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The Indian ecosystem lacks market consolidators. But that could change imminently.
If the deal between Flipkart and Snapdeal goes through, it would be the largest acquisition in the Indian e-commerce space to date. This consolidation can be seen as an attempt to take on Amazon in the battle for market share in India, prevent SoftBank from having to write-off its investment (given its roughly 30 percent stake) in Snapdeal, and provide Tiger Global Management with liquidity. However, there are many reasons why the deal may not happen and perhaps an even bigger implication to the broader ecosystem if it does.
Despite recent negative sentiment, the Indian e-commerce opportunity is one of the largest market shifts taking place globally – 277 million users online growing at 40 percent year-on-year. The online retail market in India is estimated to reach $64 billion by 2021, representing a 31 percent compound annual growth rate over five years. It comes as no surprise then that global giants like Amazon, which committed to investing $5 billion in India this year, and Alibaba, which further signaled entry into the Indian marketplace by increasing its stake in Paytm in March 2017, are fighting for the lead role in this e-commerce growth story.
However, e-commerce is not for the faint-hearted or the investor with a light wallet. The economics of e-commerce make it challenging to make money without massive scale. Globally, few players have been able to figure this out.
There are only 12 e-commerce players globally who are publicly traded, have at least $1 billion in revenues, and at least $1 billion in market capitalisation.
So the odds are tough and the capital required to weather the storm is significant. However, the chance to own a piece of the pie of the world’s fastest growing e-commerce market has continued to lure investors. As of May 2017, Flipkart had received $4.6 billion in 13 funding rounds with its latest $1.4 billion funding round from eBay, Microsoft, and Tencent Holdings announced in April. Snapdeal had received $1.6 billion in 11 funding rounds with its latest $21 million funding round from Clouse SA announced in August 2016.
Given Flipkart and Snapdeal’s overlapping customer bases, high individual cash-burn rates, and consumer loyalty challenges, the strength of the consolidated entity isn’t a guarantee.
With Snapdeal’s losses more than doubling to around $500 million or Rs 3,000 crore in the year ended March 2016, it is unlikely the proposed merger (which would value Snapdeal at $1 billion) will be immediately accretive. Further complicating matters, SoftBank’s recent $1.4 billion investment in Paytm, an Indian payment and commerce company significantly backed by Alibaba could cause a conflict of interest for SoftBank between the consolidated Flipkart-Snapdeal entity and Paytm. Such conflicts of interest within the capitalisation table may hinder decision-making and allow Amazon to be more responsive to growth opportunities.
Mergers and acquisitions are hard and many deals don’t make it across the finish line. In a 2016 Harvard Business Review analysis of 2,500 high-profile global M&A deals such as AOL-Time Warner and HP-Compaq, over 60 percent of the deals were determined to have destroyed shareholder value. Further, according to New York Times' Dealbook, 2016 was the biggest year in terms of volume of busted transactions (those withdrawn after being announced) since the 2008 financial crisis.
In addition to the evident M&A execution challenges, the Flipkart–Snapdeal merger will have to deal with overlapping product lines, logistical inefficiencies, unknown legal liabilities, and the challenges of integrating duplicative operations across various business entities. Despite the media buzz, it does not remain a foregone conclusion.
But if the deal goes through, it may be the biggest signal yet that the Indian technology ecosystem is evolving to its next phase. It will pave the way for the emergence of a future consolidator in India’s technology market. The alliance between SoftBank, Tiger Global, Tencent, and eBay will give the combined entity the firepower to execute synergistic M&A transactions and strategically compete against international e-commerce forces. China has ‘BAT’ – Baidu, Alibaba, and Tencent – who have invested a combined $75 billion since 2013 in various companies and the United States has ‘GAFA’ – Google, Apple, Facebook, and Amazon.
The Indian ecosystem has lacked its own equivalent of market consolidators. However with this merger, we could see the emergence of Mr Fat Bug. Chinese and U.S. super consolidators have been homegrown technology innovators. The Indian equivalents have an equal likelihood of coming from international markets (Amazon, Alibaba), traditional industries (Tata, Reliance), and Indian technology businesses (Flipkart, Paytm, MakeMyTrip), which means that this could be Indian technology’s first step into the big league.
First published in Bloomberg Quint
Tech companies are nothing without growth. The real value creation will take place in companies that are able to demonstrate differentiated growth by taking advantage of the imminent technology boom (a result of the explosion in data & apps).
Uber, the popular Bangalore based cap operator was asked to change its payment mechanism by the Reserve Bank of India. Popular ecommerce sites like Myntra, Urban Ladder, Flipkart, and many other have been under the scanner for various regulatory matters like FDI violation, VAT related issues, Enforcement Directorate probes for maters before April 2013, Payment mechanism violations etc. With each passing day new violations or potential violations seem to be added.
Taylor Swift demonstrates that while Spotify has 40MM users, she has a direct connection with 46.3M followers, known as the Taylor Nation. As a brand, her direct connection with people is so strong that she controls the balance of power in the distribution chain. This is a very strong statement and a real truth that all distribution businesses will quickly need to come to terms with.
The nature of the game and the implied rules of determining value for disruptive companies are very different than the game being played by traditional companies.
How we see the market opportunity in India. Lightbox partners Sandeep Murthy, Sid Talwar, Prashant Mehta, Jeremy Wenokur, talk about fragmentation
It’s really hard, but so powerful. The "hack" culture of Facebook or the "do no evil" approach of Google or the "respect everyone" culture of the Mahindras. It is amazing to see what great things can be accomplished when a founder drives core values effectively through an organization.
What started off as a simple goal to make the world a better place has turned into a race to make it happen within a certain time. Once you are sure about that, take a deep breath and get ready to jump on the treadmill, because it will definitely be an exciting run.
Those that make it through are not unscathed – they have battle wounds. The challenges of the first year take their toll… emotionally, organizationally, culturally. While the first year has likely felt like a sprint, it is important to remember that this is a marathon and it is impossible to continue to run a marathon at a sprint pace.
Everybody pivots. If you ask anyone who’s run a business in the past, they’ll tell you they pivot a lot. They pivot based on everything from customer feedback, to external advice, to market conditions. And its a good thing….
Your Product Is Your Business Model. Changes in one impact the other and in the best cases they play off each other.
Experiment, fail, learn and repeat. Try things at a small scale and at a low cost, and quickly assess if they work or not and then take a call on what is worth scaling up. The experiments should either stop or continue based on consumer feedback.
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