India-based e-commerce company Flipkart raised $1bn in funding last week from several corporates, but at the cost of its valuation, signifying that investors may have to sacrifice returns to ensure their portfolio companies continue to grow.
The round included software producer Microsoft, online marketplace eBay and internet group Tencent, and followed a reported $38.8m investment by media firm Bennett, Coleman & Co in December 2016.
Flipkart operates a diversified online marketplace that lists more than 80 million items spanning some 80 categories including books, clothing, jewellery, appliances and electronics.
The $1bn investment boosted the company’s overall funding to about $4.1bn since it was founded in 2007, its previous backers including media and e-commerce group Naspers, IDG Ventures India, which functions as an affiliate of media company International Data Group, and several institutional investors.
However, the cash was raised at a valuation of about $10bn, people familiar with the matter told Bloomberg, a steep drop from the $15.5bn valuation at which Flipkart closed its last round, in which it received $700m round from backers including Tiger Global Management and Steadview Capital in 2015.
The lower valuation can partly be attributed to the stiff competition in India’s e-commerce sector, which has made profitability difficult for all its players, not least after the entry of US-based competitor Amazon into the market.
Flipkart was reportedly losing ground until Tiger Global managing director Kalyan Krishnamurthy, who had previously served as chief financial officer in 2013, rejoined the company in May 2016 to take charge of sales. He took on the CEO role in January and after a successful holiday season Flipkart is generally regarded as being on an upswing.
However, India’s startup space is going through some tough times in general right now following a boom period in 2015. Hundreds of India-based startups reportedly closed down last year while high-profile names such as Ola and Flipkart rival Snapdeal had their valuations written down and others, like Housing.com, were acquired for less than they had raised in VC funding.
Despite the lowering of its valuation, Flipkart has big plans that include raising a further $1bn in the coming months. Perhaps the most interesting part of the deal is the rumours suggesting eBay will provide $500m of the capital as part of a deal in which its Indian subsidiary will merge with Flipkart.
The funding was expected to be earmarked for promotions and coupons as part of a market war but the proposed deal suggests the long-term strategy for Flipkart, which has purchased fellow e-commerce companies Jabong and Myntra in the past three years, will involve at least some element of strategic investment.
Acquisition deals that can increase its market share may be necessary to head off not only Flipkart’s present rivals but also a relatively new player, Paytm E-Commerce.
One of two companies to emerge from One97 Communications (the other being financial services platform Paytm), Paytm E-Commerce is backed by the deep pockets of e-commerce giant Alibaba and its financial services affiliate Ant Financial, and will likely pursue a similar strategy to the one that made Alibaba so successful in China.
Both Flipkart and Paytm E-Commerce are said to be in talks with Snapdeal over an acquisition, and that may be where a significant portion of Flipkart’s new funding goes, but either way it looks as if the online marketplace sector is ripe for consolidation and still a viable point for corporate venturing funds.