India?s $2-billion e-commerce sector may be finding it tough to become profitable, but that hasn?t stopped investors from cherrypicking opportunities and parking their funds in the sector looking at the long-term growth opportunity. Data from investment research firm Venture Intelligence show that private equity (PE) and venture capital (VC) funding in the sector stood at $141 million within the first four months of this year, which is almost half of last year?s investment of $295 million.
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In fact, the first half of last year?s figure was bloated by the $150-million investment that Flipkart received from various investors in February. Among the major deals of this year, Snapdeal, the market-place e-commerce firm, received a $50-million boost from Kalaari Capital, Nexus Ventures, Samaa Capital and others, while online healthcare products company HealthKart pocketed $14 million from Sequoia Capital India and Intel Capital.
?The PE investment in brick-and-mortar retail has failed. Brands are also realising that e-commerce is a better way to penetrate into the tier-II and tier-III cities as building the physical infrastructure is never going to be profitable,? says Arun Natarajan, CEO, Venture Intelligence.
At present, e-commerce in the country forms 6-7% of the organised retail market. The e-commerce market in India, which includes all financial transactions on the internet, is estimated to be valued at $10 billion in 2012. According to data available with management consulting firm Technopak, e-commerce is projected to grow at a CAGR of 45% to reach $200 billion by 2020. Currently, the travel transactions account for about 80% of all online sales in the country.
Experts feel that e-commerce lends itself to several innovations in categories and verticals, coupled with the fact that there are not many attractive sectors where investors find good returns. According to Pragya Singh, associate director (retail) at Technopak, the fundamentals have not changed with the internet penetration growing rapidly aided by the smartphone revolution. ?Despite the flux, consolidation and business model corrections, the positive sentiment is created by the acceptance of e-commerce by tier-II and tier-III cities,? adds Singh of Technopak.
Richa Kar, CEO, Zivame.com, the Bangalore-based online lingerie store, feels that the ability to reach out to a large audience base, unlimited shelf space, centralised inventory management, etc., make e-commerce ventures more viable in the long run. While funding has not slowed down in the sector, investors are now requesting a faster route to profitability rather than scale, from the companies. The continued investments is also attributed to the higher quantum of funding in the second stage as the companies grow bigger.
Karthik Reddy, managing partner of the R100-crore seed funding firm Blume Ventures, says that the sector is now seeing the second round of funding, where the valuations and capital requirements of the companies are usually three times higher on account of scale. ?For instance, if the first round of funding is usually $3 million on an average, the second round funding will be close to $10 million,? Reddy says.
Delhi-based Yebhi.com, which got its first round of funding of R100 crore in mid 2012 says that it will try to become profitable in the next one-and-a-half years. The company has done cost and category optimisation over the past year. ?Selected companies, which have enough scale are still getting funding even as they now focus on profitability. Everyone is rationalising the cost structure but that faith of investors in the sector has not changed,? says Manmohan Agarwal, CEO of Yebhi.com.
According to Amit Kohli, the Delhi-based CEO of Foodpanda.in, the criteria of funding has changed and the investors are interested only if the company can show a clear roadmap to profitability. ?They are now asking how soon I will be profitable. They are now convinced that scale will not be an issue in a country like India,? says Kohli.
According to Kanwaljit Singh, senior managing director, Helion Advisors, the focus of the investors is to invest in strong and balanced teams that bring in domain knowledge and build e-commerce businesses with a balance of revenue growth and path to profitability. Helion had recently invested in Shopclues.com and have invested in 10 e-commerce ventures so far.