"Profitability on the horizon for e-commerce companies"

Profitability in the ecommerce companies seems to be on the horizon, with several of them reaching break even this year - this is what Alok Mittal and Rahul Khanna, managing directors, Canaan Partners said, while spelling out on the state of ecommerce and Canaan's key investment themes. While the cost of acquisition of a customer has fallen to sub Rs 1,000 across categories - many players already at almost half at Rs 500 - Gross Margins for e-com companies now range from 20 to 25%.

The general trend that Alok Mittal and Rahul Khanna evinced was while the overall ecommerce market has become largely overcrowded, Marketplace models are accelerating and e-commerce is witnessing higher scalability due to capital efficiency. Maintaining customer experience however remains a challenge...

With $3.4 bn under management and more than 91 acquisitions and 54 IPOs to date, current technology investments include Blurb, Kabam, Lending Club, Performance Marketing Brands, SOASTA, Tremor Video and Zoosk in the US; BharatMatrimony and UnitedLex in India; and PrimeSense and LiveU in Israel. Canaan maintains a presence in the global innovation hubs of Silicon Valley, New York City, India and Israel.

Prior to joining the venture industry, Alok co-founded JobsAhead.com, a leading web based recruitment business, which was acquired by Monster.com, the global leader in online recruitment. He also brings strong telecom experience to Canaan having worked for Hughes Software Systems prior to that. Dataquest caught up with Mittal to get insights into various aspects of the current ecommerce scenario in India. Excerpts-

What are the trends emerging in the e-commerce industry?
People are now spending a lot of time on the internet and are now more comfortable pulling out their credit cards and buying things from the internet. This maturity is developing fast and this is very positive. So we are looking at businesses that can ride on that.

The e-commerce business is one of those kinds of businesses. Largely the attention of ecommerce has been around product selling, but there are other models which we're looking at such as selling services.

A lot of this growth in the usage of the internet is coming from mobile phones which include the mobile web browser and apps. This is becoming the new interface and we are looking at companies that can leverage this interface. However on the mobile phones, the propensity of the customers to pay is still very low and we are hoping that this increases dramatically in the next 12-18 months.

Taking a leaf out of the e-commerce industry in the US, how should entrepreneurs weave their way around in the Indian market?

Internet is one of the areas where global comparables have been most relevant. From a business model standpoint, there is a lot to learn, not just from the US market but also from a market like China. I would encourage entrepreneurs to look at the global examples and see the challenges that they face and how some of those can be same or different than India. Equally important is to realize that at an execution level, many of these businesses are very different than what their global counterparts look like. We were investors in Match.com which is a dating site in the US, and BharatMatrimony.com doesn't work like how Match.com used to work because marriage is a different space and people want far more trust. Hence for several reasons execution is very different. Entrepreneurs should concentrate on building something that works in India rather than relatively blindly borrowing a model from the other markets.

 

A lot of e-commerce entrepreneurs say that India is a low-trust economy. What is your take?
If you take the product selling bit 6 years ago there was zero trust. Today the trust level is higher hence people are buying clothes, mobile phones, etc, off the internet. Hopefully in another 3 years the trust will be even higher than what it is today, but that'll only happen if current suppliers build on that trust. Though I feel the trust factor has progressed pretty well so far.

How difficult or easy is it going to be for the e-commerce business to sustain a particular model? We just saw that Flipkart has switched from an inventory to a marketplace model.
The problems players face of switching to a new model that is better are actually good problems because they have proven out the first model and now they are moving to a model that they believe is more capable. For instance 5 years back if they were thinking about building a $100 mn business, today they have the opportunity to think about how to build a billion-dollar business. I believe moving to a new model is a positive notion.

Having said that, the product selling space is still relatively crowded. On this ground, horizontally, there are about 10 players in the country that are well capitalized. Clearly, a market of India's size is not going to afford 10 winners. There will be competition and there will be companies that succeed and fail.

From a venture standpoint, that's part of our business. We usually never land up in a situation where there are no competitors in the market. From an entrepreneur's standpoint I'm sure each of those 10 entrepreneurs will want their respective businesses to be successful and will do whatever it takes. I'm extremely optimistic about this market and I believe this category will end up generating revenues for both the entrepreneurs and the investors.

How soon or late would this be? What do you foresee in the next 10 years?
10 years is a long time and I think that the timeframe for some of these companies to deliver will be much shorter. With respect to both scale and competitive situation and ultimately investor return I think it should be 2-3 years. I don't think 10 years is the right framework to look at this.

Funding as such is a risky business. How do you cover yourself?
We are equity investors, so on a company by company basis we carry the risk of investment but we don't invest in just one company and if we can get 4-5 of them to scale up and become large companies and generate investor returns then as a portfolio our risk is managed.

Now even getting 5 out of the 13 companies to scale up and then exit is a challenge and that's the kind of challenge in our business. So far we have felt positive towards the Indian market to generate investor returns.