India Awards: Venture Capital Deal of the Year – Snapdeal

Having brought in eBay as a financial and a strategic partner for its Series C round, online marketplace Snapdeal continues to invest in its technology with one eye on profitability and ultimately a US IPO

While a number of Indian e-commerce sites shut down under pressure from high operating costs, Snapdeal has secured its place among the leading players through a combination of new funding and strategic partnerships.

In its second year of operation as a marketplace, the company raised $50 million in a Series C round of funding and gained a strategic partner and lead investor in eBay. Snapdeal’s commercial partnership with the US e-commerce giant, which already has an India-specific online marketplace, will allow the two to cross promote products across their sites. If a product is not available on eBay India, customers will be directed to a Snapdeal listing of the item, and vice versa.

Intel Capital, Saama Capital, Russian VC ru-Net and Japan’s Recruit Holdings also participated in the round, as well as existing investors Bessemer Venture, Nexus Venture Partners and Kalaari Capital.

Growth potential

Saama made an early commitment in the round based on its confidence in the entrepreneurs, the business model and the potential market size.

“In the Indian market, we believe that the marketplace business model with zero inventory is the right way to grow,” says Ash Lilani, managing partner and co-founder of Saama. “It’s a much more efficient way to build a business and keep costs down while at the same time leverage the growth in the Indian market.”

According to a September 2013 report by Technopak Advisors, the Indian e-commerce market is worth $1 billion, or 0.2% of the overall retail market. It is projected to reach $56 billion (in real terms), and 6.5% of the retail market, by 2023.

Snapdeal has raised a total of $102 million in funding so far. Kalaari and Nexus committed $12 million to the company in January 2011, in its original avatar as a deals and coupon website. A second round came six months later, the two VC firms returning with another $40 million, this time supported by Bessemer.

“The vision at the time we invested was that the company needs to be a customer acquisition platform for small and medium-sized enterprises,” says Vani Kola, managing director at Kalaari. “They were underserved in terms of tools and technology in a fragmented retail sector and the demand-supply was very localized in services as well as products.”

The company then pivoted to establish itself as India’s biggest online marketplace, with a registered user base of about 20 million, offering about 4 million products across 500 categories, including apparel, toys, footwear and electronic products. It will make $500 million in topline in the current financial year and aspires to reach $1 billion in annual gross merchandise value by 2015.

Under the marketplace model, third-party suppliers and merchants, rather than the company itself, bear the cost of inventory and storage in selling products to shoppers. 

“When we started building out our business, we had the benefit of hindsight looking at the inventory-led companies – while they were growing fast, they were growing inefficiently with respect to the capital invested,” says Snapdeal CEO Kunal Bahl.

However, the marketplace is more complex because every supplier is holding a warehouse, in a manner of speaking. Snapdeal invested in technology to manage the logistics and, because many of its merchants were not online, provided training and tools so it could be used properly.

Initial difference in service compared to rival online retailers, such as longer delivery times of 5-7 days, have been smoothed over as the company scales up. After Amazon and Flipkart both rolled out their next-day delivery services for India late in 2013, Snapdeal came up with a similar option for its customers.

“If you look at what Kunal’s done and his cost of growth in terms of revenue growth, he’s been able to manage a steady percentage versus a lot of other companies that have overspent,” explains Lilani. “Cost as a percentage of revenue has gone up over the past year. With Snapdeal it has remained pretty consistent so it’s not like he’ s gone out and spent a lot of money to grow revenues, which is a good sign.”

Furthermore, the company has expanded product categories through acquisitions, buying designer and handicraft products seller and sports good retailer

Future plans

New investor Intel Capital has a range of long-standing corporate relationships that enabled Snapdeal to fulfill some specific requirements or opportunities such as employee purchase programs for goods, according to Mahesh Vaidya, a director at the VC unit.

The funding has also supported Snapdeal’s launch of its payment gateway, which will roll out for third-party developers as well.

In terms of growth, Kola’s estimate is that Snapdeal should be profitable in 12-18 months. “They are already profitable in terms of the contribution margin, because every transaction is profitable for them,” she says.

There are three components to the marketplace fee structure: a platform fee of 5-20% of transaction value, shipping charges and payment collection charges. If a company earns a certain fee level on all transactions, as sales grow so will the total amount of absolute money being made. The main cost becomes marketing.

“If we turn back the dial on marketing we can get profitable in one or two quarters,” Bahl says. “However, that is not the right decision for the company because if we don’t invest to grow the market, then we don’t grow in the long run either.”

Snapdeal is considering plans to list in the US now that Indian regulators allow companies to go public abroade without first listing on a domestic bourse.

Meanwhile, according to Kola, Snapdeal will continue to raise funding because there is tremendous interest in building the one stakeholding company that might be the lead marketplace in India. “In China you have Alibaba and there is an opportunity for something like that to happen in India,” she says.

Source: Asian Venture Capital Journal

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