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    Show US the Money!!


    It is an indisputable fact that retailers need funds to expand operations, move to newer markets, renovate, increase brand effectiveness, meet working-capital needs, etc. For meeting these ends many retailers take the external funding route. In this story, we try to analyse the current scenario of external funding in the retail industry.

    India could become the second-largest economy in the world by 2050 owing to various investments in infrastructure, domestic consumption, and global outsourcing supported by growth-oriented policies of the government.

    Funds to the tune of Rs. 8,000 to Rs. 10,000 crore are being annually invested into direct retail in India. Any good investment in retail is expected to return a staggering IRR of around 30 percent over four to five years. Almost all investments in Indian retail are currently from domestic sources. There is significant investor interest in India and across the world for small and large investments in retail. Domestic investments by retailers and funds in retail have been rising as brands and retailers expand their networks. Investments in retail, e-commerce, consumer-packaged goods and quick service restaurants rose to US$ 1.142 billion (across 94 deals) in 2013–14, from US$ 855.53 billion (across 107 deals) in 2012–13, according to a leading investment tracker. Of this, investments in e-commerce firms rose 258.31 percent to US$ 805.36 million in 2013–14 from US$ 224.85 million a year ago. Investments in consumer products and restaurants fell by more than half.

    Funding routes

    Retailers may need funds to expand operations, renovate, stimulate growth by accessing new markets, or increase the effectiveness of their brand. Each of these stages of the retailer’s growth needs a judicious mix between own capital, supplier credit, bank loans and external investors’ equity. Traditional avenues to raise finance are through internal accruals or through bank borrowing. When these traditional sources of finance are insufficient, the only option to raise funds is by way of external equity. External equity can be raised from among the following sources that are available to retailers:

    • The first is private equity, which generally is growth funding for medium- to long-term investment.
    • The second is venture capitalists (VCs) who usually make early-stage investments.
    • Third are the strategic or financial investors.
    • The fourth source is capital markets or IPO.

    It is a curious cycle. Structured, process-oriented and systematic businesses that are not dependent on one person (the founder) are more likely to attract outside money, and outside money puts in more pressure to create transparency and broadening responsibility. For instance, Rajesh Exports, a leading wholesaler and exporter of gold jewellery, is slated to raise around Rs. 7,000 crore for retail expansion across India. The company is expected to finance its retail push through a combination of internal accruals, external commercial borrowing (ECB) and domestic debt.

    Nonetheless, the biggest challenge for bringing in outside investors – be it private equity or venture funds – is finding business models that are logically scalable within a four-to-five years’ time frame and allow the investor a decent exit.

    Typically, companies in the horizontal zone of operation focus on listing in public markets or IPOs on a large scale while the verticals focus on profitability at a smaller scale and alignment with a strategic investor or acquisition by a larger brand.

    Private equity investments

    Private equity is an important source of funding for modern retailers and has been a part of India’s emerging story for about a decade now. The country’s growing global stature, economy opening up more to external business interventions, coupled with positive indications of reforms and perception of value residing within the fabric of the economy, have been encouraging investments into the country. Private equity investors look for innovative and disruptive business models that target the customers’ segment and have process-driven operations while tackling rising costs, improving profitability and acquiring fast scale. Such enabling factors combined powered India’s GDP growth rate to over 9 percent in 2005.

    Overall private equity investments across sectors in India have also increased by 11 percent from US$ 9.49 billion in 2012 to US$ 10.5 billion in 2013. “The increase in private equity inflows was primarily due to rising investments in residential assets and other sectors like retail and hospitality. The year 2013 witnessed total investment of US$ 9.1 billion across 392 deals, mainly due to a few big ticket transactions. Given the difficult economic conditions, developers are finding it increasingly difficult to raise capital through traditional sources and are opting for alternate sources,” says Abhishek Sharma, CA, Sharma Associates.

