tens of thousands of clients spread across 114 countries.

“We’ve been humbled by the overwhelming positive response,” Kumar and his team said in a blog post.

“We are excited to join forces with Yahoo and to continue building on our vision.”

Lexity applications will continue to operate as independent offerings.

“We will continue to support the current platform, the Lexity Live app, existing customers, and third party apps and developers,” Yahoo said.

“In the near future, we plan to integrate the service with the Yahoo Small Business offering.”

The acquisition continues a shopping spree launched after Mayer became chief of Yahoo a year ago.

Yahoo’s growing list of acquisitions includes Qwiki, a New York operation behind an application that converts video and pictures on iPhones into sharable movie clips complete with music soundtracks.

Yahoo has also bought Xobni, a startup behind tools for better managing contact lists and email inboxes, and Bignoggins Productions, a one-person operation specializing in fantasy sports applications for iPhones.

Yahoo in June completed a billion-dollar deal taking over the popular blogging platform Tumblr, a move aimed at bringing more youthful users into the company’s orbit.

Since former Google executive Mayer became chief at Yahoo, the company has snapped up an array of startups including GhostBird, Alike, Stamped, Snip.it, and a Summly application built by a British teen.

Mayer’s plan for reviving the fortunes of the faded Internet pioneer includes making priorities of mobile devices, video, personalized digital content, and elevating the company’s popularity outside the US.

Amazon.com seeks FDI policy relaxation for retail e-commerce

Global online retailer Amazon.com on Tuesday sought relaxation in the foreign direct investment (FDI) policy, which restricts such companies from offering services directly to retail consumers.

Currently, 100% FDI is allowed only in Business to Business (B2B) e-commerce and not in retail trading.

The issue was raised by Amazon Global vice-president Paul E. Misener during his meeting with commerce and industry minister Anand Sharma here.

“We talked about it,” Misener said when asked whether he has sought policy relaxation in e-commerce from Sharma.

“We talked to the government officials on all kinds of issues... (we are) trying to find a better way to serve our Indian customers, both sellers and buyers,” he told reporters here after the meeting.

“We have nearly 9,000 employees here in the country and we are looking ways to better serve our customers,” he added.

Google India partners e-commerce sites for ‘Cyber Monday’ on 12 Dec

Internet users can log on to www.gosf.in and get deals for 24 hours on this day from over 50 partners. 

 

 Google India on Tuesday said it has partnered with a host of e-commerce players including Flipkart, Snapdeal, Homeshop18, IndiatimesShopping, and makemytrip to bring to India its own version of ‘Cyber Monday’ on 12 December.

 

Internet users can log on to www.gosf.in and get deals for 24 hours on this day from over 50 partners across e-commerce, local and classified, online travel sites and BFSI (banking, financial services and insurance) industries, Google said in a statement. 

 

The festival will offer users an opportunity to shop for jewelry, shoes, apparel, travel packages, books, kidswear, gadgets, watches, computer accessories, health and fitness equipment, home decor products and real estate deals, it added. First coined in 2005 as a marketing term by online retailers for the Monday coming after ‘Black Friday’, which itself is the name for Friday after Thanksgiving in the US, the ‘Cyber Monday’ has become a phenomenon over the years. 

 

In 2010, comScore reported consumers spent $1.028 billion online on Cyber Monday (excluding travel) compared to $887 million in 2009. With over 137 million Internet users in the country, India is witnessing a significant growth in the online activity. 

 

This is for the first time, an industry wide initiative of this scale is being attempted to offer users an incentive to gain from deals that they can find on the web on a single day, Google said. “The initiative is aimed at encouraging shoppers to adopt online shopping with a focus to reach out to first time online buyers. The participating companies will also offer special deals for the first time buyers on their websites,” it said. “The online shopping industry is already over $1.5 billion and with this initiative, we want to reach out and promote online shopping to the first time buyers,” Google India MD and VP sales and operations Rajan Anandan said. “For this 24 hour sale, we have lined up some really exciting offers from our portfolio of 500 brands and we’re confident that shoppers will come back for more,” Myntra.com co-founder and CEO Mukesh Bansal said. 

