Has E-commerce Really Fallen Out Of Favour With Investors?

The year 2011 was a watershed year for the (non-travel) e-commerce industry. The segment attracted more than $500 million of capital with close to 50 companies getting funded over the course of the year. The year 2012, on the other hand, began on an ominous note for the industry with news of fundraising processes of certain leading e-commerce players hitting a speed bump. The last two quarters of 2011 also witnessed a dramatic fall in valuations of Chinese Internet stocks. The flag bearers – Baidu, Renren, Sina Corp, DangDang, Youku and Sohu.com Inc – shed between 50-80 per cent of their market value in this period.

This has led to a distinct slowdown in momentum of new e-commerce investments since the start of this year. Media is abuzz with questions about whether the industry is bracing for consolidation or whether we will witness many more mortalities in this segment because companies may not be able to raise subsequent rounds of funding. The current situation in the e-commerce industry seems quite analogous to our country's expectations around the Indian cricket team – a player has a good run of form in one series and he gets hyped up as being the next captain in waiting. It doesn't take long for the same folks to write this player's epitaph if he suffers a temporary loss of form down the road.

It's time we wake up to the fact that the e-commerce journey is a marathon and celebrate the fact that the race has already been flagged off. The more pertinent questions doing the rounds today are: (a) Is risk capital still available for e-commerce ventures and (b) How critical is the issue of path to profitability for a venture to get funded.

Based on conversations we have had with investors in recent times, I believe capital is very much available for e-commerce ventures. The first three months of 2012 have witnessed eight e-commerce transaction closures with half of them being series A investments. New categories like home furnishings, lifestyle/beauty and community-focused marketplaces have been the pick of investors this year. The current market dynamics are also driving discussions more towards gross margins and contribution margins. Beyond COGS (cost of goods sold), issues being scrutinised closely include how returns are being managed, how the company is innovating to bring down shipping/packaging costs, how many inventory turns the company is managing to achieve, what the customer acquisition cost per transaction is and more importantly, if the Lifetime Value (LTV) of a customer to customer acquisition cost is trending towards a level that will help achieve profitability down the road. It isn't fair to say that these metrics were not being evaluated before. However, investors today expect entrepreneurs to demonstrate tangible traction on the ground of each of these metrics for them to open up their cheque books.

The big concern is whether an over-emphasis on profitability at such an early stage in the evolution of the industry will keep the much-needed capital away and severally dampen the industry's growth trajectory. While many folks criticise the level of capital invested in e-commerce companies in China, it is important to note that the industry there grew at a CAGR of 100 per cent during 2008-2011 and at a base which was more than 15 times the size of the Indian e-commerce industry today.

The drive towards focusing on fundamentals is healthy but one hopes for a whiff of fresh air that brings the excitement back into an industry that holds the promise of being the most significant economic story of this decade.

(The writer is executive director and head Digital Media & Technology, Avendus Capital.)