Deal or Ordeal?

“They behaved like junkies on dope!” That’s how an investor describes 34-year-old Kunal Bahl and his best pal Rohit Bansal, the co-founders of Snapdeal, once a promising e-commerce player but now relegated to the sidelines in a hyper-competitive online retail world. At its peak valuation of over $6.5 billion in 2016, Snapdeal had all the strapping of a unicorn till it all fizzled out to today where it’s now turned into a unicorpse, a Silicon Valley term that describes a start-up whose valuation falls below $1 billion. Snapdeal, which attracted over $1.7 billion from investors, had everything going for it, till the co-founders blew it all up in the wild chase to take on the might of Flipkart and Amazon. 

Despite its travails, Snapdeal is still online and clocked a turnover of Rs.903 crore in FY17, but it is no longer a strong contender in the business. Though detailed financials of Snapdeal for FY17 are not available, it’s quite likely that it might have slipped deeper into the red. In fact, the loss figure for FY16 at Jasper Infotech, the holding company of Snapdeal, had more than doubled to Rs.3,316 crore, while revenues stood at Rs.1,457 crore. Call it hubris or aggression, riding on the back of a record $700-million SoftBank cash infusion the co-founders felt that they could leapfrog over rivals in the online retail race. Not to mention the fact that unlike the Bansals of Flipkart who cashed out much later, the Snapdeal co-founders also got to take money off the table very early in the game. “Even before the model could be proved if you let a young founder make money, unknowingly you have already killed his hunger,” says the earlier mentioned investor. Unlike Flipkart, which has found its calling in fashion and electronics, and Amazon with Prime, Snapdeal could never find its USP. In a bid to scale overnight, the co-founders ended up making a raft of acquisitions, which ended up as an albatross around Snapdeal’s neck (see: Far from a string of pearls). None of the deals added significant value with a majority being sold off as distressed assets. Neither did the company reply to Outlook Business’ email, nor did Bahl respond to calls or messages.

Last May, Snapdeal had signed a non-binding term agreement with Flipkart to explore a merger, prompted by their biggest shareholders, SoftBank and Tiger Global. But the $850-million deal fell through, prompting SoftBank to pull the plug on Jasper Infotech, the holding company of Snapdeal. “I still don’t know why despite being in control and board seats, the three big investors did not oust the co-founders,” says an investor, who made an early exit in Snapdeal. But analysts believe Flipkart wouldn’t have gained much from the deal. “Paying $900 million for a 5% market share isn’t a bad deal if you have a long-term vision. But the market share gains Flipkart would have made from this transaction have reduced for every month that the deal was in negotiation,” points out Aman Kumar, co-founder and chief business officer at KalaGato, a data analytics start-up in New Delhi (see: That shrinking feeling). While SoftBank continues to be a major shareholder, for all practical purposes it has written off the investment. Today, the notable investors are only Kalaari Capital and Nexus Venture Partners, the very first ones who bet on the co-founders when they were running Snapdeal as an online discount coupon business. Both Vani Kola of Kalaari Capital and Suvir Sujan of Nexus Venture Partners refused to comment for the story. In fact, Kola quit Snapdeal’s board in May 2017 and had stated in an interview: “I am extremely disappointed and shocked with the founders’ disregard for investors and employee interests. We were not aware of this decision [to call off the merger], it wasn’t discussed and did not receive our support. These actions harm the credibility of the nascent start-up ecosystem in India.” Today, bereft of deep-pocketed investors and a clear strategy, Snapdeal has lost the momentum that began with a bang, less than a decade back.

Fast and furious
Just like most enterprising start-up folks, Bahl and Bansal had spotted an opportunity in the offline coupons business by floating MoneySaver in 2007, and three years later went online with the business. It was at this point that IndoUS Venture Partners, Kalaari and Nexus came on board by pumping in an initial $12 million. The same year Bessemer Venture Partners invested $40 million. With a large merchant network, the duo took over the likes of Smile Group’s DealsAndYou and had a 70% share of the coupons market. It was around this time on a visit to China that the founders got taken in by the Alibaba wave and returned to India with a plan to pivot Snapdeal into a marketplace. The script played out well when in mid-2013 eBay along with Recruit Holdings, Intel Capital, ru-Net, Saama Capital and existing investors pumped in $50 million.

