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Pumping Funds In Fashion Retailing

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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 the growth-oriented policies of the government.

Funds to the tune of Rs 8,000 to Rs 10,000 crore are being invested annually 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 into retail have been on a growth trajectory 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 investment tracker VCCEdge. Of this, investments in e-commerce fi rms rose 258.31 percent to US$ 805.36 million in 2013–14 from US$ 224.85 million a year ago. Investments in consumer produc ts and restaurants fell by more than half.


Retailers may need funds to expand operations, renovate, stimulate growth by accessing new markets, or increase the effectiveness of their brand. Each stage 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, which can be raised from among the following sources 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 fi nancial investors.
  • The fourth source is capital markets/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 example, 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 fi nance its retail push through a combination of internal accruals, external commercial borrowing (ECB) and domestic debt.

However, 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 profi tability at a smaller scale and alignment with a strategic investor or acquisition by a larger brand.


Private equity (PE) is the 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. PE investors look for innovative and disruptive business models that target the consumer segment and have process-driven operations while tackling rising costs, improving profi tability and acquiring fast scale. Such enabling factors combined powered India’s GDP growth rate to over 9 percent in 2005.

Overall, PE 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 an overall investment of US$ 9.1 billion across 392 deals… mainly due to few big-ticket transactions. Given the difficult economic conditions, developers are finding it increasingly diffi cult 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, health care, fi nancial services and real estate in 2013. The highest number of PE deals last year was seen in the technology space at 80 followed by retail and consumer (50), health care (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 fi rms 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 Bharti Airtel, 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 rollout is expensive and diffi cult 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. Likewise, 7 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 focussed on becoming profi table, 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.


Branded apparel business is attracting many PE investments. Future Ventures backed branded apparel maker such as Biba and Anita Dongre recently saw a change of hands when global PE funds like General Atlantic and Warburg Pincus invested Rs 150 and Rs 300 crore in them, respectively. Even the government has set up revolving incubation fund of Rs 10 crore to help product designers to become entrepreneurs. But the 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 many opportunities to influence the global fashion because of 500 million plus youth in the country with median age of 27.

Looking at a few deals in this segment are: Mandhana Retail Ventures, the licensee of Salman Khan’s Being Human brand, has begun talks with PE funds to raise Rs 120–Rs 150 crore by selling up to 30 percent stake in the company, two people 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 products portfolio. Khan’s Being Human Foundation has given the global licensing rights to Mandhana Retail Ventures for which it earns a royalty between 7 percent 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 said it would 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 and 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.

PE firm Everstone Capital will invest Rs 100 crore for an undisclosed minority stake in Ritu Kumar, a fashion house for women’s clothing. Menswear label Mufti, on the other hand, is said to be in advanced talks to sell a 35 percent stake to PE giant Carlyle. Other examples include women’s ethnicwear brands ‘Jashn’ and ‘Bawree’ have initiated talks with a host of PE investors; ethnicwear brand Soch is in the process of appointing an investment bank to scout for investors while women’s formalwear brand Chemistry has signed a term-sheet with a PE fi rm to raise Rs 40–Rs 50 crore.


Generally, an investor fi rm decides exit at the time of fi nalising investment in a certain company. And, 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 through IPO (2 exits). Exits in the retail sector were not very large with only one or two players like V-Mart.

Private equity is often used interchangeably with venture capital. There are, however, key differences between the two kinds of investments. The fi rst and key difference is with respect to the stage and quantum of investment. While PE investments are larger and are targeted at growth-stage companies, venture capital investments are smallersized  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 PE 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 Devangshu Dutta, Chief Executive, Third Eyesight. Raising money too early via venture capitalists can have its own drawbacks as:

  • huge distraction because in it the business spends majority of time in raising money, rather than spending time building the business.
  • A majority of time goes in convincing people how wonderful the idea is 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.

VCs come 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 that they simply must have – 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.

Dutta believes “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 signifi cant-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 offi ce investors like Catamaran and Unilazer who also do early-stage investments.


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 fl urry of activity 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, which has kept investors at bay. Over the last 3 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.


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 among 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 affl uent HNIs (High Networth Individuals) to invest their money in; serial entrepreneurs, CEOs, senior executives, and highly qualifi ed 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 sAnandan and Kris Gopalakrishnan is also a great boost to the startup ecosystem. Though seed-stage investment is not clearly defi ned, 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 fi rms focused on seed-stage funding are beginning to bring in fi nancing 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 of the successful seed funds are:

Mumbai-based consumer startup that allows users to build their “One Wish List for Life” has undisclosed amount in seed funding led by early-stage fund India Quotient. The round also includes participation from angels like Vijay Shekhar Sharma (Chairman and Managing Director of One97 Communications), Uday Sodhi (CEO of HeadHonchos) and others investors. The funds will be utilized by the company for product development and to add engineering and design talent to the team. Mirchandani along with Prashant Choksey has found Mumbai Angels and has 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.

One of seed fund’s biggest success stories is, the bus-ticketing website. Bangalore-based Phanindra Sama launched the venture 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, 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 start-ups and investors. “There is no time to evaluate hundreds of business proposals which 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. But we are yet to reach that stage,” says a seed fund advisor.


Most 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 fi rms. Ladsariya has exited three ventures. The fi rst 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 1 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 Traffl ine 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. That includes online wedding planner and Tax Spanner, one of India’s largest e-fi lers of tax returns.


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 started buying products online and it is becoming a habit, as there is no need to stand in a queue, walk on corridor and get tired while driving.

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, no question asked, etc. Internet retailers are doing this to be ahead of competition and able to execute this because of big money they receive from their investment partners.

Here is the list of some of the Internet retailers who received funding. 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 profi tability 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 Flipkart, followed by Snapdeal. Except for the top couple of e-commerce fi rms, 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 fi rms. 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 fi rms could raise funds but only 3–5 fi rms 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.Some successful examples are:

  • Snapdeal also received three rounds of funding in January and July 2011, and recently in 2013 from Nexus Venture Partners, Indo-US Venture Partners, Bessemer Venture Partners, and eBay (US$ 12 million, US$ 40 million, and US$ 50 million from eBay).
  • Myntra also received funding of US$ 5 million, US$ 14 million, and US$ 20 million funding from Accel Partners, Mirchandani from Mumbai Angels, Tiger Global, IDG Ventures and Indo-US Ventures.
  • Yebhi received funding from Nexus Venture Partners, Catamaran Fund, Fidelity and Qualcomm. The size of funding was US$ 2.5 million, US$ 9 million, and US$ 20 million.
  • Zivame, a lingerie online site run by Richa Kar and Narsee Monjie, also received funding from IDG Venture and Indo-US Venture Partners.
  • selling baby products online received funding of US$ 4 million and US$ 14 million from IDG Venture and SAIF Partners.
  • 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.
  • Online private label footwear retailer Famozi is in the process of raising its fi rst round of PE investment led by Future Lifestyle Fashion, says Puneet Khanna, Founder & Director of Famozi.
  • Russia’s ru-Net has also backed Indian online companies Bestylish and Freecultr.
  • Intel Capital has invested in Healthkart, an online retailer for fi tness and healthcare products.
  • 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 to close the funding round by end of this year. They will be looking at this round as a growth funding one and the company also plans to go for an IPO by 2016.

Experts say 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, could improve the ‘investibility’ of early-stage retail businesses. From an economic growth and government policy standpoint, there are no signifi cant changes expected until the new government assumes offi ce 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.

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