One of the worst-kept secrets in India’s e-commerce industry was finally outed yesterday as Flipkart, a broad-based e-commerce firm in India, said it was buying fashion e-tailer Myntra in an all-stock deal reportedly valued at about $330 million. Given that media had published nearly every detail involved for the last few weeks—the New York hedge fund manager backing the deal, the law firms involved and the price and other details—the announcement itself didn’t surprise anyone.
Yet I was taken aback at the number of pundits who spoke of the deal as a watershed moment in Indian e-commerce, how India is at some apparent consolidation phase in e-tail, how this portends better things to come, an inspiration to entrepreneurs for great exits, a great combination to fight Amazon in India and so on. The spin doctors are working overtime.
Many of us in the industry have watched Flipkart acquire companies and see a pattern. A few years ago, Flipkart acquired the music content assets of a VC-funded firm called Chakpak. The rest of the firm was bought by another VC-funded firm, Trivone. Flipkart shut down the part it bought. Meanwhile, Myntra, itself a VC-backed entity, acquired another VC-funded fashion brand, Sher Singh. Flipkart then went ahead and bought yet another VC-backed e-commerce player, LetsBuy, and shut it down too—despite its earlier assurances that it wouldn’t. All of this culminated in Flipkart buying Myntra yesterday.
Again, we’re told that there’s no intention to shut it down.
Look under the surface, you’ll see that every single one of these firms—Chakpak, Trivone, Sher Singh, LetsBuy, Myntra and Flipkart—was funded by the same VC, Accel Partners. The bigger firms here—LetsBuy, Myntra and Flipkart—also had a second investor in common, the New York hedge fund Tiger Global. Calculations indicate that at the time of the purchase, investors owned more than 80% of each firm, so the founders were probably down to low-single-digit shareholdings in the merged Accel-Tiger e-commerce entity.
So this was perhaps less about finding a great acquisition opportunity and more about the funds who own these firms taking five eggs from five wobbly baskets, putting them all into one larger basket and hoping it wouldn’t wobble so much. Add that to the disclosure that the founders of Flipkart are now on salaries of nearly $2 million each—an extraordinary number by Indian standards for young first-time entrepreneurs running a loss-making company, and you’ll see that this is perhaps less about entrepreneurial passion to hack it and more about trying really hard to make The Great Indian Roll-up work for its investors. Hardly the watershed e-commerce moment that’s being talked about.
And that’s a shame, really, as e-tail has grown steadily in India, month after month and year after year, and it’s spread across more people in more parts of India and across more devices and socio-economic categories. But we’re still waiting for our big e-tail story.
Perhaps it’s the BRIC curse. Many analysts have traditionally put forth the idea that Brazil, Russia, India and China will have their own equivalents of Google, Amazon, Facebook, Twitter and eBay and hence those are the firms one should fund and look out for in each country. It almost holds true, too: the Google of Russia is Yandex, and of China is Baidu. The Facebook of Russia is VKontakte and that of China is RenRen. The Amazon of Russia is Ozon and its Chinese equivalent is Jingdong or JD. And the Twitter of China is Weibo while its eBay is Alibaba.
The analogy falls apart for India. The Google of India is Google, with a 95%+ share of the market. The Facebook of India is Facebook. The Twitter of India is Twitter. The eBay of India is eBay. And hey, there’s reason to believe that the Amazon of India could well be Amazon, too. India, with its English-speaking Internet base and open-to-business government is probably more part of the US-UK internet brand ambit—the vast majority of Quora’s users, for instance, are from India. While China and Russia are almost on different dot-com planets.
Winning in India will probably mean you have to evade the paths where the large US players are, and build new ones. As JustDial and RedBus have shown. (Disclosure: I used to be an investor in RedBus.) It’s commonly known that Amazon turned down an offer to buy Flipkart a couple of years ago, and decided to go its own way. And Amazon’s seemingly done well since, growing to an estimated one-third of Flipkart’s size in just a couple of years. Amazon’s also been the innovator in India, with mobile apps, same-day delivery, and sending goods to the true hinterland of India–more than 20,000 PIN codes, or postal zones—where even large consumer companies aren’t able to get products on to shelves. Amazon also has deep pockets and is in no investor-driven hurry to exit.
Flipkart may not be so lucky. After raising almost $600 million, it’s still losing cash—and that means it can’t technically list in India, per Indian stock exchange rules. So it’s moved its official base to Singapore, which means it could list on a US exchange in the near future. But US markets might not give it the kind of support that they gave two other large new-economy Indian firms that listed there: Rediff and MakeMyTrip –originally positioned as “India’s Yahoo” and “India’s Expedia.” Rediff has become a non-entity in India but curiously still has some support on NYSE. One media outlet called it “the Google of the Ganges,” betraying a lack of understanding about both—the river and the website. MakeMyTrip—also a Tiger investee—has done a little better on the US big board.
But both those firms didn’t have significant opposition from Yahoo and Expedia in India when they listed. While Flipkart certainly will—with Amazon getting larger in its rear-view mirror and in the eyes of global investors.
So what next for Flipkart? Well, there aren’t other companies within the fund’s internal portfolios to flip it into. Or even to flip into it. eBay has chosen to back another rival in India, Snapdeal. And Flipkart is on a timeline—it will likely run out of cash in a couple of years. A public listing is one option. And there’s a bunch of folks the company can flip it to: Amazon is a potential buyer, if they choose to bite on a large asking price. Or if the Chinese or Russian giants, or Japan’s Rakuten choose to do so. Or something else will be cooked up among the guys who ponied up that $600 million chunk of change.
E-commerce in India has been built by discounting. Venture capitalists have subsidized consumer purchases till now. This very tool that Flipkart has used to grow past others is now a challenge as it takes on Amazon, with much deeper pockets. But while the deep pockets duke it out, there’s one person who benefits for sure–the Indian consumer. Discounts and offers are in store. But those will plunge when the battle’s over and the last man stands up.
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