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Online retailers making most of investor interest revival

LiveMint logoLiveMint 21-05-2014 Mihir Dalal

Bangalore/New Delhi: Top online retailers, including those behind Flipkart.com and Snapdeal.com, are benefiting from a strong revival of investor interest in India’s fast-growing e-commerce business.

The companies are making the most of it by raising money in a gradual manner, announcing successive rounds of funding within months, which helps them benefit from rising valuations. Over the past year, top local e-commerce sites have significantly increased their spending on technology, marketing and supply chains—requiring hundreds of millions of dollars in fresh funds.

They will need to spend even more in next few years, partly because of the entry of world’s largest online retailer Amazon.com Inc., which launched its India marketplace last June and has since spent heavily to build a large product portfolio.

The revival of investor interest comes after two years, when most of the venture capital firms steered clear of local e-commerce companies. Now, analysts say, they can’t seem to get enough; large global financiers such as Morgan Stanley, Singapore’s sovereign wealth fund Temasek Holdings Pvt. Ltd and US investment firm BlackRock Inc. are queueing up to invest in India’s e-commerce businesses.

The formula for the top firms is this: grow faster by increasing the product offering, advertising heavily, maintaining the eye-watering discount levels and building the supply chain and delivery networks. Even though this requires sites to burn cash faster as they grow bigger, investors are willing again to bet on this strategy. Rather than raising money in one go, top e-commerce firms are now doing so in a gradual manner, representing a significant shift from previous years when they were willing to take as much as they got, and when they did.

“Most local e-commerce firms found it difficult to raise funds last year so they took whatever amount they got. Some of the big name announcements caught the attention of large foreign investors who followed-on quickly,” said Manik Arora, founder and managing director at venture capital firm IDG Ventures India. “Now, with renewed interest in the sector, valuations are rising much faster. Staggered funding will still continue but for a different reason—to avoid excessive dilution for founders and early investors who believe they can raise more later at a much higher valuation.”

Snapdeal, run by New Delhi-based Jasper Infotech Pvt. Ltd, said on Wednesday that it raised $100 million, mostly from five new investors including Temasek, BlackRock and Premji Invest—less than three months after it had received $133.7 million. The latest round valued Snapdeal at roughly $1 billion, higher than the $800-$850 million valuation it received in February, one person familiar with the matter said, asking not to be identified.

Flipkart, promoted by Flipkart India Pvt. Ltd, first began raising money in this way. Last July, the company surprised analysts by announcing that amid the funding drought in e-commerce, it was raising $200 million from its existing investors including Tiger Global Management Llc and Accel Partners. Three months later, a new bunch of firms, including the Dragoneer Investment Group and Morgan Stanley Investment Management, invested $160 million in Flipkart in a deal that valued the company at roughly $1.6 billion—about 5-10% higher than the July round, another person familiar with the matter said, asking not to be identified.

Mint reported on Wednesday that the company is in talks to raise another round of funds.

Even online fashion retailer Myntra is pursuing a similar strategy. The company received $50 million from Premji Invest and others in January at a valuation of $200 million and it is set to be acquired by Flipkart this week for $300-$330 million, two people with direct knowledge of the talks said. Neither of the two wished to be identified.

If Myntra was not selling out to Flipkart, the company would’ve raised at least another $100 million this year, one of the two persons added.

Flipkart, Myntra and Snapdeal declined to comment.

Raising a large round of funds in one go is not always the best option for an entrepreneur, said Mukul Arora, vice-president at the private equity firm, Saif Partners. “If you raise a large round you don’t have to worry about raising money for next two to three years especially in an uncertain market, but then you get diluted significantly,” said Arora.

“Raising a large round means your ownership in the company goes down, therefore it might be better to raise a slightly smaller round, execute and reach a larger scale and then look for more capital.”

mihir.d@livemint.com

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