The sentiment of investors in e-commerce is changing. Though the monthly data on deal value and volume don't reflect this yet, in the past six months, the initial exuberance has given way to a reality check of sorts.
"Investors are calming down a bit, letting things settle. The crazy euphoria has slowed. Investors are looking for differentiated models, real traction before they invest," says Sandeep Murthy, partner, Lightbox, a Mumbai-based venture capital firm that primarily invests in consumer technology companies.
The evidence is more anecdotal than empirical.
"Investors are saying 'I can come next month; I don't need to take the next flight to India'. The big bets (Flipkart, Paytm, Snapdeal, Ola, and Quikr) have been taken. In time, these big deals will become even bigger but we might not see too many new players raising $100 million. Investors are looking for real traction, watching things a little bit," says Murthy.
"The deal sizes are smaller now," says Shivpriya Nanda, partner, J Sagar Associates, which advises e-commerce companies.
A top executive with a venture capital firm says one of the first indications of the slowdown is the fact that investors are going back on signed term sheets. Though this isn't the case with high-quality start-ups, access to capital for sub-standard companies is on the decline. "The current situation had become untenable; so many firms were getting so much capital," says a senior executive with a venture capital firm.
Investors say if high-quality companies have to compete with others, the overall capital efficiency is reduced.
"I am in the business of capital efficiency. If a firm's capital is exhausted, it has to raise capital. I will get diluted and my returns will be muted. The whole business model of VC fails," says the VC executive quoted earlier.
"When hedge funds, which have a different evaluation criteria and cost of capital, start investing in series-A and series-B stages and the time gap between two rounds shrink to six-eight weeks and two-three months, these end in massive busts, which is not good for anyone. Slow correction is good, and this has started. It is more likely to be a slow correction than a bust," says Avnish Bajaj, managing director, Matrix Partners, which has backed start-ups such as Ola and Quikr. He adds it is likely a time correction is happening - the valuation of a company isn't declining, but isn't rising either.
Another indicator is investors are putting more pressure on start-ups to show better earnings. "Earlier, growth was all that mattered. Today, companies are starting to look at profit-and-loss statements very carefully; everyone is cutting burn, questioning their investment decisions. The phase of craziness is muting; everyone is behaving rationally," says the chief executive of a venture capital firm.
"Bigger investors have a ticket-size issue. Amounts of $30-100 million went into companies not because these had numbers to justify, but because investors had to put enough money, in terms of their usual ticket size. Now, before these companies raise more money, they need to get their numbers to catch up…Even those who haven't invested so far are watching what happened to the firms that raised so much capital. A few more bad experiences like the one in the news recently will make it tougher. If the funded companies perform, investors will be back very soon, says Anand Lunia, founder of Indiaquotient, an early-stage venture capital firm.
Are valuations ahead of times? Of course, say investors. But they add this isn't a bubble, as valuations are backed by underlying fundamentals. "Hedge funds are not stupid. They have figured it. In India (e-commerce), the next five years will be similar to the past seven in China," says Bajaj. "There's a very strong, underlying secular demand, driven by mobile and internet penetration." Currently, India's 3G data mobile base is estimated at 80-90 million. This is likely to touch 500 million in the next four-five years. "That will be larger than the population of most countries and second only to China. This kind of multiplication happens once in a lifetime. This will create several billion-dollar firms," says Bajaj.
Clearly, investors are betting big on this.