Walmart becomes SoftBank of ecommerce startups


VCJ Venture Flipkart Walmart guest column
The logo of India's ecommerce firm Flipkart is seen on the company's office in Bengaluru, India, April 12, 2018. REUTERS/Abhishek N. Chinnappa

By Rohit Kulkarni, SharesPost

Walmart paid $16 billion for a 77 percent majority stake in Indian ecommerce leader Flipkart, implying an exit valuation of $20.8 billion. Flipkart is not only Walmart’s largest acquisition to date, but also the largest ever acquisition of a VC-backed ecommerce company worldwide.

Per Walmart filings, in the fiscal year ended March 31, Flipkart generated net sales of $4.6 billion, more than 50 percent higher than the previous year, on a gross-merchandise value of $7.5 billion.

Interestingly enough, Walmart supports Flipkart’s plan to eventually go public as a majority-owned subsidiary of the U.S. retail giant. Such a stock offering could represent the largest tech IPO for an Indian company.

Rohit Kulkarni, SharesPost.
Rohit Kulkarni, SharesPost.

Ecommerce unicorn M&A vs. IPOs

Over the past couple of years, the ecommerce industry has consistently witnessed record-setting M&As. Most notably, PetSmart bought Chewy.com for $3.35 billion in 2017. That deal bested the prior record held by Jet.com, which Walmart acquired for $3.3 billion in 2016.

The Walmart-Flipkart union is worth more than 6 times those deals. As the retail industry matures, we believe M&A deal sizes will get bigger, as Amazon, Alibaba and brick-and-mortar retailers fight for ecommerce dominance. From 2013 to 2015, only two ecommerce deals a year surpassed the billion-dollar mark, compared to more than six deals over the past two years. The chart below shows major ecommerce M&A deals since 2014.

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Walmart M&A (Source: PitchBook, news reports)

By contrast, ecommerce IPOs have lagged the M&A trend. Shares of Blue Apron and Stitch Fix, two of the most high-profile ecommerce companies to recently go public, have not performed well. Since 2015, M&A deals for ecommerce unicorns outnumbered IPOs 2 to1, according to the chart below

Flipkart’s implied valuation of $20.8 billion represents a 35 percent to 50 percent premium above its most recent private valuation range of $13 billion to $15 billion. Post-IPO valuations of ecommerce startups have yielded mixed results.

Brick-and-mortar retailers may follow Walmart’s lead

While Walmart’s recent acquisitions may appear like a simple game of “catch up to Amazon,” the company is likely crafting a more subtle long-term strategy.

Walmart has purchased digitally native and primarily mobile commerce brands focused on younger consumers, possibly to lure them to its physical stores in the future. Clearly, Walmart has increased its deal making over the past couple of years amid growing pressure from online rivals.

Walmart’s Jet.com acquisition certainly turned heads in 2016. But consider this: Not only is Flipkart Walmart’s biggest ecommerce acquisition to date, the deal is larger than all of Walmart’s previous online retail acquisitions combined.

Flipkart shows way for international ecommerce unicorns

The Indian startup ecosystem has rapidly grown over the past decade. American and Chinese companies, including Tiger Global, SoftBank, Alibaba and Naspers, have made organic and strategic investments in over a dozen major Indian startups.

In the taxi aggregation market for instance, the Indian startup Ola competes fiercely with Uber, even though they share a common investor in SoftBank. Together, leading Indian unicorns, excluding Flipkart, boast a cumulative market cap of over $25 billion and raised almost $12 billion in private funding.

We are closely watching these firms, along with rising Indian companies we call “Soonicorns,” because of their innovative business models, rapid growth trajectories, and fundraising track records to date.

“India is one of the most attractive [retail] markets in the world,” said Doug McMillon, Walmart’s president and chief executive officer, in May.

Nevertheless, the current market opportunity for ecommerce companies may not justify such lofty valuations. According to Forrester Research, the Indian online retail market totaled $20 billion in 2017, or 2.4 percent of total retail market in India, which is still relatively small compared to older, better penetrated markets.

But beyond market size, investors really want growth. India is home to a growing middle class, which is fueling household spending growth on par with that of China and ahead of the mature U.S. market.

Over the next five years, analysts predict more consumers there will gain access to the internet for the first time than there are in the entire U.S. internet population. From 2017 to 2022, estimated online retail sales in India will grow more than 150 percent to more than $73 billion. Overall, we believe India’s private tech ecosystem trails its Chinese counterpart by about eight to 10 years, a possible upside for investors.

China is currently the leader in the number of ecommerce unicorns and the percentage of total market cap, followed by the United States. Savvy investors should closely watch developments and opportunities in the Indian ecommerce market as the country continues to grow into a formidable economic power.

Rohit Kulkarni is managing director and head of research at SharesPost.

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