Can Flipkart Deliver?
Image: Namas Bhojani for Forbes India
et’s put it this way. Sachin Bansal and Binny Bansal have audacity and balls.
If you think of these as virtues, what you get are friends who grew up together, studied at the prestigious Indian Institute of Technology, Delhi (IIT-D), are now around 30, and in five years built Flipkart, India’s largest e-commerce company.
This financial year, they expect to show investors Rs 2,500 crore in revenues, a 400 percent growth over last year’s numbers. They sell 17,500 items each day—or 6.5 million items annually. Nearly 5,000 people, including contractors, work for them. Their closest competitors make do with 700-800 people.
But if you’re the kind who think of audacity and balls as the foundation on which hubris and foolhardiness are built, then Sachin and Binny Bansal’s Flipkart begins to look like an entity skating on thin ice. What lends credence to this view is that it is shared by General Atlantic Partners, the world’s 12th largest private equity firm with over $17 billion in investments.
The view was cemented late last year when Sachin and Binny travelled to New York with a single point agenda: Convince General Atlantic Partners’ investment committee to invest $150-200 million into Flipkart at an overall valuation of somewhere between $750 million to $1 billion.
After three rounds of meetings with multiple committees, including ones with Martin Escobari, a managing director at the firm specialising in online commerce, and William Ford, the CEO, they all declined. Why? They couldn’t understand all of Flipkart’s accounting strategies or its numbers. How much, for instance, was it using shareholder’s equity to fund operating losses? Just what was the true cost of ‘returns’ for the company?
More importantly, they figured that at the pace at which Flipkart was building Infrastructure and adding people, it would need at least $2 billion in annual sales to just break even. Getting to that number, they argued, would take an awfully long time given where Flipkart was back then.
Though it remains unstated, Flipkart’s goal is to be the Amazon of India. But that may be a chimera. Amazon relied on the funds from its 1997 initial public offering (IPO) to tide through the aftermath of the dotcom crash that took out most of its rivals. Without competition, it could afford to lose money on building infrastructure. It would take $2.8 billion in losses over six years before it declared its first quarterly profit in January 2002.
When faced with these posers, Sachin and Binny didn’t have answers. They took the flight back home to Delhi. Disappointed, they had no option but to go back to their existing investors: Tiger Global, their long time sugar daddy, and Accel Partners.
Hedge fund Tiger Global and Accel too had been looking forward to the deal, because that would significantly increase the value of their own Flipkart stakes.
Sources say even the term sheet the Bansals carried with them to New York was drafted by Tiger Global. Now that Sachin and Binny were on the back foot, they were told Flipkart was, at best, worth not more than $500-600 million. And that $100 million was the best Tiger Global and Accel could put on the table right now.
Flipkart refused to comment on any of its investment deals or discussions.
When Flipkart was founded in 2007, it was on the back of a fanatical promise. Whatever be the cost, delight customers. Starting with books, a market it upended in little time, Flipkart started to offer CDs & DVDs, mobile phones, consumer electronics and more recently, healthcare and beauty products. Their fanaticism won over two million sceptical Indians.
To get them to Flipkart, though, the Bansals invested venture capital funds into infrastructure that could support customer service, last mile delivery, warehousing and technology. They spoilt their customers silly by offering them the option to pay cash on delivery (CoD) if they didn’t have credit cards or were uncomfortable using them online, heavily discounted prices, free delivery and later, no-questions-asked returns.
It was a model they’d imported from their multiple visits to China, a country which they thought had problems similar to India: Large population, poor transportation, low penetration of modern retail, unreliable third-party logistics and few credit card transactions. Chinese e-commerce vendors had gotten around the problem by creating infrastructure around each problem.
Flipkart thought that was the way to go. Instead, they were gobsmacked by even worse ones. With CoD, cash flows are controlled by courier companies. It takes weeks to reconcile accounts and they charge fat fees as well. To get around this, the Bansals started their own courier firm.
But as the division grew, they realised efficiencies could come only if deliveries from warehouses were streamlined. But to do that, inventories ought to be in stock. Meanwhile, thanks to CoD, fickle customers often changed their minds at the time of delivery, in turn leading to growing returns.
That posed an altogether unexpected question. How do you fund the delivery and logistics business? The solution: Flipkart Logistics, an initiative that started off as a pilot in December 2010 to handle the company’s in-house orders, but would grow over time to become a platform that could offer warehousing, packaging, delivery and CoD to any company for a fee. (Flipkart denies it was ever a consideration).
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