Are investors smiling at the Smile Group?

Online space in India is warming up and gaining traction since past few years with ecommerce as a key growth business vertical. Considering the series of investments in the year 2007 thru year 2011, ecommerce attracted many aspiring entrepreneurs who are now in startup, early or growth stage of their business and trying to raise funds from Indian Angles and VCs. However many of them are still unaware of the fact that, they might need few more additional skills over and above passion, intellect, good team, good idea, and good business to get the funds, or else they would be left to their fate and sacrificed for so called “Investors Sentiments or market skepticism”.

It has now been long since Iamwire heard negative sentiments around investing in ecommerce by many reputed investors; some of them saying, “Ecommerce is a deep pocket game”, and some saying there are no numbers in ecommerce right now.

Further, after talking with many start-ups iamwire realized that the series of questions they were asked before being looked at, such as revenue, order per day, gross margins, contribution margins, EBITDA, etc, maybe a very good way of evaluating startup potential. But, we were taken by surprise when some or rather many of the investments we saw, did not fall in line with these metrics. This is where iamwire started investigating and exploring facts about such investments, with our interest in multiple investments made in startups led by same individual/group, such as, the one in the discussion today, The Smile Group.

The facts, data, information presented here is compiled as received by various sources and available publicly.

Let us analyze the recent funding in the Group and the state of others which are likely to be funded soon (?)

Freecultr.com which was started by Harish Bahl along with Sequoia Capital, with Sujal Shah – ex IMG Head Fashionweek, and Sandeep Singh,  has recently raised another round of funding from Sequoia and Ru-Net – Moscow based Venture Fund of US$ 9 Mn at a valuation of INR 180 Crore.

Ru-Net which has recently entered India, was looking to invest US$50 Mn in the South-East Asian Market with 5 to 20 million dollars in a single transaction, preferably in the areas of e-commerce, online travel, online entertainment, and social gaming, and preferably in startups which have already received some amount of seed funding.

Freecultr initially raised US$4 million from Sequoia and very small contribution from original promoters which they successfully burned over a period of few months, and could only reach monthly revenues between INR 3-5 Lakh. With this high burn rate and very low revenue, certainly the company needed a lot of cash and soon.

Freecultr.com with a 3.5 lakh revenue/month raised $9 million funding after burning more than US$4 Mn dollars: what logic do investors buy? Freecultr did create a buzz in the market by getting the kingfisher calendar girls to wear – I luv Freecultr tees and KKR to post Freecultr logos on their Tees at a cost of INR 40 Lakhs and clearance sales to other group employees and other vendors. It has raised US$ 9 Mn selling a plan of doing almost INR 100 Crore in revenues this financial year and investors did buy the idea of revenues increasing from INR 3.5 Lakh/month to INR 50 Lakh a day from next month to commit this number.

Other interesting venture of this group, dealsandyou.com is at a burn rate of INR 4 Crore a month and had a massive layoff recently including ‘realignment’ of Gaurav Kachru (CEO)’s role. Amazingly DNY also managed to raise USD 17 Million @ a valuation of USD 85 Million within 14 months of its existence. Out of the many instruments that worked for DNY, some were jacking up sale by selling to group company FNY and selling refurbished and defective blackberry phones to customers, certainly they are not the only ones doing this, with many ‘well-invested’ companies also sharing the same boat.

Further, one of the talked about success stories of Smile, Fashion and You, leader of group’s growth story, with multiple rounds of investments, is now seen to be struggling with stagnating monthly revenues and growing burn rate. It is apparent from the data iamwire received from sources that Fashion and You grew drastically to revenue of INR 11 Cr (rounded) per month; however has moved little since June-2011 and almost stayed around 12 Cr in past few months. [Similar trend is experienced by other “Discount” focused companies and for some the revenue has even come down, some of these cases iamwire will present further in this series]

Pearl recently talked to the press about hiring 400 new employees, but how will they do it? Is Fashion and You looking to raise more funds?  Further fund raising opportunity for FnY is currently restricted due to legal issues, with one of the co-founder obtaining a stay order from CLB – company law board against Gold Square Sales India Pvt. Ltd. – the holding company.

According to the sources, there is significant value of dead inventory in the warehouses for which Pearl Uppal recently approached SnapDeal’s Co-Founder to explore the possibilities of liquidating some of the dead stock.

