Entrepreneur Asia: Power Players

Investors give Indian online stores another chance

Gauri Bhatia, Special to CNBC.com

India's online retailers have seen renewed investor interest with big names like Flipkart and Myntra attracting hundreds of millions of dollars in funding. What has changed?

Over the past few months, India's lossmaking online shopping sites have been hitting the headlines, as investors queue up to fund their mega-plans.

These internet start-ups have attracted investments of over $600 million in the last nine months, the highest ever for India, according to Venture Intelligence, a firm that tracks private equity and venture capital deals.

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This aggressive push to fund these entrepreneurs, as they spend lavishly on marketing and advertising in spite of losses, has raised concerns that investor optimism in India's online retailing might be misplaced.

"The interest in this sector is completely rational, I don't think its over-optimistic," says 32-year-old Sachin Bansal, co-founder and CEO of Flipkart, India's largest online marketplace that crossed the $1 billion sales figure mark last month. Started in 2007 by engineering graduates who had worked at Amazon, the entry of Flipkart was seen as a game-changer for the sector, which has since seen stupendous growth.

The e-commerce sector – which has an estimated 200 active players including the big boys like Flipkart, Myntra, Snapdeal and Jabong – is today worth almost $3 billion in sales. And the market is expected to keep doubling over the next few years to exceed $70 billion by 2021.

A visitor browses through books of Indian online book retailer Flipkart on a screen at the New Delhi World Book Fair in New Delhi.
Maral Deghati | AFP | Getty Images

"The long-term fundamentals of the sector cannot be doubted, it holds huge potential and that's what is driving it," says Pragya Singh, associate retail vice-president, at consultancy Technopak.

And it is this promise that saw Flipkart raise $360 million in private equity in 2013, which according to the company is the highest amount raised by any Indian internet company.

"The market is hot," says 36-year-old engineer Ashutosh Lawania, who co-founded fashion e-tailer Myntra in 2007 as a company that would personalize gifts like T-shirts for organizations and individuals. By the end of 2010, the founders decided to reposition the company as a fashion portal.

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Myntra has raised $125 million in private capital so far, with the last infusion of $50 million coming in February and Lawania says it is looking for more funds as it wants to further scale up. With revenues around $160 million for the fiscal year ended March 31, 2014, the firm, which offers 600 brands on its site, is looking at more than 100 percent growth over the next few years…and will then only talk of profits.

"Profitability will come," adds Lawania, who sees the Indian e-commerce space as presenting a huge opportunity for entrepreneurs, investors and customers alike. "We believe it [e-commerce] will play out in a big way."

Last year's arrival in India of Amazon, the world's largest online retailer, has added to the buzz with many seeing the entry of this bigwig as a validation of the Indian market. eBay too recently led a $134 million investment in online marketplace Snapdeal.com.

Too big to ignore

The opportunity is huge with access to the internet in India growing at a rapid pace. According to an industry estimate, 200 million Indians currently have online access, up from about 40 million in 2007. According to a Flipkart, 40 percent of India's population, which stands at over a billion, will have access to the internet in the next seven years.

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Adding to the e-commerce potential is the fact that while strong economic growth over the past decade has increased disposable incomes, the offline retail market has not kept pace.

Outside the top six Indian cities, the availability of services and products is still scarce, say industry experts. The overall retail market in India is estimated to be $400 billion of which e-tailing accounts for less than one percent, so "we have just about scratched the surface," says Rutvik Doshi, principal at venture capital fund Inventus that has invested up to $20 million in the e-commerce space.

Doshi, adds that "it's OK if they [e-commerce companies] are not making money as they are growing at a certain pace…many are more than doubling over the last few years."

It is this promise of growth that is making investors cast an almost blind eye on the exorbitant marketing costs incurred by these start-ups. Lawania of Myntra agrees that the industry has overspent on marketing, but argues that in a nascent industry one has to spend to create awareness. "We had to break barriers, make customers comfortable into shopping online."

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Logging in to shop

Keen to tap into this demand, there has been a flurry of niche shopping sites selling everything from baby goods to mutual funds. In the middle of last year, Inventus said it had profitably exited its investment in redbus.com which sold bus tickets across the country. Doshi of Inventus believes that while only a handful of large multi-brand e-commerce sites will survive in the years ahead, the market will welcome niche players.

Cbazaar.com is one niche player that customizes Indian ethnic wear for the diaspora. Set up in 2005 the site has raised $3.5 million so far and its co-founder 35-year-old Rajesh Nahar says, "we are profitable from the March quarter, that makes us more interesting."

But Cbazaar.com seems to be an exception in this marketplace where profits are almost considered a bad word and spending money a good thing. "Pioneers need to spend money to create," said one investor and he along with others are willing to put in "patient capital" as they wait for their investments to bear fruit. They argue that even Amazon took 10 years to make money so what's the rush and given the strong fundamentals there is little cause to worry.

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Sudhir Sethi, managing director of IDG Ventures India, one of the earliest investors in Myntra, believes that people are bound to shop online because India can just not make so many malls in the next 15 years. "Myntra supplies to 8,000 PIN codes in India, can Shopper's Stop (a departmental store in several cities) do that?"

Even top management and engineering graduates are looking at these start-ups for their first jobs. "E-commerce has moved away from a phase two years ago when people asked whether it will be mainstream or not to attracting the best talent," says Bansal of Flipkart.

While they have built a billion-dollar company, Flipkart is yet to set a timeline for profitability. The e-tailing market is in the middle of disruptive growth and the firm wants to continue to scale things up. "Over the last two to three years, every time we think of profits, the market has surprised us….it is growing very, very fast and this is the right time to invest," Bansal told CNBC.

While no one can argue against the attractiveness of the market, it is only a matter of time before promises have to be delivered on. As Doshi warns: "Down the road they [online retailers] will have to make money otherwise they will go bankrupt."