 

The partners include eBay India, Flipkart, Snapdeal, IndiatimesShopping, Makemytrip, Yebhi.com, firstcry.com, Homeshop18.com, Croma, Gitanjali Group, Monster India, Tradus, GoIbibo, among others.

E-commerce may be gaining momentum in India, but an estimated 70-80% of e-commerce companies are in dire need of funds

Over the past three years, 52 e-commerce companies have raised about $700 million in venture capital. A large portion of this funding has gone into one company, Flipkart.com, which has raised roughly $550 million since 2009.

E-commerce may be gaining momentum in India, but an estimated 70-80% of e-commerce companies are in dire need of funds, said a KPMG and Internet and Mobile Association of India (IAMAI) report e-Commerce Rhetoric, Reality and Opportunity. The report puts the size of the e-commerce market in India this year at $13 billion.

Several e-commerce companies are struggling to raise capital and carry on with their day-to-day activities in what is universally accepted to be a money-burning business.

Between November 2012 and April 2013, 136 e-commerce start-ups folded, according to data collected by Ashish Sinha, who runs the website NextBigWhat.com

Experts say money will not come easily to e-commerce firms.

Over the past three years, 52 e-commerce companies have raised about $700 million in venture capital. A large portion of this funding has gone into one company, Flipkart.com, which has raised roughly $550 million since 2009.

Inventory carrying e-commerce companies such as Myntra.com, Flipkart.com and Jabong.com with large product spreads may require funding to the tune of $200 million to get to profitability, said the report.

Over the years, the average deal size has almost doubled from $6 million in 2007 to $11 million in 2011, as e-commerce businesses have gained traction and require larger investments for growth, it added.

Even then, except for the top two-three e-commerce firms, most companies are surviving with 12-14 months of cash and therefore need to raise capital, said Mukul Singhal, vice-president of SAIF Partners, which has invested in four e-commerce firms. He added that e-commerce is a capital-intensive business and profitability takes time because of infrastructure issues, logistics costs and early-stage competition.

“Few companies will be able to raise funds and a few will not be able to do that,” said Singhal while pointing out to the fate of companies in the online travel segment as an illustration.

According to Singhal, in 2006, 15-20 online travel firms raised funding. Only three-five firms were able to raise the third round of funds and only two or three raised a fifth round.

It’s the ability to raise subsequent rounds that distinguishes the winners from the others, according to another expert.

“E-commerce in India is a game of the biggies who will continue to raise follow-on rounds. Category leaders are more or less identified. In the large, horizontal play, we will see a few firms emerging as leaders, while in the niche segment there could be multiple leaders,” said Deepak Srinath, director at Allegro Capital Advisors, an investment bank. “We will see natural death or another wave of M&A in this space.”

The e-commerce market is growing at an average rate of 34% since 2009 and is expected to reach $13 billion by the end of 2013, according to the KPMG-IAMAI report. The online travel segment contributes 71% of total consumer e-commerce transactions whereas online retail, or e-tail, is the fastest growing segment contributing 16% of the overall transactions as of 2012.

In the past year, some of the biggest investments have happened in the e-tail segment in companies such as Flipkart.com and Myntra.com. The e-tail sector is expected to grow at 59% a year and will account for one in every two e-commerce transactions by 2016, said the report.

E-commerce drivers include discounts, cheaper prices, convenience and accessibility. Nearly two-thirds of people buying online due to the cheaper prices and discounts, it added.

“Pricing followed by availability and experience are the most important drivers for us,” said Praveen Sinha, co-founder and managing director of Jabong.com, who added that nearly half of his firm’s overall sales comes from cities outside of the top 50. Consumers in most of these cities do not have access to these products and choose to buy them online, he explained. Sales to customers in these cities is growing faster than that to customers in the metros, and in coming years, the contribution of sales from these towns will exceed that from sales in metros, Sinha added, without providing any numbers to back his claims.

Yet, servicing the smaller towns and rural areas is a challenge due to limited last-mile connectivity. Over 50% of the logistics cost for e-commerce companies can be attributed to last-mile delivery, said the report. Moreover, only 10,000 out of more than 150,000 pin codes in India are covered by courier companies, it added.