Flipkart has finally pushed itself back into the game. Reportedly, the homegrown ecommerce poster boy has raised $1 Bn at a valuation of $10 Bn from undisclosed investors. Also, by the end of 2017, the Bansal duo is also looking to raise another $1 Bn.

In a bid to strengthen its market position, Flipkart was in talks with investors from past many months to raise an additional $1.5 Bn at a $10 Bn – $12 Bn valuation. As per reports, it was also in talks with Microsoft Corp., eBay Inc., PayPal Holdings Inc.,Tencent Holdings, as well as Google Capital for the ongoing round.

The company went through a severely rough patch since December 2015 -valuation markdowns, product shutdowns, leadership shuffles and much more. Let’s take a deeper look on what went wrong, and how Flipkart pulled itself through with this massive funding round.

What’s Going On With Flipkart?

Struggling to raise funds, increase in losses, and failed strategies – are the three major issues for the homegrown unicorn. The continuous devaluations, to an extent, indicate dwindling investor confidence, thereby, adding to Flipkart’s troubles in fundraising at a decent valuation.

Although the company had raised a small amount, $38.7 Mn (INR 260 Cr) from the media giant, Bennett, Coleman and Co. Ltd (BCCL) in February 2017.  No other major investment has been pumped into the company, since the $700 Mn round in July 2015 at $15 Bn valuation.

As shown in the table above, Flipkart saw a golden period starting from August 2012, when investors extensively fuelled up the company coffers.

In particular, July 2015 was the time when a lot was talked about the company’s profitability, achieving positive unit economics, and great leadership. With promises to generate $10 Bn GMV, investors gave it a 1.5X multiple, thereby valuing the company at $15 Bn.

But it seems that the startup pundits spoke too soon, as Flipkart’s winning streak gradually came to a halt. It began in August 2014, Flipkart was penalised for $150 Mn (INR 1,000 Cr) as the Enforcement Directorate found it guilty of violating FEMA provisions. In December 2014, Flipkart’s warehouse in Ghaziabad was raided by the Commercial Taxes Department of Uttar Pradesh and a penalty of $21K (INR 13.8 Lakhs) was slapped for non-compliance with the rules related to importing of goods.

For 2014, the GMV countdown stopped at $4 Bn and soon failed expansion strategies – such as the shutdown of Flyte Digital Music Store and PayZippy; closure of its ebooks category; criticism on issues such as the failure of the Big Billion Day sale in October 2014; mass protest over net neutrality etc. – started adding to Flipkart’s woes.

Again, in January 2015,  the IT department imposed a penalty of $3.5 Mn (INR 23.51 Cr) on the online retailer for irregularities in its operations and on account of fake documents and bogus listed trade partners. Also, according to an official confirmation, Flipkart shut down two of its private labels -Flippd and Citron.

In 2016 alone, Flipkart shut down four of its products/services, launched in previous years. This includes DigiFlip, Image Search Feature, Ping, and Nearbuy.

Here is the complete list of Flipkart’s product/category/service launched and shut down:

Dwindling Investor Confidence With Rising Losses

Despite considerable effort such as category expansion, new services launch, seller enablement, and focussed logistics, Flipkart has not been able to make investors happy on the financial front. Though, initially, they trusted the business model and continued investing even through the increasing loss graph enabling the company to set growth as its priority.

For instance, in FY 2013-14, Flipkart raced ahead of its competitors on all fronts – GMV, revenue as well as losses. As per a VCCircle report, Flipkart was losing INR 2.23 for every INR 1 in net revenues. In contrast, Snapdeal and Amazon were just under the INR 2 mark for every INR 1 in net revenue.

In 2013, Flipkart raised a Series E round of $360 Mn in two tranches and added new investors including Morgan Stanley Investment Management, Sofina and Vulcan Capital, and Dragoneer Investment Group. After the fundraise, Sachin Bansal, then CEO of Flipkart, also stated that the issue of profitability is not a priority for them. As he said,

“We can be profitable today if we choose to be. But for us, the key issue is not profitability but growth. It’s a long-term game.”

In FY 2014-15, the company generated $115.9 Mn (INR 772.5 Cr) revenue, against $164.5 Mn (INR 1,096 Cr) loss. This was the year when it raised three major rounds – $210 Mn Series F, $1 Bn Series G, and $700 Mn Series H, raising its valuation to $15 Bn.

