[Edit Note: The e-commerce Industry in India is going through a growing up phase. There are happy and sad times, good and bad news, but it is all part of the game. At NextBigWhat, our endeavor has been to chronicle the journey, in a manner that we think is right. In keeping with the tradition of gleaning insights from the industry, we bring you views from Rahul Chowdhri, Director of Helion Venture Partners, on the fledgeling ecommerce sector. Helion is a $605 million India focused funds which has backed ecommerce companies such as redBus.in, Hoopos.com, Fashionara & ShopClues]
There are a few important trends that runs across the ecommerce industry. Fundamentally in India, we need more number of online buyers. About 10 million buyers are good for a country like Russia where on an average about $100-$150 is spent per person. But that’s not good enough for India. The market is large but scaling is a challenge in India.
Currently, there is a clear shift towards marketplaces. The clear logic is that inventory leads to more cash burn and limits you in terms of how much you need to spend to buy things. Wastage and liquidation of stale inventory changes the margin structure. If you don’t own the item, you can have a much larger range. If you don’t own it, all you need to do is cataloging.
But marketplace it is a bit abused term. Marketplace is when your brand to the consumer and make the merchants responsible. Returns and other heavy lifting must be managed by the marketplace to ensure smooth operations. This is starting to happen. But there are still a few things that need to be solved.
In the ecommerce industry, there are a few things the industry can solve and there are a few that can’t be solved by the industry alone. The balance between growth and profitability is the first that needs to be addressed. It’s tricky. You can’t stop growing but can’t afford to lose sight of profitability either.
Secondly, players need to bring in differentiation. Large horizontals will face pressure from marketplaces and in turn, large horizontal companies will challenge smaller niche companies. Another challenge is to figure out how to continue getting finance. Companies need to be in the limelight and look positive to investors.
There needs to be regulatory clarity as well. This is not an issue we can immediately address. We can’t do much about investor sentiments either. A global firm might have a negative outlook because it took a hit in some other market. Then there is the issue of broadband penetration which is again not in our hands.
It’s hard to understand the logic behind capping investments on e-commerce companies. Because large retailers won’t go to smaller towns anyway. One needs to analyze how many jobs ecommerce has created and build a case.
Venture Capital and Exits in Indian Ecommerce
In e-commerce, over 80% investment comes from venture capital. There was a dip in interest a few months back but deals are back now. It’s not at a high like in 2009-10 but that is good. If you have too much money, people will spend on useless stuff. Now people are more cautious. A mistake all investors made was that there was so much euphoria at the time that they forgot to look at the fundamental business. Large retailers like Walmart operate on a razor thin margin. This is a business in which you need to be very efficient. It’s a lesson all investors and startups are learning.
There are a few possible exit options in my view. The larger ones can go for an initial public offering. Large horizontal companies like Flipkart will qualify. Public issue outside India is surely a more reasonable possibility as there aren’t enough internet stocks traded from India. I don’t have confidence that there will be any big buys by Indian companies in the space. There will be foreign players wanting to buy in when there is more regulatory clarity.
As of now, most companies aren’t ready to be sold. There are a lot of things that need to be fixed before that. There are very few companies that are over $50 million in sales. It is nothing but a retail business done in a more efficient manner unless you are a brand. For a 3rd party retailer, $50 million is not a good size.
(As told to Jayadevan PK)