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[Published on YourStory.com]
This week Craftsvilla announced a Rs 110 Cr round led by Sequoia and supported by existing investors Lightspeed and Nexus and new investor Global Founders Capital. This is an important milestone for a company that has quietly been building out India’s largest marketplace for ethnic apparel and products.
In our view, Craftsvilla stands out from the majority of e-commerce companies for a few reasons:
– It has broken into the top-5 ecommerce companies in India by GMV scale
– Has grown 4x in scale in the last six months (and continues that trajectory)
– It turned the corner on cash flow breakeven while achieving such scale and growth
All this, on the $1.5M that the company cumulatively raised from Lightspeed and Nexus across its seed and Series-A rounds in 2011 and 2012. This performance is exceptional by all standards and is driven in essence by two key factors:
A. A fundamentally strong business model: Craftsvilla is going after the massive ($30B) market of ethnic apparel and products in India. This market is highly fragmented across a very large supplier base and thus needs a specialized vertical player to go after it. Since the supplier base is fragmented, it takes longer to build liquidity on the platform but once the critical mass of buyers and sellers are live on the platform, then the margins are attractive and entry barriers are very high. ETSY solved a similar problem for the US market and is currently valued at $2.8B post its recent IPO. Craftsvilla has gone through the hard part of getting the platform to scale and the quality of the current business is reflected in several metrics:
- Marketing spend has stayed below 10% of sales while revenue has grown 4x in last six months
- Organic sources contribute two-thirds of the total traffic
- An active seller base of 12K artisans who by themselves upload and manage an inventory base of 2M SKUs on the platform
- High fragmentation within the seller base: Median contribution of top-10 sellers to GMV is 1.5% and beyond top-10 no seller contributes more than 1% of sales.
B. Extraordinary perseverance and focus of the founders: There has been a frenzy of ecommerce funding in India. Instead of going down the path of driving GMV through discounting and at the cost of margins, Manoj and Monica went through the harder path of building the core of the business – bringing thousands of suppliers across the country on to the platform and helping them sell online. To continue to do this for multiple years while the industry was rewarding a capital led growth path needs strong founders with deep conviction. It is always helpful to look back at certain ‘forks in the road’ and learn from the experience. The team made a number of critical decisions with crystal clear conviction that, in hindsight, worked well for the company. These include the following:
- A clear commitment to being a marketplace vs. a retailer (or mix of the two)
- With this clarity, focused aggressively on aggregating sellers and building strong technology-led capabilities to on-board sellers and allow them to sell through the Craftsvilla platform
- Letting the diversity of supply drive demand instead of using a discount led approach
- Kept the team lean and fixed cost burden low: Manoj and Monica gave it everything they had and built a young and highly motivated team around them – a team of 15 people till a couple of months back! Conventional wisdom might have argued for a seasoned and pedigreed team that allows for accessing capital faster.
When Lightspeed, along with our partners at Nexus, made the seed investment in Craftsvilla back in 2011, we were struck by the founding team’s passion for, and understanding of, the market opportunity as well as more measurable factors such as market size, the potential for attractive unit economics and the scope to build a differentiated company that the horizontal e-commerce platforms would not be able to easily replicate. We also believed that this was a powerful opportunity to leverage the internet to unlock new markets within India and globally for artisans and vendors who, until then, were only able to serve their local customer base.
As the company looks forward, there remains much work to do – from iterating on product to building company leadership and replicating the platform in similar markets globally. They can do this with the very strong foundation of capital efficiency and product-market fit that has already been built. We are fortunate to be associated with the company and look forward to being a part of this journey with Manoj and Monica.
Also read Manoj’s post on how the Craftsvilla team created this magic.
[Also published on VCCircle]
There has recently been increased discussion, and mainstream press reporting, on the adoption of a ‘marketplace’ model (vs. an inventory model) by e-commerce companies (e.g. these two articles in Mint: Mint 1 and Mint 2). This discussion reflects an underlying presumption that one model is better than the other. In framing the issue as a comparison of the two approaches, I think the dialog fails to address the more important question of why this shift is taking place and whether there are other approaches that can address the underlying challenges.
The shift towards ‘marketplaces’ is taking place as companies try to find a new balance between the following priorities:
- Maximizing capital efficiency
- Maximizing customer delight (selection, post purchase experience etc), and
- Minimizing logistical complexity (which helps to maximize scalability)
The need to find a new balance is triggered by scarcity of capital. As long as capital was freely available, most ecommerce companies focused heavily on the customer experience, which was best served by an inventory model. As capital tightens, these companies must now balance the need to delight customers with the need to build a viable business.