Come 2014, Snapdeal hit the fast lane with Nikesh Arora, SoftBank’s man on the ground in India, leading the Japanese VC fund’s massive $627-million infusion in Snapdeal. “The chemistry between the founders got going as Arora was a Punju (Punjabi) and a Delhiite which made things easier,” says a senior Snapdeal executive. The cash kept flowing when in 2015, Alibaba, Foxconn, and other investors participated in a $500-million round of funding. “Alibaba was, however, not happy that it didn’t get the same price as SoftBank. In fact, the global fallout of SoftBank over Jack Ma’s decision to spin off Ant Financial from Alibaba was one reason that the co-founders, under Arora’s influence, did not offer a preferential valuation to Alibaba,” says an investor who participated in the round.

Around the same time, Snapdeal in a bid to impress investors and show that it was ahead in the GMV (gross merchandise volume) game was selling just about anything — from tyres, to cement to flats. Besides, between mid-2014 to end 2015, the co-founders went on an acquisition spree. That’s when SoftBank asked the co-founders to get in a second rung of professionals to run the show. “There were just three board meetings in between that period and given that most investors were still trying to find their feet in what was a business on steroids, saw the co-founders pretty much calling the shots on the buyouts,” says an executive who had joined in a senior role. The first write-off happened late 2015 when it had to forgo Rs.500 crore of receivables. “The company had no transaction details or PAN numbers. Despite skiptracing there was nothing much that could be recovered,” says an executive who was part of the clean-up operation. The focus also shifted to the quality of retail GMV. While Myntra and PhonePe proved to be worthwhile buyouts for Flipkart, Snapdeal’s acquisition of FreeCharge and Exclusively proved to be its biggest flops. 

According to Satish Meena, senior forecast analyst at Forrester, “Myntra and Jabong are proving to be the biggest growth drivers for Flipkart.” It’s not without reason. Vasanth Kumar, executive director, Max Fashion India, which operates 200 stores in the country besides running an e-commerce portal, says, “Myntra was a first mover in its space and its positioning was also clear and the acquisition of a dedicated fashion portal helped Flipkart consolidate at the right time. Snapdeal was late to the party and the names [Doozton and Exclusively] that it acquired were too niche to make a difference.” In fact, Snapdeal’s investment in GoJavas too ended in a mess when forensic audit showed issues of misgovernance and poor reconciliation of financials. Snapdeal’s biggest bet, Rs.2,400 crore on FreeCharge, the largest online mobile recharge company, was sold at 90% markdown to Axis Bank. The co-founders wanted to replicate Alibaba’s success, which earns $20 billion a year from mobile recharges. However, Vishal Mehta, co-founder Infibeam, says, “The kind of customers a recharge player attracts makes it very difficult to cross sell.”

In all, Rs.4,000 crore was spent on acquisitions that went belly up. Arora’s sudden exit from SoftBank in mid-2016 only compounded Snapdeal’s problems. In May 2017, SoftBank marked down the value of its investment in Snapdeal by $1 billion, followed by eBay writing off $61 million. In July 2017, Snapdeal sold FreeCharge to Axis Bank for Rs.395 crore. “That visibility of cash gave the confidence to the co-founders that they need not toe the line for the merger with Flipkart,” says an investor. The following week after signing the deal with Axis, Snapdeal terminated talks with Flipkart stating that it will pursue an “independent path”, while SoftBank in a statement mentioned that “we respect the decision.” But before the merger was scrapped, according to an investor, Bahl had approached Masayoshi Son, who had made an offer that was hard for him to accept — Snapdeal would get money at a $2.7-billion valuation but the co-founders had to go. Before Tiger Global came on board for a merger with Flipkart, Son made Bahl another offer: a $300-million lifeline over six months, but that would come at $50 million a month — $30 million for Snapdeal, and Rs.20 million for FreeCharge. “But the condition was that the co-founders had to showcase their performance,” says an investor. But that obviously didn’t work out. The co-founders while laying off employees in February 2017 mentioned in an email: “We started doing too many things, and all of us starting with myself and Rohit, are to blame for it”; but they did not walk the talk. Unlike Flipkart, where Lee Fixel of Tiger Global got the co-founders to exit and brought in Kalyan Krishnamurthy, a professional as CEO, Snapdeal’s founding duo is still at the helm along with Nexus. Kalaari, which invested an estimated $19 million, sold $5 million worth of shares for $100 million in an early round. For the balance 8% stake, it is being reportedly offered $10 million and is the only early investor to have made a killing. Nexus, which has pumped in $45 million over multiple rounds, hasn’t liquidated its stake. That Nexus is aligned with the co-founders was evident when they both pumped in Rs.113 crore [Rs.17 crore by Bahl and Bansal] into the company last May. At peak valuation, Nexus’ stake was worth well over $500 million. Snapdeal and Nexus are mum on what the independent growth strategy 2.0 entails, but for now the odds are clearly stacked against Bahl and his team.

