Flipkart funding lifts mood but start-ups are still hazy on outlook

Consumer tech firms in India still have a lot to prove, managing partner at firm Iron Pillar, said

E-commerce marketplace Flipkart’s $1-billion funding round has lifted the sentiment for domestic start-ups and internet firms, but for others, getting investments at higher valuations might still be difficult.

On April 11, Flipkart announced it had raised $1.4 billion from Tencent, Microsoft and eBay at a lower valuation of $11.6 billion. However, players in the sector are of the opinion this is a positive development.

‘‘Fresh money coming into the sector after what has been a winter is positive. It displays that there is clear belief in the market potential,” said Suchi Mukherjee, founder and chief executive officer (CEO), Limeroad, a fashion portal.

She added this displayed a funding appetite for Indian start-ups even as some have seen marked-downs. “Valuations going up or down are a reflection of the business of the company concerned. But though funds inflow may not be as high as it was two years ago, capital is coming and there are reasonably high mark-ups.”

Rahul Khanna, co-founder of Trifecta Capital, which provides venture debt, said while there was never a shadow on the survival of companies such as Flipkart, such fund-raising would boost confidence in the sector. It was also good news for secondary companies such as advertising, payments portals and logistics.

“Where does all this money go? Into better warehousing, advertising and enhancing the consumer experience,” he added.

But is this a turning point for the e-commerce sector? Investors are of the opinion that this would not significantly alter the lives of other start-ups.

“Flipkart’s funding and start-up valuations are at the opposite ends of the spectrum and largely unrelated,” said a venture capitalist who was also an early investor in Snapdeal. He did not want to be named, but said, “Flipkart raising money was never in doubt. Even if it had not, the current investors would have found a way to keep it funded.”

Nor would valuations rise easily. While three-four firms, such as Flipkart, Ola, Snapdeal and Paytm, had grabbed a lion’s share of the funding, other start-ups got only peanuts.

‘‘I don’t think valuations transmit as easily. This (Flipkart’s funding) shows people believe there’s a long journey ahead,” said Trifecta’s Khanna.

Anand Prasanna, the managing partner at venture capital firm Iron Pillar, said, “Consumer tech firms in India still have a lot to prove. We are seeing more flat and down rounds.”

Investors were of the opinion that India was the final e-commerce frontier, and very few markets would provide opportunities that it would in the next 10 years.

‘‘Though it might appear volatile in the short term, if you remain invested here for long, you will make money,” says a venture capitalist, who did not want to be named. He added the top two firms in each category might attract a valuation scale-up.

Trifecta’s Khanna said the e-commerce journey in the country had just begun and there were large categories such as food and home that would still see huge penetration.

Experts are of the opinion investors were waiting for consolidation in the sector so that they could pick a side and back them in the race to the top.

“Investors want to ride the consolidation wave. Now, they are ready for the fight as they know who the competitor is. So fewer people will get fatter cheques,” said Ashneer Grover, CFO, Grofers.

Flipkart’s journey also had a few lessons for peers.

‘‘Funding cycles are a reality; winters will come. Any expectation that burning cash to build growth is sustainable is misplaced. Businesses that can buckle down and build through winters will get funded. The real trick is in anticipating it and living through it,” said Limeroad’s Mukherjee.

And finally, Flipkart’s funding round has provided a shot of hope to the beleaguered sector.

“The second half of 2015 to end-2016 was like a long winter. Investors were not ready to pay; the market was really bad. But I think that is over. Flipkart might have got the money at a lesser valuation but they have got a lot of money from marquee names, which is a trend reversal. From here on, for the next three years there would be bull cycle,” said Sandeep Aggarwal, founder and CEO, Droom.

Also, while flat funding rounds have become the new normal, many companies in the sector, such as Rivigo, Black Buck or Bug Basket, have also had a value markup.

‘‘Some expected markdowns may lead to knee-jerk reactions, but that did not happen,” said Alok Mittal, a VC-turned-entrepreneur.