What are marketplaces?
Let me start by defining what I believe to be true online marketplaces. These are platforms that enable a large, fragmented base of buyers and sellers to discover price and transact with one another in an environment that is efficient, transparent and trusted.
- Efficiency is a function of liquidity (enough buyers and sellers) and an effective price discovery mechanism (e.g. an auction).
- Transparency is ensured by applying the same set of rules to all participants, and because buyers and sellers know who they are dealing with.
- Trust is provided by features such as buyer and seller ratings, reviews, and integrity / guarantee of payment.
Marketplaces are difficult to execute against because they require adequate and simultaneous liquidity on the buyer and seller side. Once adequate liquidity has been established and the ‘flywheel is spinning’, these businesses exhibit strong network effects (because a market that has the most buyers will attract more sellers, and the increasing base of sellers will in turn attract more buyers). So once a marketplace becomes dominant, it scales organically and often exhibits ‘winner take all’ characteristics. Additionally, because marketplaces are essentially technology platforms that provide tools for buyers and sellers to participate and a trusted environment that facilitates price discovery and transactions (vs. actually being responsible for fulfilling transactions), they can scale very rapidly.
We’ve seen all of these dynamics play out at close range as a result of our investment in the Indian Energy Exchange (IEX; www.iexindia.com). IEX operates an electronic market for power in India and has emerged as the dominant power exchange in the country with deep liquidity.
The take-away is that when you get marketplace business models right, they are profitable, scalable, defensible and highly valued. Which is why contrasting the inventory model with a marketplace model makes for an exciting debate.
The inventory model
In India, there is no question that being in control of the product (i.e. having physical inventory) enables a superior post-purchase consumer experience. If you have the product in your control, then (assuming your systems and processes are robust) you: (i) have visibility into your stock level, (ii) know where the product is physically located, and (iii) control the pick, pack and ship process. This means that you minimize the likelihood of accepting an order only to later discover that you don’t have the product. It also means that you can optimize dispatch time. The bottom line is that being in control of the product enables you to deliver faster and with higher accuracy, and respond effectively to customer inquiries about shipping status. Given the correlation between delivery times and return rates that we’ve observed (i.e. long delivery times are clearly correlated with high return rates), this is really important.
The problem is that being in control of the product has meant that companies compromise capital efficiency – because they buy product from vendors up-front, thus tying up capital in inventory, while at the same time exposing themselves to inventory mark-down risk. This can get ugly – which is why it makes sense to explore other approaches, one of which is a marketplace model.
Marketplaces in ecommerce – how different are they really?
The reality is that most of the marketplace models we see in ecommerce are not ‘platforms’, as described earlier. For example, in ecommerce marketplaces the prices are fixed, not discovered, and the ecommerce company is responsible (from the customer’s perspective) for several aspects of the post-purchase experience, such as fulfillment and customer service. The reality is that to the customer, many of these marketplace companies look identical to inventory-led ecommerce businesses. In other words, these models are simply one possible response to the constraints and challenges of traditional inventory models. And the marketplace model is not without its downsides – for example shipping costs are higher because multi-product orders are fragmented across vendors and shipped separately. And this in turn may lead to customer dissonance because a customer won’t receive their entire order at one time.
There are other solutions [Note that for purposes of this discussion I am not considering FDI related implications on company structure.]
Other possible ways of mitigating capital intensity while remaining in control of the product include (but may not be limited to) vendor credit, consignment sales (where products are in the possession of the ecommerce company but are not paid for upfront) or back-to-back purchasing (where the ecommerce company places the order on a vendor/supplier after receiving an order from a consumer). For example, ASOS, a UK-based online lifestyle retailer, has net working capital of less than 2% of sales while operating an inventory model. Similarly, Shoppers Stop in India has a negative working capital model – again despite being an inventory-led business.
Focus on the substance, not the glossy headlines
This is a meaty and critical subject for any company involved in online commerce. We’re encouraging our companies to experiment with strategies that resolve the trade-offs outlined in this post because we think companies that successfully do so will have more attractive scale and economic characteristics over the long-term. The purpose of the post is not to take sides on the inventory vs. marketplace model debate or address the pros and cons of each approach in detail – rather it is simply an attempt to surface the underlying issues that are driving the evolution of how ecommerce companies operate in India.
Mr Venkat R Chary, IAS (Retd), Chairman of Lightspeed-backed Indian Energy Exchange Ltd delivered a speech at the CII Southern Regional Power Conference in December 2012. Here’s the video!