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Will Flipkart Survive without funding?

12 Aug

flipkart.com, india’s largest ecommerce retailer, announced on July 10 that it has raised $200 million in its fifth round of venture funding from existing investors Naspers, Accel and Tiger Global. It is by far the largest funding raised by any Indian ecommerce company, adding up to $380 million since Flipkart’s inception in 2007.
The Times of India reported it is in talks for another $100 million. With an estimated $80 million unspent from its August 2012 funding of $150 million, Flipkart has $280 million before it needs more cash. This gives it a ‘cash runway’ advantage compared to Jabong, Snapdeal or Myntra. Using recent estimates, the company has three to four years of runway left. Flipkart’s objective will be to thwart Amazon and remain the dominant brand. This will spell bad news for less-capitalised rivals who want to dominate their own spaces-Snapdeal (marketplaces), Myntra and Jabong (apparel). Flipkart is likely to build infrastructure services that can be hired out to competitors.
Co-founders Sachin and Binny Bansal have diluted their stakes to reportedly single digits and the company is being driven by investors. It will be interesting to see how Tiger Global and Naspers, the two largest, plan to exit: An IPO or a sale to an international giant?
Yes, the market estimates its valuation at $1.2-1.5 billion, up from $850-900 mn last year, when it raised $150 mn from the same set of investors. However, experts argue that as the company has been not getting much external funding and the latest round is also from existing investors, the valuation doesn’t matter much. “It is in everybody’s interest to up the valuation,” said a top private equity (PE) executive who is aware of the company’s funding history. “Even if the investors have to pump in more money for a smaller stake, the worth of their overall investments goes up.”
Issues
Indian e-commerce is running on a capital-intensive model, where companies are burning more cash than they’re generating. Almost all the entities are surviving on multiple rounds of funding from PE companies. “Most of the traditional investors are currently shying away from putting more money into the sector, as no one knows when it will turn profitable. There are only a few PE players like Tiger or Accel which have taken long-term bets on market leaders in countries like China and the US and have succeeded. They are hoping the same will happen in India.”

On whether the company tried to raise funds from other investors this time, Binny Bansal, co-founder and chief of operations of Flipkart, “We cannot comment on the specifics of our fundraising. What is important is that our existing investors have reinstated their faith by investing $200 mn in us, the largest amount to be ever raised by any Indian internet company.” In the e-commerce segment, it’s important to have scale and be a large player, a retail expert said. “Getting this kind of funding will help Flipkart achieve scale.”
Bansal added the current investment validated the belief their investors have in the company’s long-term plans. “They have invested in us before and an additional round is an emphasis on the fact that we are all aligned to grow the company and retain our market leadership at all times.”

On whether the current investors have indicated any time frame for exit from the company, he said, “We are all thinking long term. The industry has a lot of potential to grow and we want to be at the forefront. Our focus is on expansion and an eventual public offering at some point. Neither we or our investors are focusing on anything else at present.”
Amazon also took several years to become profitable and even though Flipkart has not turned Profitable right now, the marketplace model to which it is slowly moving to “makes sense and finds favor with the regulators also.”

Our View:

