UPDATED: Facebook stocks slide further and now at the lowest ever. Shares of the No. 1 social-networking company ended the day down $3.14, or 11.7%, to $23.70, which not only notched a new low but also marked a nearly 40% decline from the company’s initial public offering price. (SOURCE)

I had recently written a blog post on the over-valuation of Dot.com portals in India; and their subsequent crash in the stock market when they desperately try and find an exit option; often leading to an IPO; whether in India or abroad. Once correction comes, they are flattened, with millions wiped off within weeks or days – in case of Facebook over-evaluated IPO.

India is currently witnessing a Dot.com boom. Dozens of B2C e-commerce portals popping up like wild mushrooms, left and right, selling this and that every month. Mostly, either powered by Angel / VC Investors; and a few being funded by their own Export / Manufacturing houses. Flipkart, Myntra, Yebhi, Yepme, FreeCultr, Fashion&You, Deals&You, Lenskart, Healthkart and others. There have been 69 deals in the ecommerce space in the last 18 months, says Venture Intelligence, a company which tracks venture capital. Will this continue or dry up soon? (Source: Why is ecommerce funding drying up?) In fact, the death of Taggle.com in 2011 definitely did raise some eyebrows… and then followed up by LetsBuy.com going bust. Neither of them had a solid business model in place; entirely depending on discounts, discounts and more discounts for luring new customers daily.

But the main issue is – none of the companies are profitable; in fact, all burning cash to stay alive; and with (negative) cash flows. In fact, the poster boy of Indian E-commerce portals, Flipkart.com, may soon be in trouble. As covered by TimesOfIndia, earlier today – “Flipkart needs big money to keep delivering“; it points out some of the main issues that Flipkart.com is currently facing.

BANGALORE/MUMBAI: Flipkart needs about $150 million from new investors in the next six to nine months even as bulge-bracket private equity firms remain wary of the online retailer’s initial public offering plans in the US—crucial to making handsome return on investments.

PE giants like Bain Capital and Kohlberg Kravis Roberts could look at potential investment deal but demand clarity on Flipkart’s ability to pull off a public issue, said bankers familiar with the matter. Two existing investors Accel Partners and Tiger Global are unlikely to pump more capital after $100 million follow-on investment earlier this year.

Flipkart would be running out of money unless big investors step in the next nine months. The poster boy of India’s latest e-commerce wave is limiting cash burn and improving profitability, but that alone won’t improve listing prospects.

“While there is appetite among US domiciled investors for high growth stories like Flipkart, recent negative experiences with offshore structures of Chinese tech companies will cause concern. Flipkart has to be a foreign domiciled (offshore structured) entity for US listing since Sebi regulations ask Indian companies to trade first on local bourses,” said Praveen Chakravarty, CEO, Investment Banking and Institutional Equities, Anand Rathi Financial Services.

Chinese e-commerce engines which took the foreign domiciled route to US listing have seen their valuations plunge in the past one year. Flipkart with revenue topping $350 million has had negative gross margins till recently, but just slipped into 2-3% profit margins after expanding product catalogue. It wants to boost operating margins to 8-10% in the next one year.

Indian market regulator stipulates profitability norms for listing on local exchanges. Flipkart, which invested heavily into backend logistics as a business differentiator, has started controlling runaway costs and letting go some employees. It has more than 5,000 delivery men servicing 45,000 orders daily.

“We are a privately held company and hence are unable to comment on investments, margins or ongoing discussions with investors,” said a Flipkart spokesperson in response to queries from his newspaper.

Last year, General Atlantic Partners walked away from Flipkart being unconvinced about the financial model. Promoters Binny and Sachin Bansal then turned to existing investors for a bail out deal. The absence of big PE investors in Indian e-commerce has been conspicuous with most firms managing to raise only follow-on investments from venture capitalists.

Bansals control about 37% of Flipkart equity, while the Accel Partners and Tiger Global together control 48%. Management holds the remaining 15%. This leaves Bansals with little room in discussing a large deal with PEs beating down valuation. Some bankers argue that Flipkart would opt for strategic sale with Amazon a likely acquirer if multi brand retail FDI is allowed.