Despite pulling in over $3.15 Bn, it couldn’t attain profitability, and positive unit economics was not achieved. 

This led investors to take their first tough decision. In December 2015, Morgan Stanley slashed down the value of its shares by 27%. Morgan Stanley first invested in the ecommerce marketplace when it raised $160 Mn, in October 2013.

Probably, there’s no quarter post-December 2015, when the company has not faced investor lashings in the form of valuation markdowns.

And now, at the start of 2017, Flipkart has added to its account three more markdowns, each from – Morgan Stanley, Penn Series Fund, and Optimum Fundmaking it a total of 18 devaluations, to date.

The most recent one came from Penn Series Funds, part of the 170-year-old Penn Mutual Life Insurance Company. The fund reduced the value of Flipkart shares by 34.51% on Y-o-Y basis, for the quarter ended December 2016.

As per Regulatory filings with the US Securities and Exchange Commission (SEC), Flipkart’s share value has been reduced to $93.15 per share in December 2016, from $96.29 per share in September 2016, by Penn. It is a 3.25% decrease in value.

Penn had invested in Flipkart’s A, C, E, G, H funding rounds and currently holds 7,206 shares in the company.

Earlier this week, Macquarie Group’s Optimum Fund, also reduced Flipkart’s valuation by about 3.6% for the quarter ending December 2016, as compared to the previous quarter, and valued the company at $9.95 Bn.

As per Regulatory filings with SEC, Flipkart’s share value has been reduced to $93.15 per share in December 2016, from $96.29 per share, in September 2016. The fund has marked down its valuation by over 31% on Y-o-Y basis from its highest level of $135.12 apiece in the quarter-end December 2015.

Optimum Fund had invested in Flipkart’s Series A, C, E, G and H funding rounds and currently holds 18,850 shares.

One Year, 18 Devaluations And More

Amongst all investors, to date, Morgan Stanley’s devaluations have been the most jarring. Last week, it marked down the Indian startup poster boy’s valuation to an all-time low of $5.37 Bn, lowering the share value to $50.51 per share, as of December 2016, from $52.13 per share in September 2016.

This was the fifth successive markdown by Morgan Stanley. The first markdown came in December 2015, when Flipkart was valued at over $15 Bn.

Here is the complete list of Flipkart devaluations.

It won’t be an exaggeration to say that the continuous devaluations have been difficult for Flipkart founders. The duo is now out of the Hurun Global Rich-Indian billionaires list, and the recent devaluations have also come at a time when two major foreign players – Alibaba and Amazon – are strengthening their war chests to grab the majority market share.

The first devaluation by Morgan Stanley not only came as a warning for the ecommerce poster boy, it was also an eye-opener. It led the founders to think about revising their execution strategies and boosting their leadership team.

Further devaluations led to a drive of terror in the Flipkart camp, with growing penetration of Amazon and threats from hidden dragon Alibaba. This led Flipkart to join forces with another homegrown player Ola to raise the flag of nationalism to appeal for rescue from its ‘situation.’ Reportedly, Flipkart’s Sachin Bansal and Ola’s Bhavish Aggarwal urged the government to design policies to favour homegrown companies and help them battle with foreign players, such as Amazon and Uber.

Not only this, earlier in October 2016, Sachin also revealed his intentions to create a lobby group for local consumer Internet startups, with an aim to form a trade association that will solely fight for local companies such as Flipkart and Ola with the government for favourable laws.

Rethinking Strategies

Taking their cue from earlier mistakes, Flipkart started mending the gaps, leading to a fall in revenues and downfall of the brand. Here  are a few of them:

Technical Glitches Sorted To Have A Great Big Billion Day Sale

After the failure of its 2014 Big Billion Day Sale, the sale concept was revised in terms of technical glitches. Also, the founders sent an email to all their consumers apologising for the inconvenience. Flipkart completed the second edition of the sale in 2015 with a business turnover of $300 Mn in gross merchandise volume. In 2015, it sold 150 Mn products, a 150% growth over the last year, added more categories, set up off-line distribution stores and increased delivery presence in smaller towns across India.

Increased Focus On Gaining Consumer Trust

In order to encourage consumers to invest in the brand and increase their engagement – services such as Flipkart assured, Fliptech, HobbyHub and more were introduced in March 2016. Also, in order to align with the growing mobile payment ecosystem, Flipkart Money (now PhonePe) was launched in March 2016.

