E-COMMERCE : INVESTMENT AND M&A ACTIVITY MAY 2013

Allegro Corporate Finance Advisors Pvt Ltd

Deepak Srinath

Aravind G.R

Srikrishna Swaminathan

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E-Commerce VC investment summary

53 E-Commerce companies have raised ~ USD 853 Mn in Venture Capital over the past 3 years*

*Excluding Seed and Angel funding and un-reported deals until May 2013 **Jabong and other Rocket Internet backed firms are not included in this report as investment data has not been disclosed

Horizontal USD 458 Mn

Total Investment USD 853 Mn

Others USD 164 Mn

Apparel USD 231 Mn

USD 191 Mn

across 53 firms

USD 245 Mn - 11 firms

53 firms raised USD 191 Mn

Series A

11 firms raised

USD 245 Mn

Series B

Series C,D

10 firms raised

417 Mn

•  11 Horizontal e-retailers (multi category) have garnered ~USD 458 Mn (over half the amount invested in the sector)

•  20 Apparel & Accessories firms have been funded to the tune of USD 231 Mn

•  5 Baby Products focused firms have raised USD 41 Mn cumulatively

•  Daily deals portals raised USD 25 Mn ; however, most of them have pivoted, shut down or merged with horizontal e-retailers

•  14 other niche category players have raised about USD 98 Mn

•  Of the 53 firms who raised Series A, only 11 companies have managed to raise further rounds **

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E-Commerce PE/VC investments by category

School  Products  

Home  Décor  

Jewellery  

Health  &  Beauty  

Groceries  

Miscellaneous  

Daily  Deals  

Baby  &  Kids  wear  

Apparel  -­‐  Private  Label  

Apparel  &  Accessories  

Horizontal    

Num

ber

of In

vest

men

ts

Qua

ntum

of

Inve

stm

ents

in U

SD M

n

11

17

3

5

3

5

2

2

2

2

1

458

189

42

41

25

23

12

24

30

8

1

4

E-Commerce exposure of VC funds

•  49 Venture Funds and Institutional Investors have

invested in 53 ecommerce companies over various

rounds

•  11 investors have invested in 3 or more

companies, with estimated exposure of $40 - $50

Mn per fund

•  18 investors have more than 1 E-Commerce

investment

1

1

2

2

2

2

3

3

3

4

4

4

6

6

6

8

10

ebay

Unilazer

Matrix

Nokia

Qualcomm

Naspers

Sequoia

Lightspeed

Intel

SAIF

NVP

Nexus

Kalaari

IDG

Helion

Tiger Global

Accel

More funds

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2011-12 – Pivoting to survive

Continuing Original Model

- 75%

Niche, 4

Home Appliances and Electronics, 4

Apparel - Niche, 3

Daily Deals, 2

Pivots - 25%

Horizontal 8 Companies

Apparel & Accessories

5 Companies

Pivots into

75% Venture funded ecommerce companies in India are continuing with their original model. However, anecdotally the ones who pivoted seem to be doing much better.

Companies have pivoted mainly:

• To offer more choices and a bigger basket to the current user base

• To increase the ARPU & Lifetime value of an acquired customer

• To add segments which (a) Are complimentary (b) Offer better margins (c) Make strategic sense

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E-Commerce investment activity in 2013 (Jan-May): Incumbent Investors putting more money into select portfolio firms

•  9 follow on investments in 2013 (Jan-May) with a cumulative value of USD 155 Mn

•  Key deals:

–  Nexus and Bessemer, along with new investors eBay and Recruit Co’s invested USD 30-50 Mn in Snapdeal

–  Helion’s follow on investment of USD 12 Mn in the Babyoye & Hoopos merged entity

–  SAIF Partners follow-on investment of USD 10 Mn in the Zovi & Inkfruit.com merged entity

–  Tiger Global’s follow-on round of USD 15 Mn in Caratlane

–  Intel Capital and Sequoia Capital’s investment of USD 14 Mn Series B in Healthkart

–  Norwest Venture Partners’ investment of USD 8 Mn Series B in Pepperfry

–  Unilazer & IDG’s investment of USD 10 Mn Series B in Valyoo (Lenskart)

•  There were no fresh Series A investments in this period

•  There is a rising trend of investment into merged entities, which will drive more such similar mergers in the sector

Investor Company

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E-Commerce M&A Activity

•  In CY2012 the key M&A deals were horizontal E-Commerce players acquiring category firms

•  In 2013 the emerging trend is Tier-2 players merging and raising funds to compete effectively against leaders

•  M&A activity in the sector has largely been investor driven, especially when firms have the same investors

•  Majority of these M&A’s are cashless stock deals and similar deals are expected in the short term

2

4

7

3

CY 2010

CY 2011

CY 2012

CY 2013

Target Acquirer

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Evolving E-Commerce market structure

