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The New Targets

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Over the past few months, Flipkart and Snapdeal have become familiar names on prime time Indian television. The two are among a bunch of second-generation Indian e-commerce startups that have recently increased their advertising budgets to build brand recall with consumers. Not coincidentally, most of these companies are also flush with venture capital. Since January, venture capital investors have parked $137 million across 21 reported e-commerce deals. This excludes the online travel segment, which alone raked in nearly $100 million this year.

While investor appetite for e-commerce has grown consistently over the past four years, the first nine months of 2011 have seen a quantum leap. Last year saw $55 million invested across 12 e-commerce deals, accounting for 8 per cent of the overall $690 million venture capital investments for the year. This year, overall venture capital investments are already at $666 million, and e-commerce investments at $137 million (excluding travel) account for 20.5 per cent, according to private equity research firm Venture Intelligence. Group buying sites such as Snapdeal, and horizontal and vertical online retail plays such as Flipkart and Exclusively, respectively, currently dominate. (Horizontal plays offer consumer items from diverse categories, while vertical plays offer items from one or two related segments.)

As more money flows into the sector, concerns of a valuation bubble are not unjustified. "It is certainly becoming more expensive to build e-commerce companies. These are very capital-intensive businesses," says Sateesh Andra, venture partner with Draper Fisher Jurvetson (DFJ). The recent $40-million Series B fundraising by Delhi-based Snapdeal is an example. US-based Bessemer Venture Partners, along with existing investors Nexus Venture Partners and IndoUS Venture Partners, picked up an undisclosed stake in the company at a reported valuation of over $200 million. The company, according to media reports, closed fiscal 2010-11 with revenues at $20 million (about Rs 90 crore at Rs 45 a dollar) and targets $100 million by 2014. It has raised $52 million in venture capital so far. (Series A funding usually comes after seed funding, and is followed by Series B and C rounds.)

If Snapdeal typifies the valuations prevalent in the group buying segment, online books-to-electronics retailer Flipkart leads the horizontal online retail segment. The four-year old Bangalore-based startup is reportedly in the market to raise anywhere between $100 million and $150 million as part of a Series C round. It had earlier raised $31 million from Accel Partners and Tiger Global, at a reported valuation of $230 million. The company's revenues as of March 2011 was about $11 million, and it aims to hit $133 million by next March. "There is a big shift waiting to happen in e-commerce as large offline spends move online. Businesses like Flipkart spell 50x-100x (50-100 times the original investment) kind of returns for venture capital investors," says Prashanth Prakash, partner at Accel, which was the first investor to enter Flipkart.

Looking Beyond
As valuations get dearer in the relatively mature segments represented by Snapdeal and Flipkart, investors now feel the need to scope out white spaces. "An early-stage investor like us should not invest at such prices. We have to look for new areas," says Samir Kumar, managing director at Bangalore-based Inventus Capital Partners, which invests $3-4 million in very early-stage companies. In August, the firm invested $600,000 (about Rs 3 crore) in online mutual funds marketplace FundsIndia. The company represents an emerging breed of vertical plays, which are beginning to catch the fancy of the venture capital community.

Recent venture capital deals in the sector indicate that more money is moving into vertical-focused, niche e-commerce startups. In May, Tiger Global teamed up with Accel to invest $16 million in fashion e-retailer Exclusively. The company sells jewellery, handbags, crafts, paintings, wedding attire and other products within the ambit of fashion. In July, SAIF Partners incubated and invested $5.5 million in another online fashion site called Zovi.

The vertical wave has also started attracting the attention of larger private equity firms, which typically invest in more mature companies. In July, Infosys promoter N.R. Narayana Murthy's firm Catamaran Ventures joined Nexus Venture Partners to invest $9 million in online shoes retailer Bigshoebazaar. The company enables offline mom-and-pop shoe retailers to set up online storefronts and helps them manage logistics and inventory. Mumbai-based real estate-focused group buying site Groffr roped in $1 million in Series A funding from Indian Angel Network the same month. In August, Tiger Global invested $13 million in online automobiles marketplace Motorexchange.

The quick succession of deals in vertical plays also indicates that e-commerce, in its second run here, continues to evolve at a fast pace. DFJ's Andra thinks that many of the newer startups, and maybe a couple of the mature ones, will blend elements of group buying and offline sales channels into their business models over time. "It is still very early days for the Indian e-commerce market and a lot of experimenting will take place," he says.

The addressable market, driven by over 100 million Internet users and a $100 billion-plus offline retail market, leaves a lot of room for India's new e-commerce warriors to experiment. The question is will the venture capital community be able to take the associated risks in its stride and keep pace?

snigdha(dot)sengupta(at)abp(dot)in

(This story was published in Businessworld Issue Dated 10-10-2011)


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