Launched New Look Website – Termed As ‘Web App’

In August 2016, Flipkart launched a new look website termed as a ‘web-app.’ The feature was rolled keeping in mind users’ shopping patterns and was aimed at tapping into a multi-platform user experience where one shifts from the app to the website in the process of finalising the purchase.

Investment In Logistics

In November 2015, the company announced to pump in $2 Bn in beefing up its logistics network. One of the largest automated warehouses was inaugurated in Telangana, spread over 2.2 lakh sq. ft. and holds a storage capacity of 5.89 lakh cubic ft. As stated officially, it has the capacity to create over 17,000 direct and indirect employment opportunities within the area and is expected to ship out 120,000 items every day.

‘Private Label’ Attempted Again

After shutting down its three private labels Citron, Flippd and Digiflip –  Flipkart again attempted to launch a new private label in the electronics category under an umbrella brand called Flipkart Smart Buy, in December 2016. The move was said to be directed towards pushing the revenues of the company. This was in line with its earlier private label launches – Citron in home appliances and personal healthcare category, Digiflip in consumer electronics, and Flippd in apparels.

Made Acquisition And Acqui-hires A Key Part Of Growing Strategy

In a bid to clamp down on the competition, Flipkart also acquired two of its major competitors – fashion etailer Myntra in May 2014 and ecommerce platform Jabong in June 2016 (via its subsidiary Myntra). While Myntra’s acquisition was more of an initiative by the investors on board, acquiring Jabong turned out to be an unbelievable deal for Flipkart.

A company that was valued at $1.2 Bn just two years before was sold at a measly $70 Mn – and Flipkart stole the prize under the noses of competitors such as Alibaba, Amazon, Snapdeal, Aditya Birla Group and Future Group. The two acquisitions worked towards fending off competition on the fashion ecommerce front and contributed major firing power in Flipkart’s’ arsenal in its ongoing and brutal ecommerce war.

Also, several other acquisitions were made in order to strengthen its digital, mobile-first strategies. Here is a complete list of the same.

Rethinking Leadership: Unexpected Reshuffle In Organisation Structure

Step Down Of Founders 

Flipkart also went through a major reshuffle in its organisation structure at the start of 2016. In January 2016, Sachin Bansal stepped down from his position as CEO, citing lack of performance and was replaced by Binny Bansal. The move occurred as the result of a downfall in Flipkart’s sales when Sachin Bansal decided to focus on an ‘app-only’ strategy. This drove Flipkart’s potential desktop customers to other platforms. They attempted to rectify the mistake by launching a revamped website called the web-app.

Mass Layoffs

In line with the above decision came another – the lay-off of 700-1000 underperforming employees, when it faced a downfall in its valuation by Morgan Stanley, T. Rowe and others, in July 2016. Flipkart also curbed its discount pricing and placed a cap on salary increments, with an aim to bring down its monthly burn rate to $40 Mn from $80 Mn-$100 Mn in the first half of 2016.

The Appointment Of An Outsider As CEO

The most shocking move, though, was the appointment of an outsider – Kalyan Krishnamurthy as the company CEO. Kalyan Krishnamurthy, who was earlier a part of one of Flipkart’s major investors, Tiger Global, and, at the time of appointment, heading the Category Design Organisation, became the new CEO of Flipkart in January 2017. Kalyan had rejoined Flipkart as Head of Category Management in June 2016, to lead preparations for the flagship sales event (Big Billion Day) in 2016. The move was said to have come at the behest of Tiger Global Management, one of their biggest backers since inception.

Despite all these initiatives, investor confidence plummeted continuously as losses doubled to $346 Mn (INR 2,306 Cr) against a revenue of $293 Mn (INR 1,952 Cr) in FY 2015-16. And, post-Morgan Stanley’s first devaluation, it almost became a trend for an investor to devalue Flipkart’s shares almost every quarter.

Striving To Find New Opportunities, Recovering From Losses

The 2016 festive season saw Amazon, Flipkart, Snapdeal, and Shopclues battling head-to-head to emerge as the winner. Flipkart emerged as the eventual winner, claiming to have sold 15.5 Mn units, majorly high ticket value items like electronics and mobiles. It reportedly sold over half a million products within one hour of the opening of the sale on Day 1.

For the year ended March 2016, Flipkart reportedly clocked in revenuess of about $2.68 Bn and incurred a loss of $863 Mn.

