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E-commerce Firms Gearing Up for Next Round of Funding
Oct 8, 2016

The festive season has started. With host of ecommerce companies laying full page ads and coming up with TV commercials to lure you with limited time period and discount offers, there is no way you can miss its arrival.

There is hardly someone with access to internet who would not have experienced online shopping yet. It's indeed a megatrend getting bigger with the time. In the battle within the ecommerce titans - Amazon, Flipkart and Snapdeal, it is the consumer that is emerging the winner.

So where are these firms trying to get with claims of doing the highest sales?

Well, it seems they are gearing up for next round for funding. With an unclear business model and bottomline still in red, the only argument that they have to make to be the best and deserving is their sales and market share.

As an article in Livemint suggests, Flipkart, after generating bumper sales during Big Billion Days (BBD) sale this month, is planning to raise large round of funds from fresh investors. It is looking to raise at least US$ 500 m and could go up to US$ 1 bn.

One must note that after multiple rounds of such fund raising in the preceding years, the e- commerce firms had hit a valuation wall early this year. Their valuations were slashed by more than a quarter and were getting a cold shoulder from investors. With the rise in competition in the online market place and ballooning losses, investors were forced to change their mind about the huge 'start up' opportunity.

Now that the Finance Ministry is considering removing multiple restrictions on ecommerce, these firms might be able to talk investors into funding them. And the shopping fest may continue for consumers. So far, so good.

But the issue one needs to ponder is... Where and how will this end? The big investors who are pouring funds in these cash burning business models are not doing so out of generosity. They hope to make good returns at last, whenever they decide to exit. And this is where all this have serious implications for common investor.

One of the ways to exit will be IPOs for these firms. The way it is raining IPOs, even for loss making businesses, the day may not be too far.

And while you can relish this megatrend as a consumer, investing in these firms will be a whole new ball game. And not a good experience we believe. The reason is these businesses are far from being profitable. And without profits, the ecommerce business model cannot be a long-term success. Their key argument so far has been gross merchandise value, which is a function of discounts, and can only work against profitability. So while you must continue to ride on this boom as a consumer, beware of being a stakeholder in these firms as a shareholder.

Data Source: Livemint *Includes Myntra and Jabong **Includes FreeCharge ***Amazon has already invested US$ 2 bn and promised to invest another US$ 3 bn in India

This Chart Of The Day was published in The 5 Minute WrapUp - The Art of Dividend Investing

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