Early-stage PE funding slows down in e-commerce sector

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Industry received funds to the tune of $326 million in 2012

Private equity investment in e-commerce has gained traction in the past few years due to the low start-up cost in the business and its ability to reach out to a wide customer base. In the recent times, however, early stage funding has been slowing down and PE firms are making subsequent rounds of funding in companies that are showing signs of survival.

PEVC investments in 2011 had made a leap of over 500 per cent to $346 million from $54 million in 2010. In 2012 also the sector received funds to the tune of $326 million. The number of deals also had gone up from nine to 38 in 2011, as per the data from research firm Venture Intelligence.

A recent study by Franchise India on the e-commerce sector in India finds that private equity firms do not want to miss out a growth opportunity in the sector, which has strong long-term fundamentals. “Digital infrastructure is poised to move a lot faster than the traditional retail infrastructure. Initial drivers are value-based commerce, but the long-term drivers are going to be access and convenience,” the study said.

However, in the highly competitive market, PE firms are chasing a few quality companies and this has been reflecting in the growing chunk of subsequent funding rounds.

In 2009, early stage funding accounted for 69 per cent of the total investments. This dropped to 29 per cent in 2011. In 2012, only 38 per cent were early stage investments.

Among the bigger deals in recent times, Flipkart raised $150 million in its fourth round funding from Iconiq Capital, Tiger Global and Accel Partners. Yatra Online also received $14 million in the fourth round funding. In 2011, it had raised $45 million. Despite the fact that most of the e-commerce companies have not yet started making profits, the valuations in the subsequent rounds of funding are going up to $100 million and $200 million.

International PE firms have been leading the pack of investors in the e-commerce space. Tiger Global, which has invested in Facebook and LinkedIn in the US, YouKo.com and Dang Dang in China and also a few portals in Russia and Latin America, has pumped in $82 million in Indian companies since 2009.

According to Franchise India study, big companies are likely to be acquired by global firms that wish to enter the market in the coming years. Online companies will also start going public in the coming decade.

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