The company also announced the formation of a new Flipkart Group Organisation, to be headed by Binny. The organisation aims to create a future value through a portfolio of new, high-growth businesses, manage capital allocation across group companies, and ensure each business has a strong CEO in place.

These are some wins that still place the ecommerce major in contention. Regardless of its apparent reversal of fortunes, Flipkart is continuously striving to find new opportunities and recover from losses.

It recently partnered with Microsoft, just a fortnight ago, wherein the ecommerce biggie promised to adopt Microsoft Azure as its exclusive public cloud platform. In addition, Flipkart suspended its logistics arm – Ekart’s customer-to-customer (C2C) courier operations, earlier this month. Ekart has also ceased its hyperlocal delivery services in Bengaluru that were launched in November 2016.

Flipkart has also reduced its marketplace fees for sellers. In addition, the company has reduced forward-shipping fees by at least 10% and the fixed fees it charges merchants for selling on the platform by more than 30%. These changes will bring down the overall cost of doing business through Flipkart by about INR 30 per unit (of 500 gms shipped in the same zone or state), on an average.

Moreover, in a recent interview with ET, Binny Bansal also stated, “We will be getting into the fiscal year 2018 with a growth tailwind. By March 2017, the company will have cut its burn rate by 50%.” Also, while giving his take on how Flipkart is planning to fend off competition with players like Alibaba and Amazon, Kalyan Krishnamurthy, in an interview with Mint, stated,

“Others’ aggression is of no consequence as innovation is the real aggression. Throwing away money will not make someone win.”

Clearly, the leaders are determined to stay in the market with an aggressive growing strategy as their metric to retain success on a long-term basis. While some believe that it’s not fair play to compete against those who can pour billions without losing anything, others also mark that India is a free economy and there’s equal opportunity for all.

Conclusion

Flipkart began as a dream of two entrepreneurs to sell books online, at a time when this phenomenon was barely making a stride in India. Its growth too was unprecedented and unexpected, but its success made headlines nationwide. In a way, credit needs to be given to companies like Flipkart for igniting the startup ecosystem and the entrepreneurial bug in like-minded youths. But, while we may count the roses, we also have to look at the facts.

And the facts are these:

Flipkart has been in business for 10 years. There is no measure or yardstick to judge the true worth of entrepreneurial success save the confidence it has inspired – among its peers, in the sector, the public and, not least of all, its employees.

While 2015 was the year of investors being overly generous, investing on meteoric (maybe undeserved) valuations, 2016 was a reality check. For investors, for ecommerce, and most especially, for Flipkart. A valuation tumbledown from $15 Bn to $5.37 Bn is a harsh blow to absorb. But as Shyam Kamadolli, Venture Partner with Fidelity’s VC/PE fund in the US, in an unofficial Medium post with reference to Fidelity’s US unicorn markdowns states: “… Markdowns are likely an artefact of traditional portfolio valuation reporting methods rather than a logical outcome of the bubble popping. The widespread misinterpretation may actually cause the popping of the bubble rather than presage it.”

He also talks of ‘decrease in value of comparables,’ ‘fund manager’s lower estimations as conservatism peeps in’ and a ‘material change in its operating performance’ as possible causes for the investors losing faith and continuously devaluing a once-promising investment. Of course, Kamadolli is not referring to Flipkart in this instance, but his valid points do reinstate the worldwide phenomenon of investors’ marking down once-promising companies to a fraction of their worth.

In the case of our homegrown unicorn, is Flipkart alone to blame for the same? That is a question for the ages. Right now, all that can be said is that, with Kalyan Krishnamurthy at the helm of Flipkart’s future, faith is slowly being restored in the company. However, Alibaba’s $200 Mn infusion in Paytm’s ecommerce arm is bound to affect existing players – Flipkart, Snapdeal, and the other global contender, Amazon.

While Amazon is pumping in millions into its Indian businesses, Snapdeal has its own share of troubles (layoffs, vendor appeals), and Paytm looks to diversify into the Payments Bank space – will the real Flipkart be able to keep up or will it be left on the sidelines of this great Indian ecommerce gold rush?

Updated on: March 24, 2017, at 11:25 am: The conclusion of the story has been reworded to more accurately reflect expert Shyam Kamadolli’s views regarding markdowns in the US and the world, in general. 

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