E-commerce in India to get major boost from VCs

by Darinia Khongwir    May 24, 2013

Online Shopping

Venture capitalists and private equity players are betting big on India’s e-Commerce. McKinsey estimated that by 2015, online retailers in India would have annual sales of up to $2 billion. Because of which, VC investors dished out close to $700 million into 50 e-commerce sites in the past three years.

According to Ernst & Young’s report titled Rebirth of e-Commerce in India, declining broadband subscription prices, aided by the launch of 3G services, have been driving this trend. “The trend of online shopping is set to see greater heights in coming years, not just because of India’s rising internet population, but also due to changes in the supporting ecosystem. Given these developments, venture capitalists and private equity players are taking keen interest in the sector. 2011 saw a total investment of US $305 million, which amply substantiates the growth trajectory of the industry,” says Milan Sheth, Partner & Technology Industry Leader, Ernst & Young India.  

Sub-segments of e-Commerce sector

The online retail segment has evolved and grown significantly over the past few years. Changing lifestyles of the country’s urban population have led many people relying on the internet for their shopping needs. “Cash-on-delivery has been one of the key growth drivers and is touted to have accounted for 50 to 80 percent of online retail sales. Players have adopted new business models including stock-and-sell, consignment and group buying. However, concerns surrounding inventory management, location of warehouses and in-house logistics capabilities are posing teething issues,” says Sheth.

Several VCs are investing in the e-commerce space because they feel this is the right time to invest in the space and do not want to miss out on its current wave of popularity. The sector would continue to receive funding from VC and PE players despite concerns relating to a valuation bubble. Early stage - focused PE players would invest a major part of their funds (40%) in internet-based companies by 2014–15.
-Milan Sheth, Partner & Technology Industry Leader, Ernst & Young India.

To improve margins, online travel players are diversifying their offerings to include hotel reservations, along with the regular ticketing services says the report. “To make the most of this move, players will need to develop new skill sets to manage challenges associated with a diverse supplier base, technological constraints, customer experience, authenticity of information and grievance redressal,” says Sheth.

Classifieds, the earliest entrant in the e-Commerce space in India, is undergoing a shift in operational model from vertical to horizontal offering. Players now offer a gamut of services ranging from buying/selling cars to finding domestic help/babysitter states the report.

Investments in e-Commerce

India’s e-Commerce sector attracted US $305 million (in 37 deals) from January 2011 to November 2011 (454 percent more than US $55 million raised from 12 deals in 2010). The bulk of the funds raised by players was used to expand market presence, build logistics and supply chain capabilities, and enhance technology platforms states the report.

Key challenges

According to the report, some of the key challenges include:

·         Cloud surrounding e-Commerce laws in India.

·         Low entry barriers leading to reduced competitive advantages.

·         Rapidly changing business models.

·         Restriction to urban areas, with the bulk of the business being restricted to cities.

·         Shortage of manpower.

·         Customer loyalty.

·         Supporting ecosystem and future.

To ensure that e-Commerce maintains the steam that it has gained in recent years, Government needs to focus on the regulatory front. Unlike many other countries, India still does not have dedicated e-Commerce laws.