There was a time when Jabong was such a sought-after startup that some were even willing to pay $1.2 billion for it.
On July 26, e-commerce major Flipkart acquired Jabong for $70 million—lesser than any of the bids reportedly made for it in the last two years.
This may seem like an unfortunate company-specific event, but it is actually an indicator of what lies ahead for several startups.
Many Indian e-commerce firms may be headed the Jabong way: devaluation, followed by a buyout. They can blame the global slump in startup funding, lack of profitability among most domestic online retailers, and an absence of cutting-edge innovation for this.
“Around six months ago, startup valuations were ridiculously high. They have started tapering now and there will be a further correction,” said Arvind Singhal, chairman and managing director of management consulting firm Technopak. “Jabong’s valuation corrected to reflect the real value of the business. We will see Jabong-like valuation corrections happen across e-commerce in the next 12 months.”
Jabong’s story
Back in 2014, when Flipkart bought Myntra, all heads turned to the latter’s rival Jabong because it was seen as a must-buy for any player who wanted to compete with the Bengaluru-based online retail major.
At the time, Jabong reportedly had a gross merchandise value (GMV, or the total value of goods sold through a marketplace) of Rs509 crore ($76 million). The company held around 25% of the online fashion retail segment in India.
Six months after the Flipkart-Myntra deal, in November 2014, news website VCCircle reported that American e-commerce giant Amazon was eyeing Jabong for $1.2 billion. The talks were, however, called off later.
Several other bidders queued in the following years, but the offer price for Jabong kept falling. In September 2015, Mint newspaper said Paytm was in talks to buy it for anywhere between $500 million and $800 million. In July this year, another VCCircle report said Flipkart was considering shelling out up to $250 million for it.
One reason for this nosedive was that Jabong had begun losing out to Myntra, which was flush with funds from its new parent Flipkart.
Jabong also faced internal issues. In September 2015, co-founders Praveen Sinha and Arun Chandra Mohan quit to launch another company. Months later Jabong brought in Benetton India managing director Sanjeev Mohanty to run the show.
In another blow, on July 18, The Economic Times reported that a forensic audit commissioned by investor Rocket Internet had shown several corporate governance violations by Sinha, Mohan, and former Rocket Internet India managing director Heavent Malhotra.
Despite all this trouble, there was merit in buying the company—but only at the right price.
“There is no doubt that Jabong is a risky buy. Buying a failing business and turning it around is incredibly hard,” Kartik Hosanagar, professor at the University of Pennsylvania’s Wharton School.
“It comes down to valuation for me. If one can buy some of the assets like customer database and private labels at a low price, it’s worth it,” added Hosanagar, whose research work focuses on the digital economy.
Correction & consolidation
Jabong is not the only Indian e-commerce company to be devalued. The country’s largest online retailer, Flipkart, has been devalued by at least six investors since January. Investors have reduced the value of their holding in the the company by between 15% and 40%. Flipkart is now worth less than $10 billion, down from around $15 billion in September 2015.
Flipkart’s devaluation put pressure on other Indian e-commerce companies.
Meanwhile, a sectoral consolidation in Indian e-commerce was on. Between April and June 2016, there were eight merger and acquisition (M&A) deals in the sector, according to startup data curator Xeler8.
The pace of consolidation may accelerate as the bigger players seek to pick up smaller ones before a rival does, said Sanchit Vir Gogia, chief analyst at Greyhound Research. It’s a “land-grabbing phase,” Gogia said.