DEVELOPERS in Singapore sold 1,054 private homes in March, up from the 455 units they moved in February, and 47 per cent higher than the 716 units they

How are major Flipkart investors valuing the company today (early May 2016)? There have been news reports of Fidelity & others marking the valuation down to $11B, but those folks may not have a clue.

If Flipkart were on the Nasdaq, I’d borrow money to short their stock.

To my knowledge, 100% of the mutual funds that own Flipkart shares have cut the value of their holdings since January (by 15-39%).[1]

Each of those funds used their own mark-to-market formula for coming up with a trimmed NAV, but it’s pretty obvious that no one’s confidence is high. Hard to blame them.

As an industry, e-commerce in India isn’t going well. The expected growth that fueled past valuations hasn’t come, and the monthly data is looking ugly.

As seen from one March ’16 report:

“While last year was a hyper growth year for most e-commerce start-ups, pre-shipment cancellations […] were 10-11 per cent; returns were a high 15-16 per cent […] ; and cash burn, largely in the form of discounts in March, was 16-18 per cent of industry shipped GMV.”

What does that translate to in practical terms? A holy fear among pretty much every investor in that space.

Flipkart has yet to close a single round in 2016. Snapdeal, their second-largest domestic competitor, has raised a total of $200m against a target of $500m (and had to turn to C-level players to do it).

There are three massive challenges in front of them, with the third being insurmountable on its own:

  1. They have legal issues. Flipkart established itself in Singapore as a means of flouting India’s foreign direct investment laws. There are responding lawsuits already in motion. While a lot of Indian consumers might see them as a “home-grown hero”, the government doesn’t share that sentiment.
  2. Their early advantages have evaporated. Beyond scale, it’s hard to point to a single advantage Flipkart has over Snapdeal, PayTM, or Shopclues. And given that their single advantage is remarkably insecure, that’s a problem.
  3. They have an Amazon problem. This deserves its own section.

There’s one thing that everyone needs to understand about Amazon CEO Jeff Bezos. This guy is to retail what Tywin Lannister is to domestic politics: smart, experienced, and absolutely ruthless.

What he isn’t is impatient. He believes in the art of the siege. Whether it takes him a year or a decade to bleed you out makes no difference. The only essential point is that he’s going to take your market-share unless you can mount a vigorous, sustained defense.

Flipkart can’t.

They’re currently expected to be lose about $300m this year (minimum). They exist in just one market, which at most will be worth $11bn in 2016 (a very aggressive estimate). [2]

The math doesn’t look good.

Amazon is expected to spend a reported $2.4bn in India this current investment cycle alone, with unlimited amounts to follow to tighten the noose. [3]

And that’s just money for new assets. It doesn’t include the value of Amazon leveraging existing infrastructure and complementary services (Video, AWS, Alexa). They’re expected to launch a version of Prime there before the end of the year.

Early investors in Flipkart hoped it could become to India what Alibaba was to China. That no longer seems even remotely possible.

Their main strategy thus far has been using extreme discounts to build market share. But there are three massive problems with that:

  1. Amazon has more cash than you, and better efficiencies. If you lose $2, they lose $1.50. You’ll run out first. They won’t even feel the pain.
  2. It trains consumers to wait for exceptional deals (sort of like Groupon did in North America). This reinforces the dynamic from the previous point.
  3. It gooses your initial sales, which creates unrealistic trajectory expectations, which forces you into eventual down-rounds.

I have no confidence that Flipkart can ever turn a profit. Even if they went into full cash-preservation mode today (no acquisitions, lean growth), I don’t think they could hope to get into the black in the near-term.

What’s the value of a company that won’t ever return cash via profits, and doesn’t have enough velocity or assets to take over new markets?

I can see a world in which Flipkart and Snapdeal drop enough that someone like Alibaba takes control of both in an attempt to keep Amazon at bay. Aside from that, I don’t know who else would find any value in acquiring them.

That doesn’t leave any positive options.

Note: As a point of perspective, it’s important to note the difference between how mutual funds and other private capital entities handle markdown disclosures. The former generally have to on at least a quarterly basis; the latter often only do so publicly when it’s in their best interests. So the fact that private investors haven’t announced haircuts doesn’t mean they haven’t happened internally.

Footnotes

[1] Flipkart valuation marked down by two more investors

[2] Flipkart, Amazon Burn Piles of Cash in E-Commerce War

[3] Amazon India Doubles Its Authorized Capital To ₹16,000 Crore