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Investors interested in e-commerce start-ups, but can’t find the right bet

LiveMint logoLiveMint 21-09-2017 Mihir Dalal

Bengaluru: In 2014 and 2015, investors rushed to fund dozens of new start-ups that were launched to deliver food, groceries, fashion and other products to Indian shoppers. More than three years later, even though most e-commerce start-ups are struggling, some investors are again looking to fund new e-commerce start-ups. The expansion of digital payments, growing comfort levels among Indians with shopping online and cheaper and faster mobile internet connections, have all helped e-commerce steal a march over so-called modern retail.

There’s one problem, though: there are few new e-commerce start-ups and even fewer that investors believe are appealing enough. So far this year, no new e-commerce start-ups have received funding, according to investors.

The consumer internet and e-commerce market in India exploded in 2014 but in less than three years many entrepreneurs have come to believe that e-commerce is an unattractive sector for a start-up.

The high failure rates of food and grocery delivery start-ups, the implosion of online marketplace Snapdeal (Jasper Infotech Pvt. Ltd) and the growing dominance of Flipkart Ltd and Amazon.com Inc.’s local arm, turned investors off new e-commerce start-ups for almost all of 2016. Entrepreneurs, in turn, seeing that investors had lost interest in e-commerce, moved on to other sectors.

ALSO READ: 10 start-ups that lost out

Now, when market factors have improved and some investors are again keen to bet on new commerce start-ups, there are none to be found.

Venture capital firm Matrix Partners is one such investor, but it can’t find the kind of company it is looking for.

“Until now, commerce businesses have been built for the top 20 million shoppers in India. For the next phase of growth, you will need businesses that cater to the needs of the next 100-200 million Indians whose needs are very different from those of the first 20 million,” said Sanjot Malhi, who leads early-stage investing in consumer internet for Matrix.

According to Malhi, businesses will have to offer products that are uniquely customised to attract shoppers in small towns. Today, a majority of sales at e-commerce firms come from global brands in categories such as smartphones and fashion. In other categories such as, say, furniture, prices of most products put them out of the reach of a majority of Indians.

But while there’s scope for new e-commerce businesses, the consumer internet market will first have to expand significantly faster, say some investors. Last year, online retail grew by just 12% to roughly $15 billion, according to RedSeer Management Consulting, a market research firm. That was a huge disappointment for entrepreneurs and investors who had hoped for growth rates of 80-100% for years to come.

“Because of the easy availability of information about which business models are getting funded in the US and China, a lot of entrepreneurs started up in 2014 thinking that they could replicate the same success here,” said Niren Shah, managing director at VC firm Norwest Venture Partners India. “But most of these ideas were ahead of their time and that has shown (up) in the fact that the market has not grown that much over the past two years. I think there will be new interesting e-commerce businesses over the next few years but it will take time and, before that, the market will have to grow enough to support such businesses.”

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