Will Alibaba’s woes rub off on Indian e-commerce?
The funding boom in India of the past 20 months was at least partly driven by the success of Alibaba’s initial public offering (IPO), which was the largest ever share sale and valued the company at more than $230 billion. It spurred hope that India, the next big online retail market after China, could also produce valuable e-commerce companies. Eager investors pumped more than $8 billion into Indian start-ups. Tech investors in the US, Europe and Asia, who either missed out on Alibaba’s IPO or were enriched by it, queued up to invest in India’s e-commerce companies.
It’s a different matter that, time and again, investors and companies attracted by comparisons of India’s consumption potential with that of China’s market reality have inevitably been disappointed.
Now that question marks have emerged over Alibaba’s perpetual motion engine, venture capital (VC) firms and other investors said they will be more cautious on late-stage deals in India, conduct stricter due diligence and demand higher transparency and disclosure from current and potential portfolio companies.
Since Alibaba went public last September, the company’s market value has plunged to less than $160 billion from a peak of more than $250 billion. In an article published earlier this month, Barron’s, a US-based financial weekly, predicted Alibaba’s stock may fall by up to 50% and criticized the company’s accounting and corporate governance and said its claims of high user numbers and spending were inflated.
Alibaba fired back and said the Barron’s article contains “factual inaccuracies and selective use of information, and the conclusions (it) draws are misleading”.
Whatever happens to the Alibaba stock, e-commerce investors are already turning cautious on emerging markets, especially India.
“Clearly, the sheen has been taken off (Alibaba’s IPO); the IPO was a major event in the funding boom of the past year or so,” said an investor in Flipkart, speaking on condition of anonymity. “In India, late-stage valuations are already showing signs of plateauing and it’s clear they will not increase with the ease they did in the past year. Now, when new investors are evaluating Indian companies, they are doing more due diligence and asking about structures and corporate governance because they’re seeing the scrutiny Alibaba is being subjected to. These kinds of questions weren’t asked with such seriousness earlier.”
Executives at five other venture capital firms confirmed that they were doing this.
There are some close connections between Alibaba and India’s e-commerce business.
SoftBank, Tiger Global and DST Global, all three of which are currently writing the largest cheques for Indian e-commerce firms, backed Alibaba. Another shareholder in Alibaba, Temasek Holdings Pte. Ltd, which is Singapore’s state-run investment firm, is an investor in Indian e-commerce as well as a limited partner (LP) in some VCs. LPs put their money into VCs, which in turn back start-ups.
Japan’s SoftBank, in particular, has taken a direct hit from the drop in Alibaba shares as it owns roughly a third of the Chinese company. Alibaba itself is an investor in Snapdeal (owned by Jasper Infotech Pvt Ltd) and its affiliate Ant Financial backs One97 Communications Ltd-owned Paytm.
These linkages pose a threat to the funding rush into Indian start-ups that is already showing signs of ebbing as profits and viable business models still elude e-commerce companies, Mint reported on 24 August . Alibaba’s declining stock price played some part in the slight but sure shift in investor perception toward Indian start-ups and any further hit to Alibaba’s image may make a funding slowdown worse, investors said.
LPs are already asking VCs to go slower on deals because of the controversy surrounding Alibaba, a prolific early stage investor said on condition of anonymity.
There will be some negative impact on valuations, particularly for late-stage companies because of the controversy surrounding Alibaba, but that is not a “bad thing”, said Amit Anand, managing partner at Singapore-based VC firm Jungle Ventures.
“Such a correction is healthy and it will eventually build confidence among investors. While some fly-by-night investors will exit or avoid India because of the Alibaba impact, people who are serious about investing in India will continue to put in money because of the massive potential,” Anand said.
Shrutika Verma in New Delhi contributed to this story.