    Domestic consumption remained the central investment theme with close to 50 percent of the deals in sectors like retail and consumer, food and agriculture, healthcare, financial services and real estate in 2013. The highest number of private equity (PE) deals last year was seen in the technology space at 80 followed by retail and consumer (50), healthcare (49), and financial services (45).

    In India, PE is still relatively new – while early stage investment vehicles or venture capital funds were launched as early as the mid-1980s, it was only in the mid-1990s that dedicated PE firms started investing in Indian companies. PE investments exist in almost one-third of India’s largest 500 companies according to The Economic Times (ET-500 list, 2011). It includes industry heavy hitters, such as , Hero Moto Corp, Suzlon Energy, Kotak Mahindra Bank, DLF Limited, Max India, Sun Pharmaceuticals, etc. All these companies have been instrumental in shaping the growth of our economy. Avinash Gupta, head of financial services at Deloitte Touche Tohmatsu India, said: “Though retail is very attractive, the roll-out is expensive and difficult to execute. Historically, a lot of formats backed by PE investors have not done well.” 

    Looking at the overall sector,  retail has been quite an active participant. Seven percent of total deal values have been in this space, ranking fourth amongst all sectors. Operating retailers have made fairly selected and calibrated investments in store or format expansions. While most grocery retailers have been focused on making profits, apparel and specialty retailers have kept investments going owing to good double-digit growth this year. While single-brand retail has clearly attracted some large international names, other than Tesco most multi-brand players have preferred to stay cautious.

    Private equity investments in apparel segment

    Branded apparel business is attracting a lot of private equity investments. Future Consumer Enterprise-backed branded apparel makers such as Biba and recently saw a change of hands when global PE funds like General Atlantic and Warburg Pincus invested in them, respectively. Even the government has set up revolving incubation fund of Rs. 10 crore to help product designers to become entrepreneurs. However, the same government has done nothing to help the fashion designers to conceptualise products or brands and to become ‘designpreuners’ by way of venture capital or incubation. Indian fashion has now big opportunities to influence the global fashion because of 500 million plus youth in the country in the median age of 27. Looking at some of the deals in this segment are:

    Mandhana Retail Ventures, the licensee of Salman Khan’s Being Human brand, has begun talks with private equity funds to raise Rs. 120–150 crore by selling up to 30 percent stake in the company, two representatives with direct knowledge of the plan said. The extra money will help the company expand its distribution network in the overseas market as well as diversify its product portfolio. Khan’s Being Human Foundation has given the global licensing rights to Mandhana Retail Ventures for which it earns a royalty between 7 and 10 percent on sales of Being Human merchandise, which is used for education and healthcare initiatives.

    H&M received approval from the Foreign Investment Promotion Board (FIPB) for an investment of Rs. 720 crore in November. H&M stores are likely to open by July next year. Forever 21, which has six stores in the country, has committed US$ 50 million for expanding its presence in the country.
    In May, German retailer s.Oliver plans to add 20 points of sale to its existing 10 stores over the next six months after announcing a EUR 20 million investment in 2012. British retailer Marks & Spencer plans to add 44 stores in India by 2016. Japan’s Uniqlo and the American brand GAP are waiting to make their debut in India.

    Private equity investments in jewellery segment

    The industry faces many difficulties in availing financing options. Further, the unavailability of gold (metal) loans has raised the cost of financing for domestic jewellers. Traditional financing is costly, too, due to high input costs.

    According to Rajesh Mehta, chairman of Rajesh Exports, the expansion would be financed through Rs. 1,200 crore worth internal cash accruals initially, Rs. 2,500 crore through external commercial borrowing, Rs. 1,500 crore of domestic debt and internal accruals of Rs. 1,500 crore expected to be generated over the next three years. He added that the cost of raising overseas debt has not yet been fixed. The company believes that its success lies in following an associate model, wherein Rajesh Exports partners with small- and mid-sized jewelers, which undertake to exclusively sell its house-designed jewellery.

