The race is to be the first e-commerce company to be profitable at a certain scale: Sanjay Sethi & Radhika Aggarwal

Interview with Co-founders, ShopClues

Don't want to miss the best from Business Standard?

A year after Gurgaon-based e-retailer ShopClues raised $100 million from Tiger Global, it is in talks to raise $80 million more. It has raised about $131 million in six rounds and is backed by venture capitalists like Helion Venture Partners, LionBird and Nexus Venture Partners. It wants to become the largest marketplace in the unbranded and unstructured retail segment and has about 300,000 merchants selling on its platform.Set up in 2011, a majority of ShopClues’ customers are from Tier-II and Tier-III cities. An annualised gross merchandise margin of $1 billion is on its radar for 2016 and ShopClues is confident of turning profitable next year. Co-founders Sanjay Sethi and Radhika Aggarwal talk to Anita Babu and Raghu Krishnan about how they founded ShopClues, plans and Bengaluru as a hiring ground. Edited excerpts:

How and why did you start ShopClues?

Aggarwal: I was in the US and moved back in 2011 to start ShopClues. We even had a term sheet from a large venture capitalist in the US to come and start ShopClues. But, a news article did the rounds saying Amazon was launching in India. And, our term sheet was withdrawn. So, we fought this battle from day one. India is a crowded market. There were already a bunch of players in India by then.

Sethi: There were three basic things we were betting on. First, retail was fragmented and it continues to be. It’s not a new phenomenon. Second, it was difficult for offline retailers to expand because of regulatory hurdles and poor physical infrastructure. So, we believed an organisation would actually happen in the online world. Last, the incumbents in the market primarily had inventory-based models.

The next phase of e-commerce growth will come when middle-class Indians from smaller towns and cities start adopting the trend. We were also quite sure about a hockey-stick take-off of fourth generation telecom (4G) spectrum by 2013 and how smart devices were going to become cheaper, enabling lower income people to adopt these easily. We wanted to lead that revolution. India has diverse buyers, unlike the US, which is a homogeneous market. Our bet was that a single player would not be able to span the country across all segments. We wanted to be a player in the unstructured categories. Also, we wanted to do it as a marketplace, since we believe that is the most scalable model.

When you do low transaction value products, the margins will be lower, right?

Sethi: No, it’s the contrary. For example, the iPhone has a two per cent margin and for a clock it is 40-50 per cent. In the case of branded and structured categories, price comparisons are easy. Hence, gross margins are different for unbranded or regionally branded products.

Your consumer repeat rate?

Aggarwal: About 70 per cent of our traffic as well as transaction comes from mobile phones, both the app and mobile website. About 50 per cent  are repeat customers and make anywhere between eight and 10 orders on an annual basis. This is a fairly good number for a non-grocer. For Chinese online shopping site TaoBao, this number is 50 but they sell groceries, too. Our largest category is home and kitchen, followed by lifestyle.

Are you profitable?

Sethi: We’ll be the first e-commerce company to be profitable. We are profitable at gross levels but not at Ebitda (earnings before interest, tax, depreciation and amortisation) levels. We ship about 80,000 units per day. The other major players ship about two to three times this. At the same time, they have raised about 15-25 times more money than us. Their transaction values are higher and are talking about becoming profitable in years. We are half their transaction values and are talking about profitability in months.

What are your  plans? Do you need additional capital?

Sethi: Our plans are quite ambitious. We will have one more round. We have already raised $120 million. We will need an additional $80 million. We will need less than $200 million to be profitable. We are not in a race to raise the largest amount of capital. The race is to be the first company to be profitable, while working at a certain scale.

What do you think about Bengaluru as a hiring ground?

Sethi: Bengaluru generates the highest number of jobs. This is the city with the highest salaries, too.

Aggarwal: When we hire from Bengaluru, the salaries are ridiculous. Easily 50-100 per cent higher than the other companies.

Is this because there are a lot of multi-national companies that have set up campuses here?

Sethi: I think it’s surpassing Silicon Valley salaries here.

Aggarwal: I don’t think the multinationals are spoiling it. When you’re hiring aggressively from the (Silicon) Valley and bring them into town, that changes the story slightly. You now have to surpass the salaries were getting there. Another thing is when we hire, we also have the  employee stock ownership plan component, where the upside is huge. At ShopClues, the first 150-200 employees own a part of the company. They are free to exit as well. But, people always don’t look at it like that. Most of them are concerned about how much they will get in hand. That’s frustrating because there’s so much more that could be done in a growing company like ours.

How many people have you rejected?

Sethi: Probably eight or nine in the assistant vice-president and higher levels because of Silicon Valley-like salary demands. The charm of hiring from Silicon Valley is that they are used to the scale we are witnessing here in India. All the e-commerce companies in India are first-generation ones. The in-grown talent has not been built here. We have seen a Tata Consultancy Services operate at scale but not how it was made from the start. We lack those skills in India. Once the first cycle is complete, I don’t think we will have to look towards the Valley.