Need for better capital efficiency to drive consolidation effort
India’s e-commerce sector, the poster child of the venture capital (VC) investment in 2012, is heading for consolidation in 2013, according to industry experts. The consolidation will be driven by the need for better capital efficiency, VCs taking multiple bets on the sector, and shutdown in cases where performance has been low.
The sector saw a total investment of $339 million across 65 VC transactions, according to the VCCedge data for 2012 (January 1-December 31, 2012). The data also showed that although there were five exits, all were through mergers and acquisitions (M&As). In 2012, VC investment in India totalled $1.14 billion across 172 transactions.
“Companies that can use minimal amount of capital and grow will benefit the maximum, as investors are looking at such cases. But when you look around, there are not even a handful of players who have managed to do so,” said the managing director of a leading VC fund in India on condition of anonymity.
Alok Mittal, managing director of Canaan Partners, believes that consolidation can happen. “This year will see the winners in this segment taking the lead and going beyond just volume players. We will see different winners emerging within the broad horizontal space. We are already witnessing some of the players actually making money on every order they ship. They might not be profitable as such, but there are streaks of positive development will see continued support from VC community,” he said.
|SNAPSHOT OF INVESTMENT IN E-COMMERCE IN 2012|
Deal value ($ mn)
|TOP 4 INVESTMENT IN E-COMMERCE|
|FirstCry||SAIF, IDG Ventures India||14|
|FreeCultr||Sequoia Capital India,
|Yebhi.com||Fidelity Growth Partners,
Nexus Ventures, Qualcomm
Ventures, Catamaran Ventures
|Source: Venture Intelligence|
Most VCs believe that companies that have not been doing well will be merged into a similar large player or it may have to go bust.
According to Aravind Singhal, chairman of Technopak Advisors, there are reasons for consolidation. “First, there are several ‘me-too’ players and they are not making any money. Second, some of the existing players will acquire company to expand into other categories, which they have not been able to do so organically. And finally, some will just have to shut-shop,” he said. Last year, Flipkart acquired Letsbuy, and signalled the trend towards consolidation. Both the companies had common investors — Tiger Global and Accel Partners. Letsbuy, which had presence in the same categories as Flipkart, seemed like an effort of the latter as a consolidator.
“This also shows how the investors consolidated their positions, especially when one of them was not doing too well. This could well be a trend going ahead. Also, investors are looking for companies that are not capital intensive,” said a senior executive from a VC fund. A quick look at the sector will show that investors have taken multiple bets in the e-commerce space. The other fact is how some of the companies have tweaked their business model to market-place, where inventory is limited and they only take the responsibility of fulfilment.
Singhal does not agree that players such as eBay or Amazon are looking to buy or need to buy an Indian start-up e-commerce player. “They have their own strengths. In some cases, you might see a strategic fit, but it is not necessary for them to acquire,” adds Singhal.
There has been a buzz that online auction and marketplace player eBay is planning to acquire a minority stake in Snapdeal.com. The company, which started as a coupon retail site designed on the model of the US-based Groupon, has changed its business model to market place model like eBay. The official spokesperson of eBay India said the company did not comment on speculations. An email sent to Snapdeal went unanswered.
“eBay is looking at a minority stake in Snapdeal. They have been looking at this deal for sometime now. Clearly, eBay is a bigger player, perhaps they might use it for the fulfillment segment,” said the senior executive of a leading e-commerce company.
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