    Private equity investments in real estate

    on Monday reported that PE investments in real estate increased 13 percent in 2013 compared to 2012. The total inflow last year was Rs. 7,000 crore while in 2012 it was Rs. 6,200 crore.

    Private equity investments in food service (F&S) sector

    The food service sector has seen strong deal activity in the last 3 years, with over 30 investments totaling US$ 250 million invested in early and growth stage companies. The number of scale players (US$ 100 million or more in sales) are still in low double-digits, prominent being Café Coffee Day, Jubilant Foodworks Hardcastle Restaurants and Devyani Foods. PE investors have invested across all stages, such as Growth capital by ICICI in Devyani Foods and Arisaig Partners in Westlife Development. Prominent on early stage or venture were Sequoia in Faaso’s, Helion in Spring Leaf Retail (Mast Kalandar) and Mayfield in BTB Marketing (The Beer Café).

    Exits in the F&S sector

    In the same period the sector saw few exits, given most companies are in the growth phase. Exit by TVS Capital in Om Pizza, Navis Capital’s exit from Nirulas to A2Z Excursion Group and Sequoia’s exit from Amalgamated Trading Co. were the key exits in the three-year period. Specialty Foods was the Only IPO, where the initial PE remain invested.

    The sector has also witnessed M& A activity whenever there have been PE exits.

    The key PE-led acquisition was Everstone-led buyout of Harry’s. The key strategic M&A constituted Avan Group’s acquisition of OM Pizza, franchisee consolidations (eg., Hardcastle Restaurants (buyout of McDonald’s stake by Jatia family) and regional Pizza Hut franchisee consolidation (Hansa acquisition of Pizzeria business).

    Private equity investments in the FMCG segment

    Fast-moving consumer goods were the focus of many investors, but with the ‘consumption story’ fading due to economic slowdown, that is no longer the case. Growth in the consumer packaged goods industry dropped by nearly half to 9.4 percent in 2013 from 18.1 percent in 2012, according to market research firm Nielsen India. The FMCG sector saw a 50 percent jump in investments this quarter. It increased from UUS$ 43 million (in a single deal) in Q1 ’13 to US$ 65 million from two deals. As compared to Q2 ’12, the sector witnessed growth of 2.5 times in value with one additional deal.
    Later-stage retailers still have avenues to raise debt as well as private and public equity, whereas start-ups and early stage businesses that can add significant entrepreneurial colour into the business are the ones that are struggling for funds.

    PE exits in last few quarters (Q2 ’12, Q1 ’13 and Q2 ’13)

    Generally, an investor firm decides exit at the time of finalising investment in a certain company. And, the exit policy too plays a crucial role in determining the success of an investor-investee relationship.

    The preferred modes of exits in the last few quarters have been through public market sale (9 exits) and strategic sale (7 exits), constituting 53 percent of the total exit volume. The other modes were secondary sale (6 exits), buyback (6 exits) and exits through IPO (2 exits). Exits in the retail sector were not very large with only one or two players like V-Mart.

    Active PE firms

    PE is often used interchangeably with venture capital. There are, however, key differences between the two kinds of investments. The first and key difference is with respect to the stage and quantum of investment. While PE investments are larger in size and are targeted at growth-stage companies, venture capital investments are smaller sized investments into early stage companies. Second, since venture capital investments are made with the intention of driving a company’s growth, the nature of the rights negotiated is different vis-à-vis private equity investments. “Venture equity is suitable for businesses that can grow and add value inorganically, either in intellectual property-driven businesses such as technology companies and brands that can provide higher margin returns on a given equity base or by selling the business further to investors who think they can derive even more value from it in future,” says Kunal Mehta, Strategic Consultant and Advisor. Financial experts believe raising money too early via VCs can have its own drawbacks, such as:

    It is a huge distraction because it takes most of one’s time. One spends most of the time in raising money, rather than spending time building the business.
    A majority of time goes in convincing people of how wonderful is the idea rather than getting data to prove it is wonderful.

