E com players in India on life support

There are more hidden skeletons in India's ecommerce story. Almost 80% of the venture capital backed ecommerce firms are on life support after failing to raise fresh funds, said investment bank Allegro Capital, in a recent report on the sector.

In the last three years, 52 ecommerce start-ups raised $700 million in VC funding, but only 18 companies were able to attract any follow-on investments . The more alarming statistic is that just seven firms could raise a chunky late stage funding in a business playing on the 'last man standing' model, the report added.

Allegro's analysis goes on to state that inventory-carrying multi-category retailers like Flipkart may require at least $200 million to get to profitability, while other niche etailers must burn about $80 million to report gross profits. Flipkart, which has raised about $250 million till now, is still burning cash and is not yet operationally profitable.

"This is a challenging environment for e-commerce players to raise follow-on funding," said Prashanth Prakash, partner, Accel Partners, a profilic ecommerce investor. But he argued that the funding ecosystem in India was going through a phase known as "dumbbell formation" wherein there is a lot of interest from PE firms in the early stage and late stage periods.

Forty-seven venture funds have backed the e-commerce game in the last three years, with 10 of them having invested in three or more firms. Eighteen of these funds have more than one e-commerce investment in their portfolio. Accel Partners and Tiger Global top the chart with 10 and eight investments respectively. IDG and Helion Venture Partners have five each; Norwest Venture Partners and SAIF have four each.

"Investors need to brutally cull their portfolio and back one or two companies with necessary capital. Brave investors with deep pockets, infinite patience and global experience may create winners," Deepak Srinath and Aravind G R wrote in the report, arguing that most investors underestimated the capital requirements of the sector.

The industry is getting close to the $1 billion mark in sales. It has notched up 20 million online unique visitors and 40 to 50 million online orders per year, mirroring where the China online shopping market was seven years ago, before a huge takeoff.

However, current FDI rules and investigations against leading e-commerce engines for alleged violations have added to investor caution, the report said. The beating down of Chinese e-commerce stocks listed on US bourses may have also delayed the plans of companies like Flipkart to have public issues overseas, jamming a critical fund raising opportunity .