Japan's Softbank has shown interest in leading a funding round of $100 million (or Rs 711 crore) in Indian e-commerce firm Snapdeal, sources close to both the companies told CNBC-TV18. The other investors who are interested in the round are a clutch of smaller Chinese and American investors.

“SoftBank will invest half, or up to $60 million, and the remaining will be given by other smaller investors,” said one of the sources. “It is unlikely that any of the other existing larger fund houses will participate in the round.”

For many in India’s startup ecosystem, the development might be surprising. Two years ago Snapdeal’s founders—Kunal Bahl and Rohit Bansal—and SoftBank were baying for control over the company.

SoftBank had orchestrated a sale to Flipkart, which Bahl and Bansal were opposed to. That led to a battle, where the founders clawed back control, reduced SoftBank’s number of board seats from two to one, and went off the radar to turn around the company.

“SoftBank never thought that they could turn it around,” said the second source. “Things have changed, since… Now, SoftBank has confidence in the company and wants to back it against the American onslaught.”

The Indian e-commerce market is dominated by Amazon and Flipkart, which together have more than 75 percent market share.

A third source said, “Bahl did not believe that Snapdeal would see a day in 2018.” But, a lot has changed in the last two years. Snapdeal's revenue rose by 73 percent to Rs 925 crore, and losses are down by 70 percent to Rs 186 crore, in 2018-19.

SoftBank, the sources said, is convinced that there is space for a third large e-commerce company in India after Flipkart and Amazon, especially after Paytm Mall’s not so successful attempt to get the eyeballs of the internet savvy buyer. Chances for Snapdeal’s success has gone up because of the fall of ShopClues, which tried to capture the longtail of online retail space.

Snapdeal founders also make sure not to sour the revived relation with SoftBank. “Regular quarterly meetings with SoftBank folks help,” said the third source. “They understand what we are doing, now… that was not the case when Nikesh (Arora) was there.”

Arora, who was the chief operating officer of SoftBank and was considered as the one who would succeed Masayoshi Son, believed in taking competition (Flipkart and Amazon) headon. That battle meant offering heavy discounts on branded items, electronics and mobile phones. That needed a lot of money, which Snapdeal ran out of.

Neither SoftBank nor Snapdeal commented on the deal. “We never comment on speculations,” said a SoftBank spokesperson.

The new funds would be used for mergers and acquisitions, new initiatives and for buffer. “Meanwhile, Snapdeal is focussed towards driving profitable growth,” the first source said. For that, Bahl’s idea is to build a Taobao-modelled e-commerce company in India.

A Taobao Replica for India

The internet in India started opening up in a big way when Reliance Jio made data prices a lot more affordable. That unlocked the next hundred million internet users, most of which were non-English speaking users.

Jio’s wireless internet massifying has an uncanny resemblance with Snapdeal’s turnaround. The e-commerce firm wants to go deeper into India, where online shopping is not for the elite. Bahl wants to turn his store into an Indian bazaar, where thousands of people come, explore and shop. These are people who are not looking for branded clothes or mobile phones or electronics.

“As more Indians come online thanks to the 4G revolution, the industry is now also growing rapidly in the middle and lower end of the market,” Bahl wrote in his blog.

Snapdeal’s buyers are different. They are not like the first tranche of online shoppers who were fluent in English, earned well, lived mostly in larger cities, were brand conscious and were tempted to splurge because of discounts. “The next 400 million online buyers are far more diverse in terms of their aspirations, where they live, the media they consume, languages they speak, frequency of online purchases and levels of disposable incomes,” Bahl wrote.

To serve them needs a Taobao-like approach. Unlike Tmall, which is more like Amazon and Flipkart, Taobao serves its buyers with a large variety of unbranded, value-for-money products through its large merchant network. To put things in perspective, Taobao does $440 billion in annual gross merchandise value (which is the total value of goods sold without calculating discounts and promotions) and has 721 million monthly active users.

Untapped Opportunity

The India e-commerce industry lags China’s by five to eight years. India has about 100 million online shoppers. The next 100 million are entering the market. In the years to come, according to Snapdeal’s internal estimates, India will have 400 million online shoppers.

Also, online shopping is vastly underpenetrated. Only two to three per cent of retail spending comes from e-commerce. The $786 billion retail consumption is expected to touch$ 2 trillion by 2030. The non-food retail market, which is Snapdeal’s playground, $163 billion is the unbranded market, and only three per cent of the unbranded market is online.

But, building a profitable venture is not easy. “Building a longtail means having the right supply chain, the right product, right inventory carrying cost, and managing all of this,” said Raghu Viswanath, founder and managing director for Vertebrand, a Bengaluru management consultancy.

Others think having long tail might have a problem in scalability. “Snapdeal has gone through an erosion of trust, which is very important in e-commerce,” said Sanchit Vir Gogia, founder and chief analyst of Greyhound Research. “The market is big and growing, but to do something in this space is equally risk-averse.”

Snapdeal’s scale isn’t small. It does over two lakh order every day. But when compared with Flipkart, which does one million orders a day, Snapdeal’s numbers are dwarfed. Bahl has a long way to go.

Gogia said that $100 million isn’t enough for sale. “You need about $1 billion… or at least $500-700 million in the next 36 month,” he added.

First Published:Aug 19, 2019 8:03 AM IST