The story of Indian Ecommerce has a link back to Germany where it all started. German incubators such as Springstar and Rocket Internet have plans to dominate the ecommerce space in India, trying to outdo each other with their Entrepreneurs-in-Residence (EIR) Programs. Springstar is the incubator behind Fashion and You, Deals and You, Bestylish, Juvalia.in, and Rocket Internet behind Jabong, HeavenandHome, Fabfurnish (and more coming up) competing with each other and the winner being decided by the choice of their local partners. But here, their world renowned executing capabilities are getting challenged at maximum.

Though the philosophies of German Incubators are of build and exit strategies, for which they are famous worldwide, it is still helping the Indian market to rise as a top ecommerce market in the world attracting the attention of all. But are the practices well transferred? India is an altogether different Consumer market to operate and has a lot of challenges in terms of operations; still all the money that is put in can be well used, which will generate larger returns overtime. It needs a lot of change in the perspective of people of our country to survive not just in ecommerce.

Iamwire is proud to take a stand in favor of true entrepreneurship and safeguarding Venture investments, providing them neutral and analytical perspectives in Indian Online Industry. We do welcome inputs, suggestions and comments from the industry and would also ask whistle-blowers to highlight issues of corporate governance and other malpractices within the industry. Our endeavor is to promote honest entrepreneurship – and bring the wrath of peer pressure on malpractice. In case you want to highlight some issues please drop a mail at editor@iamwire.com, anonymity will be maintained. 

We strongly believe Online Industry and eCommerce in India is growing and is here to stay.

 

Springstar incubated global project 'Juvalia & You' now in India
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  • Anuj

    The information of Freecultr having monthly revenue of 3.5 lacs seems out of place. Assuming a order size of around Rs 700-800 it would mean only 15 orders a day !!. Seems to be rather low given their unique visitor numbers. What might be the source of this information if you can share that

    • Iamwire

      The information is collected as at the time of writing this post i.e. June 3, 2012

  • hemanth (Grahakji.com)

    very use full

  • http://www.lenskart.com,www.watchkart.com Nawal Sharma

    What it looks like is a game which is being played by investors across the E-Comm industry. What is important for the industry’s point of view is the market and it’s share. Another important point to consider is the operations which I think is the big decider of this game. We have seen companies with good expertize in operations are growing exponentially. Company’s profit is not for which Investors care. Industry is still not matured in India so I don’t think it’s the pretty good time to decide winner. Still a lot to come out of the box. According to a report almost every e-comm company even Flipkart before it’s elephant size funding was in money trouble. So money is playing it’s role and let’s enjoy the innovative approaches, up and down of this beautiful and promising Industry. Every company is a firefighter in this domain, you will loss only if you stop fighting.

  • http://www.seeandwear.com SeeandWear.Com

    Hi
    This article is good to reveal the inside stories of Companies.Huge money doesn’t mean they will win the race , money can only increase the time of their death.
    After two years only few companies will alive who will rule the Indian E com Industry. These guys will proof once more that Indians cannot build the industry like happened with Retail.

  • vikas

    I am not sure if the facts mentioned are correct. for example, FreeCultr has monthly sales of just 4L…this seem to be too low.

  • Anubhav Malhotra

    Interesting article. The e-commerce companies do seem to be overvalued by investors.

  • http://www.infozshop.com Mahes

    Good Article, Keep It Up. Waiting for some more interesting stories.

  • http://www.egully.com Rahul Malik

    All these VC driven investments are not utilized effectively by top management and most of them are trying to make money quickly rather than building a business with strong foundation. If you go through the expense sheet, you will realize most of the funding is used for PR and advertising which does not produce quick returns in ecommerce business as expected by investors.

  • http://www.tigc.in Anant Tanted

    Need more research on other web portals as well.

  • http://in.linkedin.com/in/mahendrabaid Mahendra

    I am not sure about the merit of this article. However, one thing is sure, solid business can’t be built over-night. You need a sincere efforts and committed population to make it. Also, funding is no way an example of successful business. Finally, over Internet; things changes in seconds; today you are successful – tomorrow you may be out of business!

  • http://jackandgill.com Nitin ( JackandGill.com)

    To be true, this was kind of expected. I have had bad experiences with Fnu and think they lacked the actual ecommerce knowledge. They managed to get investors but looks like the investment was going in the pockets of management rather than into application. Selling refurbished blackberrys etc. has been common and to top it all Bad customer service. I don’t see any reason why such portals should survive. In ecommerce, only the service provider survives.
    There are some good providers as well which have a long way to go, but companies like these blow away consumer trust

  • Mayank

    Very interesting and bold. Thanks for sharing this. Looking forward to hear more stories in the startup/VC space

  • Sameer

    Someone please tell me in 12 words or less what the objective / message of this long article is?? Lots of factiods about different companies…but what is the desired takeaway? Feel like I wasted a precious 3 minutes reading it.

