Sunday, May 13, 2018

Flipkart - Walmart deal: What Snapdeal lost, and lessons for entrepreneurs

The market is all buzzing with the Walmart Flipkart deal that happened last week. And why shouldn't it be, at $16bn USD, this is the biggest acquisition deal to have happened in India ever. The fact that the fortune #1 company is involved in it, investing in the e-commerce sector that it couldn't crack on its own, in an emerging economy like India, is only going to help the investor sentiment for Indian companies in general. But I am not writing this post to cover this deal - there is enough coverage out there already.

Note: Back of paper calculations follow, with lot of hindsight knowledge.

As I was reading through the news, I couldn't help wonder that Flipkart's valuation has almost doubled from $11.6bn in July 2017 to $22bn in less than an year. And how Snapdeal has missed the proverbial bus, spectacularly.

Here is a breakup of all funding raised by Snapdeal (all figures in USD):
$12M Nexus Venture, Indo-US (Kalaari) Venture Partners
$45M Bessemer and existing
$50M eBay and existing
$75M Softbank
$133M eBay, Kalaari Capital, Nexus Venture, Bessemer, Intel Capital and Saama Capital
$105M BlackRock, Temasek Holdings, Premji Invest and others
$647M Softbank
$500M Alibaba, Foxconn and SoftBank
$200M Ontario Teachers' Pension Plan
$17.5M (INR 113 crore) Nexus Venture
Total: $1.8 billion USD overall

Once valued at $6.5Bn, Snapdeal had been offered a USD $950M payout by Flipkart in June 2017. If Snapdeal had agreed, Flipkart could be having a better cumulative market share at around 45% compared to the 34% it has currently (at that time, Flipkart + Snapdeal stood at 37+14 % respectively). It would also have a wider reach amongst sellers, at least at around 300K vs the 100K it is believed to have currently. Snapdeal was a pure marketplace play, and it alone had 300K sellers. Finally, Snapdeal wouldn't have needed to sell FreeCharge, UniCommerce, and Vulcan Express to keep itself financially afloat. Without the sale at a steep discount of USD $60M from the purchase price of USD $400M, Freecharge would have been a readily available platform to complement UPI based PhonePe.

Given that Walmart's deal would have included private valuations of Myntra and Jabong as well within the final numbers, its anyone's guess how having Snapdeal in the clutch would have led the investors getting an even better valuation for the Flipkart group of companies. Even with a doubling up of valuation that already happened, Snapdeal's potential value would stand at ~ USD $1.8Bn today.

My optimistic guess is that the deal would have happened at a USD $25-26bn valuation if Snapdeal was also included, since having Snapdeal in kitty would have made Flipkart the market leader by a huge margin (compared to just the 5-7% lead it has right now over Amazon), with a stronger seller base, giving an ~2.3 multiplier.

In terms of the personal fortunes made, the founders of Snapdeal were reported to be making ~INR 250 Crore at the time of deal, having already made ~150 crore from previous stake sale. The Walmart deal would have meant that within an year of stay at Flipkart, they would be getting double the value they were initially receiving. Given Walmart is not keen on retaining non - core founders (Sachin Bansal to exit), it could have been an easy way out for Snapdeal founders as well. Employees of Snapdeal wouldn't have needed to be laid off, since Flipkart would have retained most of them.

Finally, the investors would stand to exactly recover the base investments they made in Snapdeal. Investors after all, like everyone else, want good return on their money. Snapdeal founders deciding at the last minute to kill the deal didn't really help anyone, probably except themselves. Its funny to see that a stake projected worth USD $450M is now being sold for INR 40 Crore, at almost 1/60th of the price when it could have been a very different story for the first investors who put their trust and money in you.

While Snapdeal isn't dead yet - it actually reported an increase in number of transactions - to me, there are 3 important lessons here for all entrepreneur's to remember:
  1. Never underestimate the deal making abilities of a Power Investor, in this case, Softbank (PowerInvestor:Investing::10XProgrammer:Coding)
  2. Good things happen to those who wait. Shortsightedness can (literally) prove costly in the startup world
  3. While coming on top at the first position is best, a position at the pedestal is still worth more than being an also-ran.
PS: I'm an ex Amazon techie, but wasn't high up in the food chain to know any of the sensitive market penetration details or strategies involved. All the content is my opinion alone, and builds from publicly available information.

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