 "E-tail market will be $90-100 billion in 5 to 6 years: Aashish Bhinde")
With deals like Ola’s acquisition of TaxiForSure and the sale of redBus to Ibibo to his credit, Aashish Bhinde, executive director at Avendus Capital, is the go-to man for technology startups seeking capital. He talks to Abhineet Kumar about consolidation in e-commerce and the next round of funding. Edited excerpts from the interview:
What are your estimates for the growth of the e-tail market?
In 2011, we had said the e-tail market in India would grow to $12 billion in revenue by 2016. This number is expected to be $9-10 billion in 2015, of the total $600 billion retail business in the country. That translates to a penetration level of 1.5 per cent. Also, almost everyone will have a smartphone in a year or two, which will ensure e-commerce penetration continues to grow.
E-tail is organised retail for India. In the US e-tail penetration is 15-16 per cent and we believe it will be higher than that here.
The Boston Consulting Group and the Retailers Association of India estimated the Indian retail market would grow to $1 trillion by 2020. If e-tail penetration increases to 8-10 per cent by then, the market will grow to be $90-100 billion in the next 5-6 years. This translates into a 10-11 times growth from current levels.
Private funding for these ventures seems to be slowing down...
This is not the first time investment momentum has slowed down. It happened in 2012-13, after fairly frenetic investments in 2011. Despite the slowdown then, the e-tail market continued to grow at a strong pace. We attribute this to the Theory of Inevitability: e-tailing has been solving fundamental problems of access and convenience across all markets globally where broadband and smartphone penetration has reached a certain critical mass. These problems are more acute in India where organised retail is less than 8 per cent, which makes it inevitable that these businesses will continue to grow strongly.
The pace of growth may moderate when capital is harder to come by, but over the medium to long term, the e-tailing market is poised to grow at an extremely robust pace.
Why is funding slowing down?
The funding environment has been extremely buoyant in the last 18 months and the pendulum has begun to swing to the other end. Once markets turn bearish, it takes a strong positive trigger to bring the positive sentiment back. In 2014, the listing of Alibaba and general recovery of listed Chinese internet stocks provided that trigger.
Even in a relatively bearish market like 2012-13, investments were concentrated in fewer companies that had either established leadership in their respective segments or were able to demonstrate a credible path to profitability. It felt like a slowdown because several companies that raised seed and Series-A funds found it difficult to raise follow-on money.
What are the other elements of e-commerce where significant growth is expected?
The internet is making an impact on every industry in India, be it financial services, logistics, education, automotive, healthcare, local services or real estate. We expect large and successful businesses to emerge from each of these industries although e-tail will be the largest segment because the underlying industry has the largest contribution to the GDP.
What is the capital required to achieve this growth for e-tail?
The total capital invested in e-tail in India is roughly $6 billion, excluding the capital invested by Amazon. For the industry to grow to a level where it can sustain itself through internal cash flows, our best estimate would be additional capital equal to at least two times the capital deployed till date.
Internet investments in the late 1990s were largely funded by public markets. This time they are funded by the private market. Why?
Before 2000 internet businesses that were looking to raise over $100 million typically approached the public capital markets for financing. After the dotcom bust, traditional investors in public markets, including retail investors, who had lost large amounts of capital became sceptical of businesses that were expected to lose cash over several years before they became profitable.
This was at odds with high-growth businesses that have the potential to scale at exponential rates by investing in developing the market. Facebook is a classic example of such a business that burnt through several hundreds of millions of dollars before it started churning out billions of dollars in profits. This gap in the market was plugged by what one can call late-stage VCs that emerged in the form of Tiger Global, DST and SoftBank.
The availability of private financing and the brutality of public markets for companies whose business models were evolving has led to private capital markets becoming the preferred route for high-growth technology businesses. Interestingly, even public market investors have started participating in the private fund-raising rounds of these businesses.
Indian conglomerates are entering e-tail. Do they have the mindset and chance to win?
The growth of digital commerce in India is a marathon that gives everyone the opportunity to participate in. Indian conglomerates definitely have the chance, though time will tell whether they had the mindset.
Investment banking for digital businesses is now concentrated on fund-raising. What about opportunities for M&As and public listing?