“Most e-commerce start-ups follow ‘the last man standing’ approach in a potentially large and under penetrated market. But one cannot keep losing money on unit sales,” said K Ganesh, a serial entrepreneur with investments in smaller rivals of Flipkart. Avnish Bajaj, managing director, Matrix India, explained that e-commerce in India has a lot going for but most customers are coming in because of the low prices, there are no loyal buyers.

“Raising money for the big players won’t be an issue but it’s the smaller ventures which will find it difficult,” argued Bajaj whose fund has invested in Quikr. Anand Rathi’s Chakravarty avers that Flipkart’s fund raising hinges upon better clarity on its US listing plans.

Additionally, Forbes India had recently covered the woes of Flipkart.com; and the negatives and issues that it currently faces. Can Flipkart Deliver? 

Another significant aspect for an e-commerce portal to run, and survive successfully, is to pay close attention to improving unit level economics (margins per transaction). A company selling an item for $4 but bettering margins by $1 is better disposed than a company selling an item for $10 but with net margin $0.1 cents. Most e-commerce portals never pay attention to this; thereby suffer in the long run. Ideally, as pointed out in this article;

But conditions that will apply, even when VCs provide companies they have already funded, additional funding. Only those which show success on three counts will get an additional backing:
1.      Growth towards showing leadership in their verticals
2.      Improving unit level economics (margins per transaction)
3.      Efficient marketing proven by customer acquisition cost going down

Flipkart has already eaten up:

a) $31 million in VC funding
b) $150 million in another series of VC funding

TOTAL = $181 million and still operating in negative cash flows. An additional $150 million would be very difficult for Flipkart.com to raise; given market conditions; and depression in the EU. What this means – Flipkart will either try for an early exit option, or sell off the company; or otherwise result in massive layoffs; and re-structuring of current debt. It looks, the Indian poster boy of E-commerce world, Flipkart, is NOT a Superman, after all.

I remember reading an article, “8 reasons why the E-Commerce Balloon In India is gonna burst..” by  Alok ‘Rodinhood’ Kejriwal in Jan 2012. Had thought – wtf? Useless article. Read it once again last night. Every line rung so true this time. If Flipkart.com does go down eventually, it will be a big learning experience for the brands still out there.

> How to decrease costs?
> How to increase margins?
> How to create a ‘brand’ rather than an ‘aggregator’?
> Propose value creation rather than going the way of discounts, discounts, and more discounts.

And most importantly, how to create and preserve ‘brand loyalty’ amongst existing customers. The key lies in these questions, and as we can see, Flipkart.com couldn’t create any of these. Thus, practically not worth a dime as a ‘business’.

PS: My detailed blog post on HOW TO CREATE AND SUSTAIN A “BRAND ONLINE”.

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About sghoshoxon

Born in India, educated in Moscow, worked in the UK; Subhasish speaks English, Russian, Hindi & Bengali. Marketing // Strategy // Consulting, Active Blogger, Social Media Evangelist, Apple fan; Thanks to all for reading my blog posts, with 'FewRandomRantings.Wordpress.com' reaching 74,000+ visits since inception. Follow me @nerdometer.

20 responses »

  1. gaganj1 says:

    Good Article Subhasish. But till the time VCs can invest insensibly, we will continue to have Flipkart stories. Flipkart Recently bought another loss making site Letsbuy.com. When they don’t have enough cash to run their own operations,then how would it make sense to buy another loss making unit with out any strategic advantage But Letsbuy was the mistake of same VCs who have funded Flipkart. So to cover their one mistake they have made another one.

