Sachin Bansal promoted Flipkart.com bought out E-Tree Marketing promoted Letsbuy.com for a valuation of about USD 25 million when they themselves were valued at around USD 1000 million just a few months before that. Both companies had almost identical business model, product list, look and feel. So why was there such a big difference in valuation? What was really there for flipkart in letsbuy whch is did not already have? Was it customer base, vendor base, supply chain management, warehouses? On all counts Flipkart would have been far superior and even to a layman, there was really no value addition in real terms for Flipkart in taking over letsbuy.
So what really happened?
Well did we miss out a very vital info? That both these companies had two big VC or Common Angel Investors, Accel Partners and Tiger Global. While these two invested close to USD 180 mil in flipkart over the previous two years, together with another VC Helion Venture Partners, they also invested USD 6 million in letsbuy.
The E-com business is typically an extremely low margin business. Hence possibility of pumping in cash flows and profits back into the business in an fast growing company such as letsbuy would always be a problem. The company was growing, so were their needs for more finance. When they went to the VCs, they thought they have already invested a lot in almost identical business flipkart which is doing much better. Hence notwithstanding the merits of letsbuy, there was very little business sense to put in more money letsbuy. So they refused. Asked the management to look elsewhere. Now that takes time. And in the meanwhile the business of the company was exploding. Suddenly they had a serious cash crunch and almost in a position of not been able to honour the sales commitments. A bad publicity would have devalued the company and the sector as a whole. So the VCs thought, let the money or value change hands. That is from left hand to right hand!! So they made the their bigger company acquire their another smaller company and hence saving the blushes for the company, for themselves and for the segment.
Hi, I am Sanchita, an avid blogger on E-Com, financial frauds and a big fan of e-commerce and its ability to bring about a complete change in the way we buy things and services. I also run an ebay shop under the user id gizmobhai, run a blogging website www.gizmobhai.com and a wannabe e-com website www.indiacod.com (wait for a few months for it to change completely). You can read my all other write ups on e-commerce here