We expect M&As to accelerate over the next 12-24 months as companies come together to become clear leaders in their segments or consolidate and strengthen their investor base. In our view, a spate of public listings is still 2-3 years away because it will take businesses that long to become IPO-ready.
What are your estimates for the growth of the e-tail market?
In 2011, we had said the e-tail market in India would grow to $12 billion in revenue by 2016. This number is expected to be $9-10 billion in 2015, of the total $600 billion retail business in the country. That translates to a penetration level of 1.5 per cent. Also, almost everyone will have a smartphone in a year or two, which will ensure e-commerce penetration continues to grow.
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We have a deep conviction that e-tail penetration in India in the long run will be higher than that in developed markets such as the US, largely because India does not have significant offline organised retail.
E-tail is organised retail for India. In the US e-tail penetration is 15-16 per cent and we believe it will be higher than that here.
The Boston Consulting Group and the Retailers Association of India estimated the Indian retail market would grow to $1 trillion by 2020. If e-tail penetration increases to 8-10 per cent by then, the market will grow to be $90-100 billion in the next 5-6 years. This translates into a 10-11 times growth from current levels.
Private funding for these ventures seems to be slowing down...
This is not the first time investment momentum has slowed down. It happened in 2012-13, after fairly frenetic investments in 2011. Despite the slowdown then, the e-tail market continued to grow at a strong pace. We attribute this to the Theory of Inevitability: e-tailing has been solving fundamental problems of access and convenience across all markets globally where broadband and smartphone penetration has reached a certain critical mass. These problems are more acute in India where organised retail is less than 8 per cent, which makes it inevitable that these businesses will continue to grow strongly.
The pace of growth may moderate when capital is harder to come by, but over the medium to long term, the e-tailing market is poised to grow at an extremely robust pace.
Why is funding slowing down?
The funding environment has been extremely buoyant in the last 18 months and the pendulum has begun to swing to the other end. Once markets turn bearish, it takes a strong positive trigger to bring the positive sentiment back. In 2014, the listing of Alibaba and general recovery of listed Chinese internet stocks provided that trigger.
Even in a relatively bearish market like 2012-13, investments were concentrated in fewer companies that had either established leadership in their respective segments or were able to demonstrate a credible path to profitability. It felt like a slowdown because several companies that raised seed and Series-A funds found it difficult to raise follow-on money.
What are the other elements of e-commerce where significant growth is expected?
The internet is making an impact on every industry in India, be it financial services, logistics, education, automotive, healthcare, local services or real estate. We expect large and successful businesses to emerge from each of these industries although e-tail will be the largest segment because the underlying industry has the largest contribution to the GDP.
What is the capital required to achieve this growth for e-tail?
The total capital invested in e-tail in India is roughly $6 billion, excluding the capital invested by Amazon. For the industry to grow to a level where it can sustain itself through internal cash flows, our best estimate would be additional capital equal to at least two times the capital deployed till date.
Internet investments in the late 1990s were largely funded by public markets. This time they are funded by the private market. Why?
Before 2000 internet businesses that were looking to raise over $100 million typically approached the public capital markets for financing. After the dotcom bust, traditional investors in public markets, including retail investors, who had lost large amounts of capital became sceptical of businesses that were expected to lose cash over several years before they became profitable.
This was at odds with high-growth businesses that have the potential to scale at exponential rates by investing in developing the market. Facebook is a classic example of such a business that burnt through several hundreds of millions of dollars before it started churning out billions of dollars in profits. This gap in the market was plugged by what one can call late-stage VCs that emerged in the form of Tiger Global, DST and SoftBank.
The availability of private financing and the brutality of public markets for companies whose business models were evolving has led to private capital markets becoming the preferred route for high-growth technology businesses. Interestingly, even public market investors have started participating in the private fund-raising rounds of these businesses.
Indian conglomerates are entering e-tail. Do they have the mindset and chance to win?
The growth of digital commerce in India is a marathon that gives everyone the opportunity to participate in. Indian conglomerates definitely have the chance, though time will tell whether they had the mindset.
Investment banking for digital businesses is now concentrated on fund-raising. What about opportunities for M&As and public listing?
We expect M&As to accelerate over the next 12-24 months as companies come together to become clear leaders in their segments or consolidate and strengthen their investor base. In our view, a spate of public listings is still 2-3 years away because it will take businesses that long to become IPO-ready.