I read with great interest the 'breaking story' of letsbuy.com getting acquired by flipkart.com.
This development is in complete sync with my article on Vulture Commerce and many others (links at the end of the story).
This is what I believe, happened behind the scenes:
First the Basics:
Let's go with the report that letsbuy.com did raise 6 million dollars of funding from Tiger and Accel as Series A.
Any decent Series A round valuation dilutes the promoters by at least 30%.
So, 6 million dollars in Series A made letsbuy.com worth 20 million dollars.
Hmmm... feeling a bit charitable? Ok! Let's say that letsbuy.com at the end of Series A was worth 25 million dollars.
Time and Burn
If letsbuy.com raised the money even a year back, and given the massive amounts of burns required to survive in the e-Commerce space in India, it would be safe to assume that the Company was nearly out of cash or had a few weeks or months of cash left.
In fact, this is exactly what Sudhir Syal had told me two weeks back, at the WAT Conference (that letsbuy.com had very little cash left).
Now, this is true for ANY Internet business. Cashburn runways for a business may last for a 1 year max (if you are burning).
Most Internet businesses do burn because they are growing. So there is nothing to be frowned upon on that.
They assumedly raised 150 million dollars at a 850 million dollar (post or pre) valuation. That means post money valuation is say 1 billion dollars.
Now, the last financier is hoping to sell the business for at least 2-3 billion dollars if any reasonable returns* have to be earned.
* 2-3 X in the case of Tiger would actually translate into a a much bigger IRR, since Tiger has been investing in flipkart.com from the early stages, so its net cost per share of flipkart is so cheap, it can afford to fund the last round at high valuations.
Now the deal:
Imagine you are Tiger Global. You have the biggest bet of your investment portfolio in India on flipkart.com.
That Company has to exit and exit big.
Now, while flipkart.com is scaling and doing its best (and let's not deny, a great job), some silly e-Commerce cowboys have begun riding on horses they cannot manage, and have started publicly falling down and making a fool of themselves.
What do I mean?
Imagine the situation:
No one invests in letsbuy.com for Series B (as per the reports, they were struggling to get funded for many months).
They collapse - have a fire/distress sale!
The entire stack of cards of the Indian e-Commerce story comes falling down! Investors are alarmed. Valuations (always a function of sentiment) tumble hard...
Who gets most affected???
So, the marriage proposal:
Let's play a Marwari groom!
I am sitting on a great business like flipkart.com and have made a massive impact on the social behaviour of how Indians buy online. I am a case study in every Business School in the world.
I am the No. 1 brand in India. I get a fab PR story every other day.
I have received enough in funding from my father (VCs) to make myself very very marriageable.
In my dreams, I hope that one day, a Rich Girl's Father (acquirer) will come calling on the best groom in India - that is me - and propose marriage of his daughter, in return for lots and lots and lots of Dahej -Dowry (acquisition price) for the same!
Wow! This is what life is supposed to be all about!
Suddenly, a marriage broker calls me and tells that some silly, drunk and homeless girl is about to commit suicide and the only way to rescue her, is that I marry her...!
So, please say yes?!
What do you think I will say?
I will say - Get lost!
I mean, Flipkart doesn't need letsbuy.com.
Like it doesn't need so many other e-Commerce sites on the brink of failing!
Who wants the pain of marrying two Start Up cultures?!
Imagine trying to get headstrong co-founders of competing businesses together!
Who would want to buy an identical business that is barely 1 year old (and hence not at all that mature in processes and standards etc, etc.) and then spend precious time and energy figuring out how to reduce parallel costs; who to fire etc, etc?
What's the need to do so?
If I were Flipkart and a distressed deal like letsbuy.com came to me, I would say, let them die.
After they collapsed and went away, I would simply hire their people. Rent out their godowns. Switch their suppliers to my network.
Advertise, 'Missing letsbuy.com? Don't go the cemetery - come to flipkart.com'
Acquisitions (usually) happen when two great value propositions come together. Not for other reasons.
On the other hand, vultures feast on the dead. But Start Ups like Flipkart are not vultures! They are growing scaling businesses that are chalking their own path!
What happened in this case?
The common investors must have really figured out that 'adopting' this girl, rather than letting her commit suicide, was the better bet!
