Is Flipkart a speeding train without brakes?

Flipkart raises $200 mn from PE investors,enough to survive another year

In market parlance it is called ‘averaging a losing position’.Private equity companies seem to have done the same in the case of Flipkart. 
 

India’s largest e-commerce company raised $200 million or around Rs 1,200 crore in its fifth round of funding. Reports say that the company had raised $150 million in 2012 at a valuation of around $850-900 million. This time around,the company raised $200 million at a valuation of $1.5 billion.
 

Since 2009,the company has raised funds starting from $1 million in 2009, $10 million in 2010, $20 million in 2011 and then the two bigger ones in subsequent years. Raising $381 million from five rounds in as many years, Filpkart’s business model is a money guzzler. Unfortunately, little money seems to be coming out at the other end.
 

The company’s promoters are aware and to some extent proud of the fact that they are making losses. In an interview given to Business Standard,after the latest round of fund raising the promoters said ‘Profitability is not a focus area….we can stop investing in one area and start making profits..’ They go on to add saying ‘… if one wants to focus on making profits quickly, then e-commerce is not the place for him…’

Flipkart, started in 2007 is still not profitable. The business clearly needs money to grow and the Bansals of Flipkart have managed to raise it through the only way possible, private equity. E-commerce currently is not a bankable business since it does not have any assets, thus leaving either private equity or the share markets as the only possible way of raising money.  

 

Having pumped in $181 million before this round, private equity investors put in more money in the hope of recovering the same someday. However, this was done only after Flipkart changed its business model from being an online retail to a marketplace model. In the marketplace model, Flipkart’s online platform and logistics is used by other vendors to sell their goods. 
 

The company was losing Rs 50 crore a month before it decided to change its business model, reduced staff and outsourced logistics functions. The company has shut down its Delhi office and its digital music download business. This however, is not enough. Flipkart continues to burn cash and needs more money to stay afloat and ahead of the race. 
 

But businesses are meant to make money, not burn them. We are witnessing the fall of the loss making airline sector which was touted as a sunrise sector not long back. Patience of private equity players in the E-commerce space will end someday unless the companies start posting reasonable profits. Being unlisted, companies like Flipkart can use power point presentations to justify valuations and raise money. The only way PEs will get their money back will be through listing and ultimately selling their shares in the market and not by way of dividends, at least not in the foreseeable future. 
 

Flipkart has set a target of touching $1 billion in revenue by 2015. Presently it is at the half way mark consuming around $381 million of risk capital. It is raising money in order to keep pace with the growth in revenue. Clearly the company will need more money to grow and meet its target. Tapping the markets is a possibility if private equity players get jittery over the business model. 
 

But the problem at the time of initial public offer will be two fold. One, the existing investors would like to sell their shares to the public thus reducing the company’s ability to garner funds for its own growth and second it will be difficult to play the same valuation game as it does with general investors. The company will have to show profits if it wants general public to invest, and if it does that it will be sacrificing growth, as claimed by its promoters themselves. In its current form, Flipkart is a speeding train without brakes.