Flipkart.com, the largest online retailer in India, is buying out Letsbuy.com, a specialised e-commerce site run by the two-and-a-half-year-old start-up eTree Marketing Pvt Ltd. The deal marks yet another consolidation move in a bustling e-commerce industry in India that has seen a string of sites folding up recently, even as many others are attracting hyper interest from venture capital and private equity investors.
“The acquisition is a combination of cash and equity, and the founders of Letsbuy, along with their 350-plus team, will continue to function independently with the added advantage of being able to access Flipkart’s superior technology platform and supply chain capabilities,” the company said.
Speaking about the acquisition, Flipkart co-founder and CEO Sachin Bansal said, “This acquisition fits into our strategy of building dominant shares in all categories where we operate. We are already leaders in the books and media verticals. Given that we managed to build a leadership position in consumer electronics as well since its launch in early 2011, it made sense for us to consolidate when we saw this opportunity. This acquisition opportunity came at a very attractive price and the timing had also been ideal. The synergies will now allow us to accelerate faster and get to a share similar to what we enjoy in the online books category.”
The exact terms of the deal are not announced but sources have confirmed to Techcircle.in that the deal value is around $20 million. This is much lower than the valuation commanded by other Indian e-com firms including Snapdeal which raised fresh funds few months ago at a valuation of around $200 million.
Flipkart had recently raised around $100-150 million from Accel Partners and Tiger Global in its fourth round of funding, part of which will be used to fund this acquisition.
The acquisition might have come as a surprise to many as the general consensus among the investor community was that Letsbuy.com was doing well. Earlier, in an interview with Techcircle.in, Kanwaljit Singh, co-founder & senior MD of Helion Venture Partners (the lead investor in Letsbuy) had said that it was one of the few companies in its portfolio emerging as the front-runners, but also clarified that it was still pretty early to comment.
“Letsbuy.com has grown 10 times in the past one year and that is a phenomenal growth story. Electronics is one of the biggest drivers in e-commerce space across the globe and Letsbuy.com has positioned itself as a specialist in that space,” Singh had said at that time.
So Why Would Letsbuy Sell Out?
For Letsbuy, it could just be a lifeline. A year ago, Letsbuy.com had received $6 million in venture capital (VC) funding from Helion Venture Partners, Accel Partners and Tiger Global in its first round of institutional funding (it received an undisclosed sum from angel investors in May 2010).
It was in talks to raise more funds but talks with a group of three investors, including Sequoia Capital and Matrix Partners, did not come to fruition.
At that time, Hitesh Dhingra, co-founder and chief executive officer of Letsbuy.com had said, “We are in advanced stages to raise money, but we can neither decline nor confirm the deal or the investors.”
But he has now claimed, “The company had the choice to raise a large round of funding as well. However, aligning our business with the largest player in the market made sense as the resultant synergies would guarantee our customers the best possible service, price and selection.”
Given the huge gap in valuation that the firm was eyeing till recently in its proposed second round of institutional funding and what Flipkart would be apparently paying to buy it, we might assume that the investors were the key reason behind the deal.
It is no coincidence that the two sites have common investors in Tiger Global and Accel Partners. Indeed, the investors could just be looking at consolidated play in the light of initial moves (See here and here) of Amazon, the world’s largest retailer in India.
Techcircle.in had hinted at the idea of Letsbuy’s integration with Flipkart around a year ago and also asked Letsbuy’s Dhingra regarding the same. Although he did not rule out the possibility outright, he had replied, “What excited them (the venture capital firms) was the opportunity in the industry. Letsbuy is focused on the digital lifestyle and gadgets, the largest selling category online after travel, whereas Flipkart is trying to offer everything.”
According to industry experts, electronics retailing is low-margin cash-guzzler, given the big ticket value of the products involved. In e-tailing, this means a requirement of anywhere between $40-60 million to sustain the business beyond one year.
Letsbuy was focused on one vertical that had to do with electronics alone. But as we noticed, the site had recently diversified from its core business with new sections on sports goods (even bow and arrow for archery and boxing gloves), toys and stationery. So it could be possible that Letsbuy was trying to evolve into a general e-commerce firm like Flipkart and required the cash to burn for the same, which did not come in.
Few weeks ago, in another M&A deal involving two companies backed by a common investor, online travel services company Yatra.com acquired Buzzintown, a website providing information on deals & events. Both the firms are backed by Intel Capital.
But Why Would Flipkart Need To Buy Letsbuy?
Flipkart is already the largest e-commerce site in India. So the question remains whether it really requires the customer connect of Letsbuy to boost its own business (through cross-selling on the site). It certainly cannot be about getting a customer base as this report shows that Letsbuy does not figure among the top 10 e-commerce sites visited by Indians.
What we notice in that report is that Samsung has ranked higher than Flipkart (although it doesn’t sell online) which decidedly shows the online user base in India tends to buy electronic products online.
Last but not the least, we come back to the common investors who could have been the driving factor for such a deal.
Being a single company, with two well-known online properties, could mean a lot for Flipkart. It would mean more competition for other e-commerce sites who are selling consumer electronics online – namely, Infibeam.com, Buytheprice.com, Futurebazaar.com by the Future Group, eBay India, Gadgetsguru.com, Indiaplaza.in and other offline retailers who are also scripting a large online play, as well as deal sites like Snapdeal and Koovs who are transitioning into general e-commerce sites.
An automatic fallout of the deal is the impact on the venture capital firms. Assuming that none of them is cashing out completely and the cash portion of the deal is only for the co-founders of Letsbuy, Tiger Global and Accel will raise their holding in Flipkart through the stock portion of the transaction. Helion will also become a shareholder in Flipkart.But, given that Letsbuy has been valued at just about $25 million as against close to $900 million for Flipkart, Accel and Tiger Global will just marginally up their holding in Flipkart while Helion may just get a small minority stake.