    • iamwire

      Dear Sameer, apology if this wasted your time, as media we do not present conclusions, we focus on presenting facts and letting our readers draw conclusions from it.

    • Jiten

      Ecommerce in India is here to stay!!

      • http://dnophsif.tumblr.com Shreyas Ghuge

        At least not for a while. The companies that will really enjoy the shine of ecommerce will not be the ones in the game now.

        And yes, the game of e-commerce really needs to be changed in how it approaches the consumer (not just how it reaches).

  • http://www.xapads.com/ Nitin Gupta (Xapads)

    As far as my knowledge goes, the customer acquisition cost is very high in eCommerce industry in India and with the low avg. spend per customer, maintaining EBITDA, profit margins or cash flows is really difficult. Cash burn rate is very high which is hurting even the best of the eCommerce business models.
    We can’t blame the eCommerce business models alone, as most of them are replicas of proven models from West.. One of the big reason of this chaos in this industry is ‘coz of the customers online behavior, most of them are doing research online but buying offline. They are still not comfortable with using there credit card to make a purchase. COD is working fine in some cases, but its an expensive payment method for the eCom companies and is not a preferred manner for them.
    Another reason being the payment gateways, most of the indian payment gateways are crappy with high bounce rate (transaction cancellation rate), which really frightens the first time users.

    All in all, Indian eCommerce industry is still very nascent and will take some time to mature and boom.

    P.S. Author/Editor, i found this post to be biased and strongly against Smile Group, shouldn’t you have involved other eCommerce players here to maintain neutrality.

    Regards,
    Nitin Gupta

    • iamwire

      Dear Nitin, as media we do not intend to be biased, we are working on presenting fact over other companies as well. Hopefully you shall see more such articles shortly.

      • http://www.xapads.com/ Nitin Gupta (Xapads)

        The post was really good & informative and covered most of the aspects of eCommerce industry in India. The only issue was with the targeting a particular brand/company..

        Looking forward for another such report but covering other eCom players too, so we can have a clearer idea about this industry.

  • aditya

    good job.keep it up.

  • http://www.fngstore.com Nisar Ahmed

    For any e-commerce initiative to be successful, it should be run from small offices, less manpower and outsourced delivery network. Majority of the money should go into customer acquisition/retention coupled with loyalty programs and marketing.

  • http://www.efello.com Narender Kumar

    The efforts put in bringing this piece is commendable. Having successfully served the market globally in the segment, we are a growing e-commerce retailer in Indian market. We have realized that future of e-commerce in the country lies in strengthening operations, management, back end support and inventory. I totally agree with Mr. Ritesh that with growing number of Internet and mobile users every day, e-commerce industry is here to stay forever long. I would like to make a point here that unless the e-retailer have their own manufacturing unit and knowledge of products , its market and its selling price ,since most of the e-retailer does not have any command over the price – all discount and incentive schemes they offer to customers is paid from their pocket- it cannot be expected to think of ROI. All investments made in these sectors are only on face value – and not on projects and plans . To expect return of investment, a strong merchandise support is necessary and that would only come if the e-retailer would have their own manufacturing unit and command over the prices.

  • http://webenture.com Ritesh Satia (Webenture)

    I want to highlight here that even after getting so much of funds, they are struggling as the sales numbers are not growing and that’s because of poor operations and management. With 200 million Internet consumers and 800 million plus mobile consumers, eCommerce has a big way to go. Can someone share the percentage of Investments going in operations and marketing. That would clear the poor operations on top of huge marketing spends(Mr. SRK ?) to acquire new customers, without retaining old ones(by selling bad items, again quality control failure)

    I have been a IT vendor to dealsandyou, for development of their Vendor Management system(still under construction). After a whole lot of development by our team, without any reason our contract was closed and even our Invoices are not cleared.

    We have been forced to go Legal if we can as they refused to write/talk to us after getting all the code from us.

    I appeal to the Investors and the Management also to please look deeply into the operations of the Invested companies also, if they really need ROI from there huge investments.

    Regards
    Ritesh Satia

  • manisha natarajan (NDTV)

    Gosh, this news makes you wonder how thin is the ice that E commerce business in India is skating on. Good job on the story. Are there more businesses in similar predicament in the e commerce industry ?