Final countdown
In a bid to bring in more customers, Snapdeal recently partnered with multiple banks to offer cashbacks and instant discounts, worth over Rs.100 crore, on digital payments over the next 12 months. The buyback and discounts will range up to 25% of the purchase. While the company is trying its best to woo buyers, data from Forrester and KalaGato show that Snapdeal is losing out to competition. According to Forrester, while Flipkart and Amazon continue to dominate, Paytm Mall, in which Chinese e-commerce giant Alibaba and its payment affiliate Ant Financial hold a majority stake, has now emerged as the third largest player. Launched in February 2017, Paytm Mall is modelled along the lines of China’s TMall, the largest business-to-consumer retail platform. Meena of Forrester, says, “Just like Snapdeal, Paytm Mall, too, is an asset-light model and has gained market share. While it continues to offer discounts and cashbacks, Paytm Mall is still not seen as a preferred e-commerce site by buyers,” feels Meena. Amit Sinha, COO, Paytm Mall, does not agree with the observation. “We have gained market share not because of Snapdeal’s decline as we are not competing as an e-tailer, rather it’s because we have been growing our market. Our business model is about leveraging the existing 15 million retail outlets in the country by bringing them on to our e-commerce platform. It’s an offline to online model.” Unlike other e-commerce players, Paytm Mall does not carry inventory and fulfilling customers’ orders is the responsibility of retailers and brands. Also, customers can shop both online as well as offline. In the offline mode, a customer can scan the QR code within a store and avail of discounts and cashbacks. “We currently have over 75,000 retailers on our platform and our target over the next one year is to onboard 300,000 retailers,” adds Sinha. According to reports, Snapdeal’s former investor, SoftBank, is now in talks with Paytm Mall to lead a fresh round of funding of Rs.3,000 crore.

While the online commerce market, according to Forrester, has grown more than three-fold from Rs.367 billion in CY14 to Rs.1,317 billion in CY17, its fashion and electronics that continue to dominate online retail sales. While on a standalone basis the market share of Flipkart and Amazon are neck and neck at 32% and 31%, respectively, on a consolidated basis, Flipkart trounces competition if one were to consolidate the numbers of Jabong and Myntra, which hold 5% and 2.5%, market share, respectively (see: The big bazaar). Kumar of KalaGato, believes it’s a losing proposition for Snapdeal. “In an industry where you are losing money per order, what matters is market share and if you see that momentum slowing down you know that something is not right.” Kumar’s observation is based on the fact that both in terms of market share and size of order value, Snapdeal is ceding ground. In fact, in terms of order value, Snapdeal’s average order value has fallen from a peak of Rs.3,860 (April 2017) to Rs.1,579 (December 2017) (see: Complete disorder). KalaGato, which means black cat in Spanish, analyses data covering over one million active smartphone users and as per available data, the number of customers uninstalling Snapdeal’s app is also on the rise, spiking to 7.4% as of December 2017 compared with 3-4% for Amazon and Flipkart (see: Uninstall mode). This is despite the fact that in some categories such as shoes, Snapdeal is selling products at deep discounts. But Kumar feels in a situation where buyers are deserting the platform, customers can turn wary of the product being sold. For example, a deeply discounted Nike shoe would be treated with suspicion.” Moving into newer categories such as furniture or grocery would also not be easy. “Today, each of these verticals has a market leader like Pepperfry, BigBasket, and other names, which are funded by deep-pocketed investors and Snapdeal can’t match them,” says a former investor. According to Rajiv Sharma of HSBC Securities, while Flipkart and Amazon are more focused in the branded and high average selling price space, the unbranded low ASP [average sales price] category is an opportunity but it needs scale. “Scale drives operating leverage and post-demonetisation the unbranded segment has suffered. This space is large but at present growth is a challenge and competitive intensity is high as multiple players are competing for the same pie,” mentions Sharma.

