The curious case of Flipkart's valuation

Orson Welles' Citizen Kane is a Hollywood classic. It starts with the mystery surrounding the dying word--Rosebud--of the newspaper baron Charles Foster Kane, played by Welles himself, and then moves back and forth through the protagonist's life.

What does a 75-year-old movie made 9,000 miles away from Bangalore have to do with Indian startups and its poster boy Flipkart? Surely, nothing.

But the way commentators have lapped on to a bit of information about Flipkart's valuation, and quickly inferred a meaning out of it, there are some parallels with how the news reporter in Citizen Kane tried to find out who Rosebud was and started searching for possibly a secret flame of Kane's.

So the media at large can't be faulted for latching on to the disclosure last month by one of Flipkart's investors, a public markets fund under Morgan Stanley, about a drop in the company's valuation. But if one goes back to the same thread of disclosures, it seems there could be much less to read into it or at least not enough to infer decisively from it.

The most intriguing aspect of Morgan Stanley's disclosure to the US Securities and Exchange Commission (SEC) is the name of the firm mentioned as the portfolio firm -- Flipkart Online Services Pvt Ltd. In fact, Morgan Stanley never invested in Flipkart Online. This was the firm through which the e-commerce venture was previously run and had attracted the initial set of investors including Accel Partners and Tiger Global.

However, when the firm hit the big league with a $150-million deal led by South Africa's Naspers in 2012, the investments came into what became the new group holding firm, Flipkart Pvt Ltd, incorporated in Singapore.

Within a year, the group's business was overhauled and Flipkart Online became as good as a shell company. This was partly aimed at regulatory compliance as foreign investment was barred in e-commerce.

That's an entirely different story. But to cut a long story short, Flipkart Online had violated a norm that restricted foreign-funded wholesale trading firms from deriving more than a quarter of their turnover from front-end retail ventures operated by group companies.

When Morgan Stanley invested in October 2013, the real businesses had moved into other firms including WS Retail (representing what was earlier Flipkart's in-house vendor and now its single-largest vendor), Flipkart India Pvt Ltd and Flipkart Internet Pvt Ltd. Barring WS Retail, whose legal ownership was separated from Flipkart founders and its financial investors, all the other firms are directly or indirectly controlled by Flipkart Pvt Ltd, Singapore.

So Morgan Stanley's public fund naming Flipkart Online as an investee isn't as kosher as an SEC disclosure ought to be.

The second point is about the inconsistency related to the separate disclosures by the fund managed by Morgan Stanley, Naspers and the publicly reported $15 billion to $15.2 billion valuation of the firm after its last funding round.

As per the Morgan Stanley fund, its original investment of $13 million in October 2013 shot up six fold to $80.6 million by mid-2015. But Flipkart's valuation has risen at a much faster pace from $1.6 billion back then, based on Naspers disclosure, even after factoring in fresh equity infusion and an additional share issue during Myntra's acquisition.

This is not to suggest that Flipkart's valuation hasn't slid. But the publicly available data is not conclusive enough to proclaim so.

Going back to Orson Welles, there are a number of theories about how the name Rosebud figured in the Citizen Kane script. One popular trivia goes that it was the pet name given by a real newspaper baron of that time, William Hearst, to the nether regions of Hollywood celebrity Marion Davies, with whom he shared a close relationship outside marriage.

The movie, for those who haven't watched it, ends with the camera focused on a childhood sled used by Kane, which lies burning in the fireplace, with Rosebud being its brand name. But who knows, maybe as a child, Kane too had a liking for a girl whom he nicknamed Rosebud after his favourite sled. So possibly the reporter was not chasing a unicorn at all!

(Vivek Sinha is Executive Editor of VCCircle)