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India’s Flipkart raises $200 million to defend its turf against Amazon, eBay and others

Flipkart is building a war chest to fend off global giants like Amazon and eBay. India’s leading online retailer raised $200 million from four of its existing investors, in one of the largest fund raising exercises ever by an Indian e-commerce company. The deal values Flipkart at $1.5 billion and takes the total investment in the company to over $380 million, according to the Times of India.

The vote of confidence comes from an eclectic international group of backers—hedge fund Tiger Global, venture capital firm Accel Partners, South African media company Naspers, and US investment advisor Iconiq Capital. And it couldn’t have come at a better time for Flipkart. eBay and Amazon are stepping up their India presence, and nimbler domestic players are starting to threaten Flipkart’s dominance. Flipkart has also had its share of internal strife, with top managers quitting and rising costs forcing it to fire of 10% of its workforce.

The Indian e-commerce market is expected to grow to $15 billion by 2017 from the current $1.6 billion, according to Forrester Research. But not everyone will be able to reap the benefits. Nearly half the e-commerce firms set up in 2012 had shut by October. Firms are having to invest more as they start expanding out of the big cities and into smaller centers. The cost of acquiring new online customers, which already eats up 70% of the revenues of most e-retailers, is expected to rise. The saturation in the bigger lucrative markets is expected to trigger a wave of consolidation, with Allegro Capital predicting that the number of venture-capital funded firms will fall by 70% to around 15, by 2014. The increased competition is also forcing some of the e-commerce firms to spend up to 20% of their revenues on advertising.

Flipkart is responding to the challenges with a new business model and new services. The company switched from an online retail to a marketplace model, where suppliers and merchants, rather than Flipkart itself, bear the cost of inventory and storage. Both Amazon and eBay follow the marketplace model in India, to comply with regulations regarding foreign investment in the retail sector. (Elsewhere, Amazon handles most inventory and storage itself.) Flipkart is also investing heavily in improving its technology and its supply chain. Last week, it launched an online payment system that can handle card payments for domestic merchant websites and mobile sites.

Flipkart, which offers products in 17 categories including books, apparel and accessories, carries out transactions worth $500 million annually. The management hopes to reach the $1 billion mark by 2015. Its ultimate goal is to try to build an unassailable lead before Amazon and eBay really get going in India.

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