The investors have become the owners; by virtue of them owning > 51% so now they are infusing capital as its their own company but will they put in that much capital needed to compete & outwit Amazon, don’t think so this will ever happen. These infusions, though large by Indian standards aren’t enough to make Flipkart get that edge
So either Flipkart will be an average investment / business just about in black guzzling enormous amounts of money to stay afloat ( an extra large IPO , if market allows, may give them some decent financial muscle ) or despite its achievements, it will be a spectacular failure, sometime down the road. Market is anyway not good in India since last 2-3 years and it is not in a position to absorb so much funding.
In the end it’s not about an ecosystem, a pioneer status or any such credo but only about making npmoney!
There are always two sides of the coin. And here we will try to analyze whether models like Flipkart can sustain or will sell out in next 24 months to some big US retail giants like Amazon who have anyway have started business in India through Amazon.in.
Sachin Bansal says, “This investment validates the belief that our investors have, not only in our capabilities as a market leader, but also in the potential of e-commerce in India.”
Flipkart has already raised 180 million US$ in the past, investors are not really in a position to ‘write off the money’ as they would do if they would have invested 10-20 million US$ in small and medium companies. So it looks little farfetched if the current investors are participating because of compulsion since they are already invested big money in the past and now they have no option but to pump in more money as the exit options in current scenario is not visible.
As per Sachin Bansal’s statement, as on today, Flipkart does 50% of 1 billion in GMV (Gross Merchandise Volume). That means that Flipkart does 500 million US$ = 3000 crores in Gross Revenues. If the company becomes ‘just profitable’ at this level of operations, let’s assume that the profit will be 5% = 150 crores = 25 million US$)
Given the assumptions made on Bansal’s comments, in the USA stock markets, Flipkart would be valued best at 1.00 – 2.5 BN US$ (assuming 2-5x multiple on sales and/ or a 50-100x PE!)
Let’s consider the capital table of Flipkart post this round. Reports say that the VCs now own more than 50% of the Company.
Hence 380 million of investments have bought VCs 50% of Flipkart.
To get back a classic 10x on investment (=4 billion US$), Flipkart will have to sell or list at 7-8 BILLION US$ for its VCs to earn a 10x return on the same!!
One of the sources says that the money has been raised from existing investors only; basically owners decided to pump in more cash and valued the transaction at a massive premium to ground reality.
Flipkart is losing 100cr/month cash and investors know that only way out is an IPO. Public will be sold 40% of the company valued at 2-2.5 bn wherein the original investors will recoup all investment. The way Flipkart is being run right now is not sustainable
No wonder the existing investors took part in this round as well. After pouring in so much money in the earlier rounds, they are left with no choice but to keep pumping in money into Flipkart. I’m pretty sure no other investor would be willing to burn their hands especially when Amazon with their deep pockets have forayed into the Indian market. I guess the only suitable outcome from Flipkart’s perspective is that they win the game in the short term which might tempt Amazon into buying them.
The negatives are huge, clearly as they need large amounts of capital to keep it going. The Godzilla Amazon is already here & expanding.
Or they seem to be setting up for Amazon acquisition, might have received some sort of an indication from Amazon or maybe something else which we are not aware of. Otherwise I wonder why VC’s would invest 200 mn $ to compete against Amazon.
The investors have become the owners 😉 by virtue of them owning > 51% so now they are infusing capital as its their own company but will they put in that much capital needed to compete & outwit Amazon , i don’t think so this will ever happen and will be really difficult.

These infusions, though large by Indian standards aren’t enough to make Flipkart get that edge so net net either Flipkart will be an average investment / business just about in black guzzling enormous amounts of money to stay afloat ( an extra large IPO , if market allows, may give them some decent financial muscle ) or despite its achievements, it will be a spectacular failure, sometime down the road. And once FDI in multi brand retail will come … Amazon will put a lot of pressure on existing operators. This move in a direction to normalize things in future.
According there can be only two reasons for this kind of investments-1.they have invested to save their existing investment and probably don’t want to call it a failure and jeopardize other such investments in an already fragile PE investment scenario in this country.2.The promoters are very good story tellers and like cute babies at night they have listened to it and happily got sold into.
Sachin and Binny Bansal have diluted their stakes to reportedly single digits and the company is being driven by investors. It will be interesting to see how Tiger Global and Naspers, the two largest, plan to exit: An IPO or a sale to an international giant?
Bansal also said “All our existing investors participated in this round. We will use money to build the technology platform, further grow the supply chain besides talent acquisition
Having raised/ burned $180 million earlier, do they still don’t have a fully ready “technology platform & supply chain”….and instead of lines of code, are they putting diamonds in their technology….instead of warehouses for their supply chain, are they building mansions/ palaces….I am asking this question because I never imagined these 2 activities cost thousands of crores of Rs. and if ‘internal accruals’ are not enough, then I thought maybe a few crores of fund-raising would be enough……
Also, need to admit that money seems to be flowing so freely into Flipkart (startup) that it would put the veteran Naresh Goyal to shame since for raising a similar level of investment for his decades-old business Jet Airways, he has to sweat around so much & still the Swamys/ politicians are not satisfied.
I understand As for Jet Airways, airlines have been a tough business worldwide, and run in a loss more often than in the black. So not so surprising to see the unusual funding for this venture.

