What can easily be regarded as the most valued startup in India, Flipkart has been in the news recently for consecutive markdowns in its value
Although Flipkart will remain as India’s most valuable internet company even after the markdowns, the development is likely to force the company on the defensive in its near future negotiations with investors to raise capital at its present valuation. Flipkart needs capital to maintain its top market share in India against the US-based Amazon and domestic rival Snapdeal.
The Story of Flipkart throws out an important lesson to all the budding entrepreneurs in India. It shows as to how sustenance of Growth is as important, if not more important than the Rapid Pace of Growth.
- It makes us realise the rapidity with which a company can be reduced in the perceived value and that a company cannot prosper on its valuation alone.
- Just because you were first to enter the market does not guarantee that your position remains at the Top. You may think yourself as the Greatest, but those who are latest even though late will eventually overtake.
- Ideas – Great innovative ideas may generate funding for a start up – But if the execution is not done with constant innovation as needed to withstand the competition, the Glory may become short lived.
I may be sounding a tad too critical but for a start up like Flipkart with all the backing that it received and the promising prospects which it projected, the current scenario doesn’t look that favourable.
With this Background, Let us now try to examine the issue in detail:
Flipkart, which competes with Amazon, Snapdeal and others in the domestic e-commerce market, had raised money at a valuation of over $15 billion last year.
In its second consecutive action, Morgan Stanley Mutual Fund Trust, an investor in the company, in May lowered its estimate of the valuation of Flipkart by 15.5 percent to $9.39 billion (Approx. Rs. 64,000 crores). At its peak valuation, Flipkart was once valued at over $15 billion (Approx. Rs. 1,00,000 crores).
These developments seem to indicate that some investors in the company believe it is worth closer to $9 billion today than the $15 billion it was valued at in 2015.
HUGE GROWTH POTENTIAL:
For any Business, Top line (Turnover) is not everything, Bottom-line (Profits) counts too. E-Commerce in India is expected to grow 100 times in the next few years and that is what drove the valuations of Flipkart and not its current turnover or the losses it is making, but the unbelievable growth potential.
When inquired about the markdowns, the Chairman of Flipkart said that E-commerce penetration in the country is very low with only 2 percent of the overall shopping happening online, while this is between 8 and 10 percent in markets like China and US. He also told that markdowns really don’t matter citing the case of Uber which managed to raise capital at a higher valuation despite the markdowns.
The Chairman also added that Flipkart does have money to hold off a year or two- it’s reportedly losing $600m a year, so its $1.5 billion in the bank can hold it till 2018. With every month that it burns more, its value actually goes down – as Amazon’s growth threatens its market leadership.
This implies that the company is on a bit of an edge. The founders and the investors don’t seem to be on the same page when it comes to the worth of the Company.
Cut throat competition:
The Fact remains that the E-Commerce firms are yet to show paths to profitability and are right now facing constant pressure from their investors and shareholders. Flipkart is also currently facing tough completion from Amazon and Snapdeal which are eating Flipkart’s market share.
It can also be observed from the industry trends that the boom of E-Commerce start ups is slowly balancing off as in correction in the valuations of internet companies with realistic estimates as close to the ground realities as possible. Venture capital firms too slowed up the pace late last year after a surge of investments heated up the valuations of Indian ecommerce companies despite dim visibility of profits. Flipkart’s management also witnessed quite a few rejigs in the past few months.
All said, it is still believed by the market experts that Flipkart is the best technologically equipped Indian company and it has the largest market share as on today with strong infrastructure which does give it an advantage to face the fierce competition in the E-commerce market.
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