Look at the deal:
If Flipkart is worth 1 billion dollars (850 mn + 150 mn) = 1 billion, and the letsbuy.com deal was done for 30 million, then that's barely 3% of Flipkart shares!!!!
Obviously this is a shares swap deal, with the promise that the next few months' salaries of letsbuy.com will be paid. Now, think about it ... if you were the letsbuy.com promoters - why would you wash yourselves out like this?
If you are selling your Company at par value, that means that that after ratcheting and adjustment for liquidation preferences, you will get nothing!
Also, can they work under 2 other co-promoters? Can they take orders from the Bansals?
Note - For the VCs who have common equity in letsbuy.com and flipkart.com, it's a minor adjustment of equity positions. For the VCs who were not invested in flipkart.com but in letsbuy.com, this is a nice way of earning some small esop quanity of shares in Flipkart!
If Flipkart sells for 3 billion, then in effect, the letsbuy.com promoters will 'have' sold for 90 million US dollars!! Wow!! Such an amazing promise in the skies!
As Flipkart, if I have to spend 3% of my equity to make the e-Commerce bubble in India still look holy, I just might (or rather did) take the bait.
In short - this is a marriage made in hell.
My question is, how many other marriages with suicidal women will flipkart.com, or for that matter, any other healthy business Start Up manage to consumate???
Heavy duty thanks to Asha for some speed editing!!
Essential reading :
8 reasons why the e-Commerce balloon in India will burst:
The threat of Junglee.com:
The Case of Vulture Capital in India:
How stupid some e-Commerce sites can be:
I was surprised to read this morning about the letsbuy acquisition.
Good to read your point of view on the deal.
What you have mentioned here is very interesting and looks like lot of people in Indian E-Com space panicking coz of the Junglee entry.
Waiting for more news to trickle in on this matter.
Did they actually need to buy letsbuy? Specially when when a large number of products on both the sites fall in the same category. Will they eventually merge such categories?
Awesomely Conveyed and Explained!! Bansals should have talked to you before taking this step and saved themselves the kind of penury they are now in.
By saying ""Lets buy"" to letsbuy.com, I hope Flipcart.com havent ""Flipped their own cart""!!
Just want to know at what stage VCs start dictating the founders & company. How can founders smartly manage voting rights throughout the life of the company (the 5,6 funding rounds).
Also, is voting share = share of the company you hold?
Very well written, Alok! I also felt that the buyout was primarily to ensure that flipkart is the only acquisition target for Amazon
What is surprising is that Flipkart with 500 Cr of annual sales is being valued at USD 1 billion, while lets buy with annual sale of 150 Cr (1/3 of flipkart) is being valued at 25 mn USD ( 1/30th of flipkart) and both by the same VC!
Amit ,its about brand value..most people knows about flipkart but very few knows about letsbuy.com and also letsbuy is cash strapped and going to die soon like Alok pointed out.So,valuations were made accordingly :D
Alok, Very aptly analyzed. I just hope Flipkart guys have not read this or will not read this as customers will be reaching out to them for unfulfilled orders.
You can keep scrolling and will know about the amount of Bad experiences people had with LetsBuy.com
In one of the review I read a person ordered Wireless Router and got a Casserole delivered :-)
Amazing world of e-commerce!!
Wonder how many ecommerce plans were sold to VC's based on an amazon exit....
My 2 cents...
there is far too much expectations and ground work involved in ecommerce that it would be a miracle for a startup to go on and stay in the game to give Amazon a run for their money...
Makes me wonder what would have happened if the fabmalls, jaldi's and the indiaplaza's of the last bubble would have hung in there...
Many of them did hang in there. Fabmall became Indiaplaza, but they are around.
It's also about traction. Flipkart was able to capture the popular imagination of the younger lot. So, while Indiaplaza was offering everything from books to kettles, it was Flipkart which got people talking about it.
Us, the jaded (so called veterans) may cock a snook at the valuations (I do that oo, every so often, when the opportunity presents itself).
But, what you can't deny, is that FlipKart has traction.
Junglee is no panacea either. It is a directory service right now. When and if it evloves into a bigger offering. Game On.
Awesome article Rodinhood Saab. I was wondering about it myself the other day. Really informative and insightful. Thanks for your frankness!
(Just appreciating. Hope this comment is in accordance with at least the etiquettes of commenting, if not the art or the science. :P Btw, I completely agreed with the point you made in that post as well.)