E-commerce faces fund crunch as venture capitalists log out
Once a favourite with investors, the e-commerce industry is going through a rough patch.business Updated: Apr 26, 2016 14:34 IST
Once a favourite with investors, the e-commerce industry is going through a rough patch. Funding has gone down drastically, and for the longest time, companies have been growing on the back of luring customers through huge discounts and cashbacks. The industry, which runs on venture capital (VC) money, is now being funded to run discounts.
VCs typically invest in companies when they are small and exit five to seven years later once valuations peak. But India hasn’t been too lucky with exists. So VCs don’t want to fund discounts anymore, which means companies, including Flipkart and Snapdeal, will have to worry about generating cash to fund its own operations and expenses.
According to VCCEdge, deal value fell 50% to $2.29 billion during the January-March quarter of 2016, against $4.48 billion in the same period last year. Exit value has been at its lowest in 15 quarters.
“When a trend is in its early stage it needs a lot of incentivisation,” said Deepak Gaur, managing director of Saif Partners. E-tailers sold everything that came up, and in order to gain marketshare they compromised on unit economics.
All that’s changing.
“Availability of capital is tighter than it was last year. VCs are investing either in very strong leadership or in companies with good unit economics,” Gaur added.
Investors are also bargaining on valuations. Snapdeal, in its last round of funding a couple of months ago, was valued at $6.5-billion less than its gross merchandise value (GMV) of $7 billion. Flipkart’s deal of raising funds from China’s Alibaba fell through owing to valuation problems, sources said. Alibaba refused to invest at more than $8 billion of valuation, though Flipkart was valued at $15 billion.
Flipkart, however, had dismissed this in an email response earlier. “The information is false and baseless. We are well capitalised for the long term… We believe in raising funds when they are available and always at the right valuation,” a Flipkart spokesperson had said then.
Paytm, too, fell short of its valuation target of $4 billion in 2015. Founder Vijay Shekhar Sharma had told HT earlier that investors were looking at more sustainable business models. “They have started talking of profitable businesses, rather than GMV,” he said.
GMV is the total amount of goods traded on a platform.
“The problem is with large e-tailers… They are going through a valuation correction,” said Rajat Tandon, vice-president, Nasscom 10,000 Startups.
“The (upcoming funding) rounds will be smaller in size and will determine real valuation,” said Vinod Murali, MD of InnoVen Capital, which has invested in more than 100 startups.
This has forced e-tailers to shed flab, even if it means exits of c-level executives (latest being Punit Soni, chief product officer of Flipkart), and job cuts – call it course correction.