Why investments in e-commerce firms dropped to 4-year low even as online shopping picked up

Private Equity and Venture Capital (PE-VC) investments in e-commerce companies (firms that allow consumers to buy products online) in India fell to $1,223.13 million for the January-September period in 2020, according to data from Venture Intelligence, a firm that tracks private companies’ investments, financials and valuations. This is a 55 per cent drop from 2019’s $2,741.42 million in the same period, and the lowest since 2016.

The number of companies that attracted investments during the January-September period also fell to a six-year low. Only 66 firms raised funding in 2020 against 107 in 2019.

This is despite more consumers increasingly taking to online shopping this year since the onset of the pandemic. In fact, according to a recent survey by McKinsey & Company on the Indian consumer sentiment during the coronavirus crisis, there is up to a 30 per cent net increase in intent to spend online even post Covid-19. There has been a 40-80 per cent growth in consumers who purchase online for most products.

Investors said the dip in funding could be due to many factors including screening on Chinese investments and consolidation of players.

“A large portion of the consumer internet eco-system in India was supported by investments from the East. But with Chinese investments needing prior government approval, equity raising prospects of the e-commerce sector in the country have been dampened,” said Pankaj Raina, Managing Director, Research and Investments, Zephyr Peacock India.

Consolidation

Anup Jain, Managing Partner, Orios Venture Partners, said the e-commerce space in all verticals is more than 10 years old and is thus seeing consolidation behind the winners. He added that in every industry, there are 3 -4 players who ultimately have more than 50 per cent of the space on maturity, unless another disruption takes place — thus Amazon and Flipkart in the horizontal space, Pepperfry and Urban Ladder in the furniture space, Myntra in the apparel space followed by Ajio and Tata Cliq, and so on.

In other smaller verticals, individual offline brands have gone omnichannel and smaller brands are using Shopify or Dukaan, etc., to go omnichannel using software as a service (SaaS) versus trying to build their own websites and logistics, Jain said, adding, “This is true for businesses which are focused on Tier- 1 cities/HNIs. Beyond Tier-I, like in China, social commerce is the only model that seems to work. We should combine investments in social commerce for evaluating the future of investments in e-commerce thus, going forward.”