Inventory led Managed Marketplace Vendor led Marketplace Offline Brands

•  Indian E-Commerce market is at a similar stage to China 5 years ago

•  Horizontal players are adding third party sellers (marketplace) for certain categories to capture the long tail of vendors and reduce inventory holding costs, similar to Amazon’s blended model

•  Flipkart & Jabong have added third party sellers on their platform. We expect horizontal players to generate a significant share of their business from marketplace models in the future

•  Inventory costs, reconciliation & returns make inventory led retailing a difficult proposition

•  Generating demand for products and connecting sellers directly to buyers is less expensive; however, marketplaces need to address trust issues and control the buying experience & fulfillment process

•  Offline brands tapping the online market will be a significant growth driver

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E-Commerce industry evolution in China

•  Marketplaces dominate the China market, with companies like Taobao (Alibaba Group), PaiPai (Tencent Group). Large B2C players are Tmall.com,360buy.com, Suning.com and Amazon.cn

•  Ecommerce buyers have increased from ~40 Mn in 2007 to more than 242 Mn now, which is 75 Mn more than US, 6x the number in UK, more than 2x of Japan

•  China E-Commerce market is expected to surpass the US market this year with size of USD 265 Bn and surpass US, UK, France and Germany combined by 2020 reaching USD 650 Bn in size

•  Key drivers for growth are the burgeoning middle class and increase in internet penetration from 16% in 2007 to ~42% currently

China E-Commerce market projections in USD Bn

Data Source : China E-Commerce research from MGI and Li&Fung

7 17 33 64 102 142 185 224 255 2 5

11 25 47

79

120

170

-

100

200

300

400

500

CY 2007 CY 2008 CY 2009 CY 2010 CY 2011 CY 2012 CY 2013 CY 2014 CY 2015

Marketplace Inventory led

10

0.2 0.6 1.8 4.3

8.4

1.1 2.2

3.4

4.3

4.5

- 2.0 4.0 6.0 8.0

10.0 12.0 14.0

CY 2012 CY 2013 CY 2014 CY 2015 CY 2016

Marketplace Inventory led

E-Commerce industry evolution in India

•  By 2016 we expect the Indian E-Commerce market to touch USD 13 Bn, with significant contribution from Marketplaces and Offline brands

•  Market-place models will level the playing field by allowing the long tail of suppliers/ manufacturers from Tier II/III cities to service national demand

•  There will be significant rise in offline brands tapping the online channel through own e-Commerce sites and on marketplaces

India E-Commerce market projections in USD Bn

Data Source : Allegro Research and expert/industry estimates

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Short/Medium-term trends shaping the Indian e-commerce landscape

•  Demand centers will expand beyond Metro/ Tier I cities to Tier II/III cities and beyond

•  Offline brands & OEMs increasingly focusing on online channel

•  New categories like auto parts, pharma, groceries will develop

Emergence of new categories and markets

•  Cost of customer acquisition continues to remain high and profitability remains elusive

•  E-Commerce players will move to outsourced logistics and fulfillment services, as self-logistics will remain unviable

•  Of the 53 VC funded companies, it is unlikely that more than 15 will survive as independent entities by 2014

Economics will remain challenging

•  Inventory holding costs will continue to put pressure on margins; horizontal players are adding third-party sellers on to the platform to transfer the inventory holding burden

•  We expect horizontal players to generate significant business from marketplace model in the future

•  Local retailers/manufacturers will use market-places to tap into new demand channel

•  Pure play marketplaces need to work hard on controlling the buying & fulfillment experience and address trust issues of first time online buyers

Emergence of marketplace model

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Funding and Exit Outlook

•  Now that the land grab is over, Series B and follow on rounds will continue to be a challenge for most E-Commerce Companies except category leaders and the big 3 or 4 horizontal players

•  Series A funding for e-commerce will be virtually non existent for the next 12 months; however, E-Commerce services companies in logistics, payments, front-end technology, etc may see some investments

•  The FDI & regulatory overhang still continues; however, a marketplace is technically not ‘retailing’ as per law and this seems to have prompted some of the ‘pivots’ to marketplace model

•  For cash strapped E-Commerce companies, venture debt is proving to be an option for bridge funding despite stringent loan terms. Snapdeal, Myntra, FirstCry, etc have raised debt from SVB

•  We expect to see a few more consolidation of portfolio companies in the next 6 months

•  Possibility of Flipkart or Homeshop18 doing an IPO in the next 12-18 months; but unlikely to be more than 2 or 3 IPO’s in the space in the foreseeable future.

•  Listings likely to be outside India, since they cannot match the continuous profitability criteria for listing in India

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Contact Information

Deepak Srinath, Bangalore

•  deepak.srinath@allegroadvisors.com •  Director, Digital Media Practice

Aravind G.R, Bangalore

•  aravind.gr@allegroadvisors.com •  Digital Media Practice

Srikrishna Swaminathan, Bangalore

•  srikrishna.swaminathan@allegroadvisors.com •  Digital Media Practice