Endgame for Indian e-commerce; biggies play it smart

Ajeet Khurana

I was intrigued to read about Flipkart raising $200 million from its existing investors. Just recently, in an article on e-commerce, I had said, “Every week, I hear private equity players predicting 'doom', 'consolidation', 'long-term bearishness' and 'shakeout' when talking about e-commerce in India. But I also hear of series-C investments and sustained high valuations. The investment world does not seem to be clear about where e-commerce is headed.” If that was not enough, read another article in Forbes, this one dating back a year or so: Can Flipkart Deliver?

On the face of it, no one seems to have a handle on Indian e-commerce. If we were to believe the argument in the Forbes article, we would be misled into believing that Flipkart was worth close to half a billion dollars only. Since then, we have witnessed a slowdown in the e-commerce space. And, after the recent entry of Amazon.in, doomsayers have been writing off Indian e-commerce players.

Why, then would existing investors pump an additional $200 million into Flipkart?

What's Wrong With This Picture?

How do you account for this paradox? Why are Indian e-commerce businesses largely seen as having turned untouchable by investors, but yet we have a $200-million investment in Flipkart?

(i) The Undeniable Growth of Ecommerce As A Sector

We can take the approach the Forbes article took while describing the accounting books of Flipkart, and conclude that the numbers do not seem appealing. Yet one cannot deny that online sales, as an aggregate, are increasing rapidly in India. And that makes it as much of a sunrise industry as any we have seen in recent history. When the Indian e-commerce sector is obviously turning out to be a tidal wave, investors do not want to miss out on the opportunity to ride it. This logic compels investors to make calculated bets on this sector. Experience shows that investors prefer to place their bets on the biggest player, and Flipkart is the biggest player.

(ii) The Upcoming Consolidation Phase Presents Opportunities for Flipkart to Buy Others

Not only is e-commerce growing, there is reason to believe that the spoils of this growth will be distributed among only a few players. This is because many players will run out of investor money before their sales reach levels that can sustain operations. Many will simply close shop but the stronger ones will be bought. And players who have financial muscle will buy them. Investing in Flipkart today gives investors more muscle.
 
(iii) Flipkart Makes An Interesting Acquisition Target

If a global giant wants to capture one-seventh of the world's e-commerce market in terms of the number of prospects, they need look no further than Flipkart. It is inconceivable that a start-up can launch today and achieve Flipkart's depth and breadth. Investors in Flipkart are aware of this, and are staring at a multi-billion dollar valuation opportunity to exit Flipkart. If a little more investment can shore up valuations substantially, so be it.

(iv) The Primary Market Can Absorb A Large Flipkart IPO

The recent JustDial IPO shows that the Indian primary market can easily absorb a large float at a high valuation if the scrip deserves it. I can easily see a billion-dollar Flipkart IPO being lapped up in India. Of course, Flipkart might choose to float its shares on an international bourse instead. In any case, we seem to be on the threshold of an exit opportunity for investors. And since that exit is near, it is natural for existing investors to raise their stakes and valuations to maximise their returns. My crystal ball points to an exit event for Flipkart investors in the next 18 months.

The author of this article, Ajeet Khurana, is the Guide to Ecommerce at About.com. An angel investor, trainer, author, entrepreneur and digital marketer, he is a member of the screening committee of Mumbai Angels, one of India's oldest angel networks. He is on the board of Rolocule Games, a gaming product company that successfully avoided getting into the services business. You can reach him on LinkedIn and Twitter.

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