It was in the blistering summer of 2011 that I met a young Kunal Bahl, then all of 25 years at his New Delhi office. He had rented a floor for his newly launched website Snapdeal.
Bahl was selling distress inventory such as sunglasses, t-shirts, unsold table bookings and even services like spa and salon.
I could see cartons carrying hundreds of Ray Bans in his room. He told me that these were products which distributors were not able to sell in time.
Bahl had returned from the US after an H1-B refusal and roped in his schoolmate Rohit Bansal as his co-founder. Before launching Snapdeal, both used to slog in Delhi’s heat selling discount coupons to restaurants.
In 2012, the website soon pivoted into inventory-based e-commerce. It later pivoted into an online marketplace.
Rumours of fake sellers, bloated gross merchandise values, non-active listings, and the company’s high return rates plagued it during the last 3-4 years. Rivals Flipkart and Amazon kept on pumping huge monies to better their systems even as Snapdeal expanded its base in selling cars to homes online.
It also burnt a lot of cash in acquiring or investing in over a dozen companies. These include the now shut PepperTap, Unicommerce, Shop, Wishpicker, Exclusively, and the loss-making GoJavas. It invested Rs 117 crore in GoJavas in 2015 and then went ahead to start its own logistics arm Vulcan, last year.
The largest acquisition was that of mobile wallet firm Freecharge for which it shelled out USD 200 million.
Thanks to demonetisation drive, the e-wallet gained a decent base but lagged behind bigger rival Paytm.
Till date, there is not even a single investment that has proven to be a money-spinner for the e-commerce firm.
As the year 2017 rang in, a pivot of sorts at Snapdeal took place. The company has laid off over half of its 4,300 employees, stopped travel meetings, consolidated offices and closed down non-core businesses such as Shopo.
In a communication to employees, Bahl said that the management will be reorganising the company into a lean, focused, and entrepreneurial one. “We are combining teams, reducing layers, eliminating non-core projects and strengthening the focus on profitable growth,” he wrote in an e-mail. (Read full here)
If existing investors Softbank and Alibaba don't commit large rounds, a merger with a larger player can be the only option out for the company, as per industry analysts.
Merger may be the only way out
As per sources in Snapdeal, the company has been left with just over USD 100 million in the bank.
It had a burn rate of about USD 10 million around Diwali, which will be reduced to about USD 4-5 million after the whole restructuring and retrenchment exercise is completed, sources said.
Even at a conservative USD 5 million burn rate, that would give the company just over a year.
Amazon is pumping in huge monies with TV and print advertising. Without additional marketing, discounts or promotional activity, the sales clock for Snapdeal is not likely to trigger.
The loss to retirement fund of Canada’s Teachers
Now, let’s look at people who will most likely lose out with Snapdeal’s merger or closure, which will be at a lesser valuation than the money it has raised till now - USD 1.76 billion. And it won’t be the founders.
Large investors such as Softbank, Foxconn, Ontario Teachers’ Pension Plan (OTPP) and Alibaba who invested close to USD 500 million in the company in 2015 will be the biggest losers. The 2015 funding was done at a valuation of over USD 4.5 billion.
In 2016, OTPP led another USD 200 million funding round at a valuation of over USD 6.5 billion.
Many of the earliest investors in the company have exited. According to a report, founders pocketed about Rs 80 crore each, with a stake sale to OTPP.
OTPP is Canada's largest single-profession pension plan fund. It invests assets on behalf of 316,000 working and retired teachers in Canada.
Even at a conservative estimate of valuation of just about USD 1.75 billion, Ontario Teachers will lose about 70 percent of the value of its amount invested.
OTPP Fund has also invested in companies such as Alibaba Holdings and JD.com. The former is also an investor in both Paytm and Snapdeal.
While a sale or merger of Snapdeal at a lower valuation than the money it has raised will not impact OTPP much as it has assets of over USD 171 billion with only 8 percent exposure to Asia. It invested over USD 13 billion in 2015 with returns of over 13 percent. The returns help the pension fund to take care of 183,000 school teachers and 133,000 pensioners.
Sadly, a negative return on Snapdeal is not likely to boost the fund’s morale to invest further in Indian startups.
Makes logical sense for Alibaba
Softbank’s recent appointee Kabir Misra is said to be leading the talks with Snapdeal’s rivals Flipkart and Paytm for a possible merger.
Officially all three companies have denied these speculations. Softbank has declined to comment on the issue. Senior leaders in Paytm have gone to the extent of saying that both companies have a different culture and it does not make sense to align.
However, for an investor like Alibaba, it makes sense unless the management of Paytm declines to entertain. For Flipkart, a Freecharge acquisition makes more sense than integrating it with Snapdeal’s systems.
With USD 1.75 billion invested since last six years, Snapdeal had enough room and bandwidth to build a global internet business out of India. It will be a sad end to a dream which many saw germinating in that Okhla office, several years ago.
(This is an opinion piece)
harsimran.julka@nw18.com
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