Many moons ago, Kanwal Rekhi and John Dougery, the founding partners of Inventus Capital, carefully examined two fledgling e-commerce ventures but passed up the investment opportunity. The two startups—Flipkart and Snapdeal—have eventually gone on to become unicorns valued several billion dollars. However, the Indian-American businessman and investor Rekhi has no regrets about not taking a position in these companies, and he remains a sceptic of their business model to this day.
"They were trying to raise money from everybody. They were burning money. We are a small fund and making a small investment for a very small stake itself was unattractive to us," Rekhi told VCCircle.
Flipkart came first and Snapdeal later. "We had one round of conversations with each of them and their investors. We gave them a full hearing. There was no excitement on our side. We are not late-stage investors. We are Series A-level investors and they were both late-stage for us," he recalled.
Investment stage aside, the duo wasn't convinced about the business either. "To sell stuff on the Internet, you have to have some advantage. If you are selling commodity stuff which is available everywhere, how do you sell without price disruption? In that model, there is no customer loyalty," he said. "You as an entrepreneur have to have a business model and differentiated value proposition. But [if] you carry inventory like everybody else, you are not going to win the market. Once you carry inventory there is a fundamental issue; the stuff has to move fast," he added.
"They were expensive and we couldn't figure out how they would make money," Rekhi said.
Has the decision served the duo well? Yes and no.
Early investors in India's e-commerce ventures have seen their investments grow manifold. Subrata Mitra, partner at Accel Partners, had told VCCircle in an interview three years ago that the VC firm's investment in Flipkart was worth a little less than 300 times. Similarly, Kalaari Capital posted multi-fold gains from selling a part of its stake in Snapdeal in a secondary transaction.
A small investment in Flipkart or Snapdeal at the Series B or C stage would have returned huge gains for Inventus. But Rekhi remains a steadfast critic of the Flipkart and Snapdeal model and sees little chance of their turning profitable.
Between 1993 and 2006, the partners at Inventus backed as many as 65 US companies, apart from some Indian firms, according to the company's website.
Though Inventus has stayed away from horizontal marketplaces, it has over the last 10 years invested in around three dozen startups, including consumer internet companies, in India and the US.
Of their investments in 91 companies, they have exited 51 with a 36% gross pooled internal rate of return (IRR), with an average holding period of five years.
Venture capital firms typically chase an IRR of 20-30% in rupee terms.
Some of Inventus' portfolio companies have also been able to attract strategic interest from international players. It exited bus-ticketing venture redBus when it was acquired by South African media conglomerate Naspers' Indian arm ibiboGroup (MIH India). In 2011, another portfolio company, offshore developer Sierra Atlantic, was scooped up by Hitachi Consulting.
Inventus also expects public listing of two of its portfolio companies in near future: insurance marketplace PolicyBazaar in India and social commerce company Poshmark in the US.
Home-grown e-commerce companies, which have attracted huge funding from global names like Tiger Global and SoftBank, have been struggling to raise capital in the face of tough competition from Amazon even as profitability remains a pipe dream. For instance, Snapdeal, which was at one point valued around $6 billion, has massively scaled down and is reportedly willing to raise a fresh round of capital at half of its peak valuation. Flipkart, which has suffered a series of markdowns by some of the US mutual funds invested in the firm, is said to be in talks for a $1-billion round at a valuation of around $10 billion, significantly less than its peak valuation of $15 billion in mid-2015.
Rekhi has been consistently critical of these companies' unsustainable business models, and the protectionism they have been seeking from the government against their global rivals. As regards the volatility that the consumer internet sector is facing in the form of valuation markdowns, down rounds and massive downsizing, Rekhi had recently said that "a forest fire was blazing through the Indian startup ecosystem".