However, unlike 2015 when funding was more broad-based, PE/VCs are now making concentrated bets in a few large companies in order to have stakes in eventual market leaders.
Funding environment for internet/e-commerce companies in India seems to be reviving after the lull in 2016. Boosted by a few large deals, PE/VC funding has reached $6.7 bn in 2017 (till August), compared with $2.3 bn in 2016 and $5.4 bn in 2015. However, unlike 2015 when funding was more broad-based, PE/VCs are now making concentrated bets in a few large companies in order to have stakes in eventual market leaders.
Large investors looking to bankroll Indian companies
Large investors such as Softbank, Alibaba, Tencent and others have led relatively large funding rounds in e-commerce companies such as Flipkart, Paytm and Ola. This has led to a revival in the funding environment – internet/e-commerce companies raised funds worth $6.7 bn in 2017, compared with $2.3 bn in 2016.
Further, these investors have also provided part-exits to original shareholders, such as Tiger Global in the case of Flipkart. It is noteworthy that after its aggressive funding stance in 2015 when it participated in 28 funding rounds, Tiger took a big breather in 2016, when it participated in only four funding rounds. Exits earned by PEs/VCs may induce some re-investments in the internet sector.
Customer and vendor acquisition to take the front seat
Recent media reports as well as our interactions with industry participants reveal: (i) incumbents which have raised high levels of funding may resort to fresh investments in customer acquisition in the form of higher advertising and marketing spends, (ii) incumbents may also actively look at entering new verticals in a bid to acquire more use cases and customers.
This is visible in the recent commentary from these companies: (i) Flipkart has publicly mentioned that cash burn is no longer a relevant metric to track in the backdrop of the recent fund-raise, (ii) Zomato intends to follow a zero commissions policy for restaurants with high order runrates, and (iii) Paytm Mall is claiming to spend Rs 5 bn as cashbacks during its upcoming festive sale.
Funding revival is limited to specific companies and is not broad-based
Data from Venture Intelligence shows that funding has become concentrated – funds raised over 2015, 2016 and 2017 were $5.4 bn, $2.3 bn and $6.7 bn respectively, compared with 580, 260 and 114 funding rounds over the same period. We believe large investors are taking concentrated bets on companies which have the potential to emerge as market winners.
Well-funded companies may accelerate the pace of consolidation
As funding remains limited to larger companies, we believe consolidation may continue as: (i) lack of funds leads to a shutdown of smaller businesses unable to scale, and (ii) stronger, well-funded companies acquire smaller rivals in order to gain market-share. While horizontal e-commerce may remain crowded for some time with both Flipkart and Amazon India continuing to invest into the business and Paytm joining the race, we see certain other spaces as ripe for consolidation: payments, travel, hyperlocal services to name a few.
Funding revives, but for few, larger companies
The absolute funding raised by Indian internet and e-commerce companies increased significantly to $6.7 bn in 2017 (till August) from $2.3 bn in 2016. However, much of the recovery in 2017 was due to: (i) two large funding rounds raised by Flipkart – $2.5 bn raised from Softbank and $1 bn raised from Tencent and others, and (ii) $1.4 bn raised by Paytm.
The Tiger may roar again, Asian investors may remain bullish on India
Large backers of Indian e-commerce companies include Tiger Global and Softbank. After participating in a peak of 28 funding rounds in 2015, Tiger’s investments in India slowed considerably to four rounds in 2016 and two rounds in 2017. Exits earned by PEs/VCs may induce some re-investments in the internet sector. We believe Softbank will stay away from early rounds, and participate in larger sized funding rounds.
Alibaba has invested in diverse internet companies such as Youku (digital entertainment in China), Suning (electronics retail in China), Lazada (e-commerce in South East Asia) and Paytm (payments and e-commerce in India). Alibaba has invested in only Paytm to date in India, although media reports have indicated of two new upcoming investments in Zomato (online restaurant classifieds and food delivery) and Big Basket.
The receipt of fresh funds (or anticipated funding in case of Zomato) has led to a change in commentary by some of these companies as well. Flipkart is re-focusing on growing the market, while Zomato is focusing on vendor acquisition by reducing commissions for certain restaurants to zero.