    There is a high amount of risk involved when money is raised too early in business, as there is no financials to prove the viability of the business.

    Consequently, the valuation and the stake of the entrepreneur to keep in the business are much lower.

    VC comes with onerous terms and conditions and that make the venture more risky. So, there are many reasons why it is best not to raise capital early. If one can raise capital from deploying innovative practices or from the customers – by selling them something they simply must have – then one can go to the capital markets or VCs later and say, look, I’ve got customers, I’ve got traction. You can raise money on much better terms and consequently grow faster.

    Of course, bank debt is not easy for an entrepreneur either – Indian banks have become more progressive, but the norms are still relatively stringent. Unless the space is bought, the retail business has few significant-value fixed assets, and bank loans are limited for businesses that cannot offer much collateral. According to the Small Business Administration, about 600,000 new businesses are started in the US each year, and the number of startups funded by VCs was about 300. This means that the probability of an average new business getting VC is about 0.0005 (300/600,000), and it also means that 99.95 percent of entrepreneurs will not get VC at startup.

    There are at least 15+ quality series A investors in India today – including Accel, IDG, Nexus, Helion, Kalaari, Lightspeed, Canaan and others, and also more recently, large family office investors like Catamaran and Unilazer who also do early stage investments.

    Funds raised through IPOs

    Amid volatile equity market, Indian companies mopped up Rs. 1,619 crore in 2013 through initial public offerings, the lowest level in 12 years. During the entire 2013, there were just three main-board IPOs – Just Dial (Rs. 919 crore), Repco Home Finance (Rs. 270 crore), and V-Mart Retail (Rs. 94 crore).

    The year, however, witnessed a flurry of activities on the small and medium enterprise (SME) platform with 35 IPOs collecting Rs. 335 crore. This is possibly the lowest amount that has been raised via IPOs due to lack of retail interest and poor market sentiments. As a result, most corporates are unwilling to hit the market with fresh issuances, which has further affected the fund-raising exercise in IPO markets. Irrational pricing is another factor that has kept investors at bay. Over the last three years, nearly 65 percent of the companies that raised money via IPOs are currently trading below their issue price. This has hurt investor sentiments and has resulted in lack of appetite for new issues.

    Seed investment/Angel funding

    In India, Mumbai Angels and the Delhi-based Indian Angel Network (IAN) lead the angel funding bandwagon. Both were set up in 2006, and they are today amongst India’s biggest such groups.

    The first quarter of 2013 alone saw as many as 35 seed and angel investments – fewer than in developed ecosystems like Silicon Valley. Angel investment is no longer just another avenue for affluent High Networth Individuals (HNIs) to invest their money in; serial entrepreneurs, CEOs, senior executives, and highly qualified professionals with proven track records have also entered this business and are beginning to make high-quality investments. The involvement of seasoned professionals and entrepreneurs-turned angels like K. Ganesh, Ronnie Screwvala, Rajan Anandan and is also a great boost to the startup ecosystem. Though seed-stage investment is not clearly defined, it is typically less than US$ 1 million. Traditionally, entrepreneurs have relied on what the venture capital industry calls ‘family, friends and fools’ to launch businesses.Venture capital firms focused on seed-stage funding are beginning to bring in financing in sizeable numbers too. These seed funds are backed by institutional investors and normally enter after a business has raised angel funding. For instance, angel investors had previously backed more than half of the 18 companies funded by early-stage investment firm Inventus Capital Partners. Some successful seed funds are:

    1. Mumbai-based consumer startup that allows users to build their ‘One Wishlist for Life’ has undisclosed amount in seed funding led by early stage venture capital firm India Quotient. The round []also includes participation from angels like Vijay Shekhar Sharma (Chairman and Managing Director, One97 Communications), Uday Sodhi (CEO of HeadHonchos) and other investors. The funds will be utilised by the company for product development and to add engineering and design talent to the team.
    2. Sasha Mirchandani along with Prashant Choksey has found Mumbai Angels and they have invested in 30 start-ups since 2002. He floated the US$ 25 million seed fund Kae Capital in February this year and recently invested in Gurgaon-based career counselling start-up Sattava Edusys. 
    3. One of Seedfund’s biggest success stories is redBus.in, the bus-ticketing website. The venture was launched by Bengaluru-based Phanindra Sama after he could not get tickets to visit his parents in Hyderabad during Diwali in 2005.

