It is not really a coincidence when Amazon.com, the world’s top online retailer, announces that it would invest $2 billion (Rs 12,000 crore) in India exactly one day after local e-commerce hero Flipkart announces that it has raised a record $1 billion in the latest round of funding – with a long-term aim to have a market capitalisation of $100 billion.
Flipkart CEO Sachin Bansal and his co-founder Binny Bansal are now said to be worth over $1 billion, while its valuation is estimated at $7 billion.
Why would so much venture capital run on a company that was founded as recent as 2007? Here are seven reasons why:
1. Sachin Bansal is young: The CEO turns 33 on August 5 – next Tuesday. Young CEOs, especially those with strong technology and management bandwidth, are hot for VCs as they represent the potential to scale up the company. His track record in the past few years –including his recent acquisition of Myntra, shows a strategic mind.
2. India is poised for a digital take-off: With 200 million Internet users expected to touch an estimated 500 million by 2020, India is expected to add a digital population that is larger than the population of the entire United States.
3. E-commerce is the new retail: With digital penetration increasing and advanced IT analytics software helping understand customers better, e-commerce players can combine home delivery with deep insights . This can cut on real estate costs while boosting sales volumes. As the biggest entrenched local player, Flipkart has an incumbent advantage. Its revenues multiplied five-fold in 2012//13 – in a single year.
4. Amazon is coming, Reliance is growing: In competitive capitalism, big money always chases the top two players. Global online retailer Amazon is entering India and is busy bu ilding five warehouses, while the government is expected to allow 100% FDI (foreign direct investment) in e-commerce. Reliance Retail is expanding furiously as well. Flipkart has the option of selling out to either, if it is not ready for an IPO -- or partner with the likes of Tatas, Future Retail or Aditya Birla Group.
5. Flipkart is a technology company: With a big focus on software creation and analytics, IIT-an Sachin Bansal’s idea of Flipkart is technology driven. As a tech company, it can potentially be a futuristic play in the market. Flipkart is hiring hundreds of engineers – not salesmen or women.
6. It is a neutral platform: The government is allowing foreign retailers who manufacture in India to sell through e-commerce platforms. There are also literally hundreds of thousands of Indian companies who may want to use Flipkart as an online “Walmart” where anything can be sold. This is the virtual equivalent of a humongous chain of stores.
7. VCs love to control smart entrepreneurs: Private equity firms that now control a majority would like to sell to the highest bidder. Sachin and Binny Bansal may be worth more than a billion dollars in stakes, but their sharedholding has been reduced to a minority. VCs like it best when the management team is smart but not in financial control. That makes exits easier.