    • sghoshoxon says:

      Thanks for the comment. In fact, if we’re to believe industry sources, and that too ‘reliable’ ones, it was never Management’s decision to purchase LetsBuy.com; it was more of an ‘Investor Induced’ decision, and Flipkart.com had to take them on. Cause to be honest, both Bansals now hold a minority stake at Flipkart.com; with Investors holding over 48% and thus calling the shots. Its very similar to Steve Jobs – when he was fired from Apple. How can a guy be fired from his own company? Cause the Board of Directors in that case, and here, the Investors practically call the shots. Overall, yeah, getting LetsBuy.com was a bad decision. Really hope Flipkart.com doesn’t tank.

  2. I love Flipkart. Here is a company which has made services its USP in a country like India where each one of us is wary and skeptical about each other, leave alone companies. We all live in the fear of “everyone in India is gonna con you”. In this landscape, what Flipkart has achieved is commendable. And, if one believes that only money/investment could have solved it, then it could have done by the Snapdeal’s and Myntra’s of the world. Its not about money but about mindset.

    Amazon took 8 long years (4th quarter 2002) to become profitable and that too in a country which has by all means far better infrastructure, bandwidth, internet penetration than India. Well, I agree they did not raise a lot of pre-IPO investment like Flipkart. But my point is we have to give Flipkart some time now. Its just been 4 years for them.

    • sghoshoxon says:

      Completely agree with the first paragraph.
      Completely disagree with the second paragraph.

      Amazon was not burning cash and begging around for VC funding at super high over-valuated valuations when in the seed, early & growth stages. And most importantly, have heard this comparison a hundred times from many others, whom time has proved wrong. Cause US is a completely different market from Asia, and others. Also, Amazon opened up a ‘marketplace’ for B2B buyers/sellers, which as far as I’ve heard from sources, even Flipkart is planning to launch soon.

      Flipkart’s future moves are:
      a) launching Mens, Womens & Kids wear categories.
      b) launching a B2B/B2C Marketplace (very similar to Amazon).

      Amazon had these and completely 0 competition when came to the market. This article lists WHY Amazon survived the Dot-com crash, when thousands others disappeared into oblivion. Not even a single one of these factors you could see in Flipkart, rather the opposite could be seen. Frugal management, excessive hiring, fat paychecks, and now begging for more money from VCs.
      url: http://mashable.com/2011/07/22/facts-amazon-com/

      Most importantly, more than Flipkart, most of the companies currently operating in the Dot.com industry are extremely fragile. From my personal experience – have spoken to many CEOs, Ex-CEOs and CMOs of Dot.coms in India, and besides “selling margins” and “cost of acquisition”, no one seems to really care about anything else, as long as items are being sold, at whatever the price. This, ‘last man standing’ approach, has brought the death knell to Flipkart. I personally, don’t see them surviving this crunch; even if they do get further funding, how much? $100 million more for 6 months? Then? $100 million for 6 more. Then? They would burn like what – $800 million for 8 years and produce what? Sell 45,000 daily, out of which 25,000 are books, 10,000 are USB sticks? Not possible.

  3. gaganj1 says:

    They may succeed, they may not succeed, but one thing is Flipkart single handedly revive the interest in Indian E-com space. The ambition to make it big, make it big real fast. Their effort should be applauded. Lot of young guys took entrepreneurship as an option because of Flipkart story. They played the role of catalyst. I hope they survive, but even if they dont, they still have manage to do something which nobody else have done before in India.

    • sghoshoxon says:

      With due respect, but don’t agree to this at all. Flipkart is solely responsible to have ‘screwed up’ the loyalty of Indian consumers online. Discounts, free shipping, free exchange, unlimited exchanges if not happy, COD and this and that…. how will ever someone make money? I purchase clothing/electronics often from US and UK sites who deliver to my doorsteps in Delhi; and they are charging GBP 30/40 sometimes for this and its justified. Having a desirability to grow and grow fast is good, but not at the very expense of your own existence. That’s what Flipkart has done, just managed to dig themselves such a big hole; now looking down the barrel. Definitely they ought to be applauded for their vision & outlook, but they sucked big time in execution. Completely botched it up. And what worse? $180 MILLION dollars of Investors cash. Thats horrible!

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  5. SBala P. says:

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