In an increasingly hyper-competitive online retail space and with falling metrics, it is unlikely that Snapdeal will attract any new investors. That leaves it with only one option — explore a strategic merger as the co-founders are reluctant to cede control. According to media reports, Infibeam had made a stock offer of $700 million last year, though its management then denied it. The Ahmedabad-based company, which enjoys a market cap of over Rs.7,800 crore, has two main businesses: web services under the technology platform BuildaBazaar, which includes the payments platform CCAvenue and a multi-category e-retail platform. A merger could bolster the company’s retail e-commerce business. Vishal Mehta, co-founder, Infibeam without commenting on whether he is pursuing a bid, says, “It’s no small feat to have millions of customers transact on your platform. If someone is going to make a bold online retail bet, it does matter. But it’s not just about valuation but what is the value of the consumer data and how much of that is monetisable.” Infibeam, has spent Rs.2,000 crore on four acquisitions in the past, with the biggest being CCAvenue. 

The other possible white knight could be a brick-and-mortar retail chain such as Future Group, which recently acquired Snapdeal’s logistics arm Vulcan Express for Rs.35 crore in an all-cash deal. The Kishore Biyani-led Future Retail had recently unveiled its digital initiative of acquiring new customers besides opening 10,000 stores by 2022. Biyani is looking at 20 million consumers per store and wants them to transact via Future Group’s wallet. Could Snapdeal then offer Biyani any heft? On how he looks at the opportunity in e-commerce, Biyani says, “The cost of business in e-commerce is crazy — customer acquisition cost is 20%, cost of fulfillment is 20%, cost of running a business (payment alone is 3%). How can any business survive with a cost of 45-50%? Personally, I don’t believe in running an e-commerce marketplace at this cost.”

At a time when the company is looking at increasing its same store sales growth and acquiring customers, analysts believe Snapdeal is not exactly an enticing proposition. Though Biyani is non-committal on whether he would buy Snapdeal or has been approached by them, he says. “We never thought about it,” but quips that if the valuation is compelling, “You never know, everything is open.”

But analysts believe that in the past Future has tried its hand at acquisitions but hasn’t been successful. “Biyani has so far not proved to be successful in the online space, even with acquisitions,” says Meena. That’s true considering that Future Group has entered and exited e-commerce thrice with Futurebazaar, BigBazaarDirect and FabFurnish. Kumar of KalaGato feels that even at 1/4th of a billion all that Biyani would get is user data. “Snapdeal does not even own the customer and nor does it have a backend,” says Kumar.

Whether a deal will happen quickly or not will also depend on how long the cash at Snapdeal will last. For now, insiders say, the company is clocking monthly sales of Rs.100-125 crore selling a mix of long-lead-low-cost items such as phone covers, curtains, cutlery, women’s ethnic wear in tier three and four cities. As per company filings, as on September 2017, Snapdeal had cash of Rs.222 crore, down from Rs.356 crore in March 2017, and, according to sources, the FreeCharge sale proceeds would have come in by the end of CY17. That means Snapdeal still has some breathing space. The coming festival season, though, will be a crucial one for all online retailers. Can Snapdeal splurge the way its peers will and if it does not, will it fade into oblivion? The answer to that will be clear before the year ends.