With an estimated $80 million unspent from its August 2012 funding of $150 million, Flipkart has $280 million before it needs more cash. This gives it a ‘cash runway’ advantage compared to Jabong, Snapdeal or Myntra. Using recent estimates, the company has three to four years of runway left. Flipkart’s objective will be to thwart Amazon and remain the dominant brand. This will spell bad news for less-capitalised rivals who want to dominate their own spaces-Snapdeal (marketplaces), Myntra and Jabong (apparel). Flipkart is likely to build infrastructure services that can be hired out to competitors. Os I can see the death of Snapdeal, Myntra and jabong in very near future.
A new set of investors, including Morgan Stanley, boarded Flipkart helping the domestic e-commerce leader to clinch the largest-ever funding for internet business in India. Flipkart closed $360 million (Rs 2,228 crore) fund-raise, as against $200 million it had announced in July this year.

The additional $160 million came from four new investors-Dragoneer Investment Group, Morgan Stanley Investment Management, Sofina and Vulcan Capital-alongside existing investor Tiger Global. The deal valued Bangalore-based consumer internet firm at $1.5 billion, and leaves it with about $425 million in cash (including unutilized money from previous round).

TOI first reported that Flipkart was set for a record fund-raise of over $300 million on July 11. The entry of new investors would also help Flipkart answer critics who have questioned the engine’s heavily bleeding business model.

Three months ago, Flipkart said existing investors, which include South African media giant Naspers, Tiger Global and Accel Partners, would pump in $200 million. That announcement closely tracked reports that India would consider FDI in e-commerce paving way for direct entry of global biggies like Amazon.
The latest funding values Flipkart, considered the Amazon of India, at over $1.6 billion, or Rs 9,760 crore. This is similar to its valuation in July, when it raised $200 million. Incidentally, Flipkart is worth more than the total market cap of all 15 listed retail companies, including Future Retail, Shoppers Stop etc. Among brand-led firms, Flipkart’s valuation is comparable with heavyweights such as P&G India and Tata Global Beverages.
How do the investors intent to make profits out of what they have invested. At present flipkart is into operating losses. Every single item they sell lends them minimal or no profit. The only way one can hope is a sell off to a bigger company which will definitely not pay Rs 20,000 cr for a buy out. And also an IPO will also be a tough thing for flipkart to come out with and raise Rs 20,000 cr through it’s IPO. All and all while the brand value and market cap are one thing reality is other.

This investment only shows why VCs/PEs have no clue on how to evaluate risk. There are other contenders to FlipKart as well. VCs and India mantra is “show us something innovative, but it has to be proven and adopted 6 times atleast! it also means that other players in this space, have raised valuations without doing anything!

Flipkart is currently reporting annualized gross merchandise sale of $600 million. It plans to take the annual gross sales to over $1 billion before starting work on an overseas listing.

According to Forrester Research, India’s e-commerce market is expected to surpass $1 billion in sales and expected to touch $ 8.8 billion in 2016. But most e-commerce firms are deep in red with no signs of profits in the near horizon. “The top 4-5 players will continue to raise money. But the challenge for Flipkart is how will it turn profitable?

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Posted by on August 12, 2013 in Uncategorized

 

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