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.