E-Commerce is big; the money is not!

It has been a rather forgettable year for home-grown firms that allow you to buy and sell virtually anything at the click of a button. Though several such companies did manage to raise seed capital, raising funds for the next growth phase is proving to be an uphill task.

The total funds raised by e-tailers plummeted sharply to $0.5 billion in 2012 from $5 billion the year before, according to a joint report by E-tailing India and comScore. In other words, no fresh money has come in the e-commerce space, except in rare cases such as Flipkart and Snapdeal, paving the way for consolidation. So, why are investors staying away from the $125 billion e-commerce industry, at a time when the world’s largest online retailer Amazon is making a beeline to India?

According to Anand Lunia, Partner, India Quotient, a venture capital firm that invests in e-commerce space, investors have become more selective in their choice of portfolio in this space.

Lunia said, “Real funding started in e-commerce space in 2010 when valuations were high but now they have hit rock bottom. People are raising lesser money than before with very few VCs willing to put money in e-commerce today.”The cautiousness stems from many players having burned their fingers by investing in companies that had wrong foundation to wrong business models.”

“Indian e-commerce companies continue their struggle towards breakeven given the low preference for making payments online, lesser number of online shoppers with adequate disposable income and several early players spoiling the market for later entrants by setting a bad precedent,” he added.

He was referring to companies such as Fashionandyou.com and Timtara.com which did not live up to customer expectations. This downside got further amplified through the power of the social media which was tapped into by disgruntled customers.

The number of complaints related to online frauds in the country has gone up by 30 per cent in the past two years, according to online consumer complaint forum Akosha. Its CEO Ankur Singla said: “Most of the complaints were related to deficiency in delivery, refund issues and non-delivery of goods reflecting non-trust.”

“Bad quality of logistic providers and vendors resulted in a bad experience for the users. It was not as if these companies were bad per se but their vendors were taking them for a ride as companies had not been careful. This worsened the environment where buyers were already struggling to trust swiping their credit card for online transactions,” added Lunia.

First phase of consolidation

The industry went for a consolidation for the first time in 2010 when dozens of players, mostly in e-tailling segment, entered the ecommerce space. However, the startup frenzy did not last for too long as investors started asking tough questions, given that many ventures focused only on sales growth even as profitability took a back seat.

While big and serious players like Flipkart, Yebhi.com, Snapdeal and Myntra managed to raise funds, little known firms such as SherSingh, StylishYou, Letsbuy and eSportsBuy merged with larger players as they were unable to find investors.

Startups like Coinjoos, which started off as a book e-tailer around the same time as Flipkart, got acquired by the latter. Unable to manage costs and traffic to their Web site, MadeInHealth (a portal that provided health and nutrition related products) was acquired by HealthKart.com.

These companies had started business for two simple reasons: easy of start and minimal investment but they failed as scaling up became difficult owing to huge investments needed in brand building and customer acquisition. In December 2011, Taggle.com quietly buried its online products retail business. It had raised funding commitments of $9.25 million as seed investment. Others that have wound up are Hari Sabzi and Sabzimandi.com.

According to various Web sites such as Next Big What and consulting firms such as Technopak and Grant Thornton, about 100 to150 e-commerce ventures have folded up in 2011.

Ankur Bisen, Associate Vice President, Technopak Advisory firm said: “Over two dozen have already shut shop this year. The mortality rate is high, especially among the e-tailers, and we expect the numbers to increase manifold this year. The market structure right now doesn’t allow profitability and hence not a single company in the space has posted profits so far.” According to a Technopak report, price war among the firms, many of whom burned huge cash on promotions and marketing, ended up going under or getting acquired by larger players.

Reports about Gurgaon-based online retailer Fashion And You planning to acquire Mumbai-based marketplace firm Pepperfry will further set the ball rolling for the anticipated consolidation waiting to happen in the $14 billion e-commerce space in 2013. Compared to the e-tailers, service-led online companies such as Yatra, Make My Trip and Book My Show managed to survive as they have managed to keep their cost low on the back of a business model that did not involve warehousing, inventory and shipping costs. The only challenge for these players has been customer acquisition.

Industry watchers believe companies will continue to face challenges to raise next round of capital and only those who innovate, adapt faster and evolve their business model will survive in the long-term thus weeding out the ‘me-too’ players.

While undoubtedly, the growth in ecommerce has spelled convenience for the consumers, it still remains to be seen if this translates into better bottomline for e-commerce ventures and betters returns for investors.