    The start-up story is now taking a new turn. Large companies such as Infoedge, which owns portals such as Naukri.com, and top VCs like Nexus Venture, Sequoia and Accel are embarking on seed-stage funding. The aim is to get stakes in companies at lower valuations. However, the inflection point is yet to reach, as India needs hundreds of upstart-ups and investors. “There is no time to evaluate hundreds of business proposals that come in every day. The global best practice is to spend at least 20 hours evaluating the technology, entrepreneur or the market before handing over the cheque. However, we are yet to reach that stage,” says a Seed Fund []advisor.

    Exit optionsMost angels hang on to their investments for three to five years, and look for an exit when the start-ups get funding from VC or PE firms. Ladsariya has exited three ventures. The first was Reverse Logistics, a company that manages the movement of products back from the consumer to the manufacturer, which accounts for as much as 12 percent of sales in India. Ladsariya had invested Rs. 7 lakh for a one percent stake and exited when the value of that investment swelled to Rs. 40 lakh in a year. He recently invested in Birds Eye Systems, whose Traffline product informs commuters of traffic congestion in metros. Angel investor Sunil Kalra earned six-fold returns in a year-and-a-half from his first investment in real estate company Assotech. Kalra, who founded high-end leather apparel export company BSLG and sold it in 2002, now has a portfolio of 30 start-ups, which include online wedding planner Myshaadi.in and Tax Spanner, one of India’s largest e-filers of tax returns.

    Online retail funding

    Indian online retailers are seeing a spiral growth in their business. India’s online retail market will expand by more than 50 percent annually for the next three years, tripling to Rs. 500 billion (US$ 8 billion) by 2016, according to leading Indian research firm CRISIL. It is because people have started making purchases online and it has become the trend since it saves time and effort both. Browse over the internet and get your product delivered at your doorstep with discounts and peace of mind through cash on delivery, try and buy, 100 days’ return policy with no question asked, etc. Internet retailers are doing their best to steer clear of the competition and they are able to execute this with seamless ease because of the funds they receive from their investment partners.

    The segment is also attracting a lot of capital. According to a paper published by Technopak, a consultancy firm, titled ‘Apparel E-tailing in India’, the US$ 130-million apparel ‘e-retailing space’ in the country has attracted investments worth US$ 70 million, or 40 percent of the total funding Indian online retailers got in the past two years. Many have also registered a high month-on-month revenue growth of 70 percent over the last one year. The e-tail sector is expected to grow at 59 percent a year and will account for one in every two e-commerce transactions by 2016, said the report.  The online travel segment contributes 71 percent of the total consumer e-commerce transactions whereas online retail, or e-tail, is the fastest growing segment contributing 16 percent of the overall transactions as of 2012.

    Several e-commerce companies are struggling to carry on with their day-to-day activities in what is universally accepted to be a money-burning business. It is a well acknowledged fact that e-commerce is a capital-intensive business and profitability takes time because of infrastructure issues, logistics costs and early-stage competition and hence, money will not come easily to e-commerce companies.

    Though e-commerce may be gaining momentum in India, but an estimated 70–80 percent of e-commerce companies are in dire need of funds, said a KPMG and Internet and Mobile Association of India (IAMAI) report titled e-Commerce Rhetoric, Reality and Opportunity. The report puts the size of the e-commerce market in India this year at US$ 13 billion. According to industry insiders, last year was tough for the newly launched e-tailers since they failed to attract investors to fund their expansion plans. However, established players were able to gain 80 percent PE funding. According to experts, the year 2013 saw big funds going to mature e-commerce players with US$ 620 million (Rs. 3,870 crore) pumped into 34 deals, with just 8 deals seeing US$ 523 million (Rs. 3,264 crore) of funds. The fattest paychecks went to India’s largest e-commerce player , followed by Snapdeal.

