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September 30, 2015

Why Flipkart & Snapdeal Can't IPO and Why the Chinese are Invading the Indian Internet Market

The latest $700 million funding for Flipkart got announced not in the form of press releases as on previous occasions, but through leaks and confirmations. Also, the new round does not seem to have attracted any new investors. The closure of rival Snapdeal's $500 million round is reported to have been protracted over mismatch in valuation expectations.

Why the seeming nervousness among investors over India's two E-Commerce poster children?

Is it the crash of Alibaba's stock price in recent months? Or something else?

Media executive-turned-Private Equity investor Haresh Chawla has some answers in his new post at Founding Fuel. Extracts:

On why an IPO is impractical for Flipkart, SnapDeal
Most listed Unicorns in the West eventually trade at earning multiples that range between 40 and 60 times their earnings. Listed Indian internet companies like Naukri, Justdial and Makemytrip trade at similar multiples....Flipkart, now eight years old, to justify its $15 billion valuation should have generated about $300 million after tax this year.  
..So far they have been more ambitious than others and have been able to convince investors they will build value in the future. It seems their idea of innovation is to acquire teams and then hope to integrate them into their larger enterprise. But we are yet to see a single one of those experiments work successfully. Their ability to retain founders post acquisition remains dismal as well. And logistics infrastructure is no longer a source of competitive advantage. The acute pressure to innovate starts now.
Chinese firms as the only potential buyers
They are live examples of how the holding-company model works. Between Baidu, Tencent, Alibaba and a few other players, they control a significant chunk of the Chinese online market. They have seen success in “controlling” large chunks of an ecosystem. They believe they can force network-effects into unrelated businesses. They know an assault on Silicon Valley is difficult and Europe is too small. That leaves India as their next beachhead. They will want these Indian Unicorns. (As I write this piece, Ola, another Indian unicorn, raised money from Chinese strategic investor Didi Kuaidi. The Chinese invasion has begun.)
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