    Except for the top couple of e-commerce firms, most companies are surviving with 12–14 months of cash and therefore need to raise capital, according to Mukul Singhal, Vice President of SAIF Partners, which has invested in four e-commerce firms. According to him: “In the online travel segment, only a few companies will be able to raise funds while the rest will struggle. In 2006, around 15–20 online travel firms could raise funds but only 3–5 firms were able to raise the third round of funds and only two or three raised a fifth round. What distinguishes Flipkart, Snapdeal or Myntra from others is the ability to raise subsequent rounds of finance.”

    As competition is increasing, it has become imperative for e-commerce companies to diversify, innovate and offer categories that others don’t have.
    Some successful examples are:

    Till now, Flipkart has received four rounds of funding from , Tiger Global, MIH and ICONIQ Capital. They received funding starting from 2009 to 2012 every year (undisclosed, US$ 10 million, US$ 20 million, and US$ 150 million).2. Snapdeal also received three rounds of funding in January and July 2011, and recently in 2013 from Nexus Venture Partners, Indo-US Venture Partners, , and eBay (US$ 12 million, US$ 40 million, and US$ 50 million from eBay).3. Myntra also received funding of US$ 5 million, US$ 14 million, and US$ 20 million funding from , Mirchandani from Mumbai Angels, Tiger Global, IDG Ventures and Indo-US Ventures.4. Yebhi received funding from , Catamaran Fund, Fidelity and Qualcomm. The size of funding was US$ 2.5 million, US$ 9 million, and US$ 20 million.5. Zivame, a lingerie online site run by Richa Kar and Narsee Monjie, also received funding from IDG Venture and Indo-US Venture Partners.6. FirstCry.com selling baby products online received funding of US$ 4 million and US$ 14 million from IDG Venture and SAIF Partners.

    7. In November 2013, Urban Ladder raised US$ 5 million in Series A funding from SAIF Partners, and from existing investor Kalaari Capital. The company needed funding to expand footprint, products range and to build its technology platform.
    8. Online private label footwear retailer Famozi is in the process of raising its first round of PE investment led by , says Puneet Khanna, Founder & Director of Famozi.
    9. Russia’s ru-Net has also backed Indian online companies Bestylish and Freecultr.
    10. Intel Capital has invested in Healthkart, an online retailer for fitness and healthcare products.

    Singapore-based Spuul, an online streaming site for Bollywood movies, classic Indian movies and TV shows, is also in discussions with venture capitalists to raise US$ 10 million  to finance expansion of technical infrastructure and team, provide marketing activities and create content. Even Shopclues is looking to raise US$ 30–50 million in PE investments and is in talks with PE players like Warburg Pincus, SoftBank, and Digital Sky Technologies for the same, and is expected that it will close the funding round by the end of this year. They will be looking at this round as growth funding and the company also plans to go for an IPO by 2016.

    Experts say that the year 2013 saw big funds going to mature e-commerce players with US$ 620 million (Rs. 3,870 crore) pumped into 34 deals, with just 8 deals seeing US$ 523 million (Rs. 3,264 crore) of funds. The fattest paychecks went to India’s largest e-commerce player Flipkart, followed by Snapdeal.


    In many countries, early stage seed, angel and venture investments are provided incentives in terms of tax structures. This is something that the venture community in India has been lobbying for with the government and, if provided, it could improve the ‘investibility’ of early stage retail businesses. From an economic growth and government policy standpoint, there are no significant changes expected until the new government assumes office at the Centre in May/June 2014, EY said.

    And, even if it does, PE investors are likely to take a cautious approach to investing leading to moderate activity levels for six to eight months of the year. The key focus, however, has to be on investor returns and exits.