Valuations are a theoretical exercise, always!


Sachin Bansal was recently quoted saying valuations are a ‘theoretical exercise’ and not based on any transactions, and he is not worried too much about the markdowns by a few of investors. Well, Sachin is right when he says that about valuations. But I wish he had said a similar thing when investors were pushing up Flipkart’s valuations based on those theoretical estimates and assumptions.

Flipkart being the poster-boy of Indian e-Commerce, this markdown comes out heralding some harsh truths about the times we are into. And this makes it utterly important to understand what just happened and how did we reach till this stage, and then where from here?

So, the story goes something like this – Till the end of year 2015, e-commerce businesses were valued on the basis of GMVs, meaning irrespective of how much bribe you give away  to your customers in order to make them purchase, all that matters is that what was sum total of the Max Retail Price (MRP) of all the goods sold. I personally prefer calling this phenomena as – Buying your own revenue. Basically you are paying something from your pocket in the form of Discounts, Cash Backs, Promotional Offers, etc to make a customer cheaply own the product sold by you. So, the entire Indian e-Commerce was gung ho about transaction count without being realistic about the money lost to buy those transactions. And for doing such a ‘sinful’ thing, these companies were getting valued more and more.

And while all the players were busy buying their revenue (or transactions) and hence pushing their valuations up, someone somewhere was trying to do some enquiry into the valuation benchmarks across the globe, and found out some contrasting numbers, like the ones below:

  • Flipkart’s GMV was anywhere between $5 – $7 billion, meaning it’s MarketValue/GMV was somewhere around 2.2x – 3.2x for its $16 billion valuation.
  • Alibaba’s GMV for Q1 2016 was $115 billion, the annualized value for 2016 being $400 – $450 billion. Its current market cap is close to $200 billion, meaning MktCap/GMV = 0.5
  • Etsy (an online marketplace for handmade goods) total GMV in 2015 was $2.5 billion. Its currently valued at slightly less than $1 billion. MktVal/GMV = 0.4
  • Walmart’s revenues in 2015 was $480 billion. The GMV must have be higher than this considering the discounts. However, its current valuation is just higher than Alibaba at $215 billion. MktVal/GMV = ~ 0.4

Considering that Flipkart is a late stage startup, its valuation should not be more than 0.5x, or at best stretched upto 1x times the GMV.

Once anyone does this calculation, he would be of the opinion that previously some massive blunder has been made, and will immediately change his mind on the valuation numbers crowned to these e-commerce players.

And thus, the goalpost got shifted. And that is why you hear Kunal Bahl of SnapDeal suddenly talking about cutting costs and adding more categories like air-ticketing, etc. And he claims that they are redefining the m-commerce space.  The reality is however different from what Mr Bahl is trying to impose.


Its no more a question of how, rather its a question of when the valuation markdown of SnapDeal and other poster boys from other niche segments will start appearing in public. And the only option these guys are left with is to exercise their options to remain attractive in the public view. Like, SnapDeal has recently made up it’s mind to buy out the distressed asset at a throw-away price (and hence save the face of Mr Nikesh Arora and SoftBank). But will such distressed asset buy-outs really help restore or defend their valuation figures? Only the time will tell.

So who must be laughing at all these valuation shifts and distressed asset buy-out plans just to defend their valuations and ‘perceived’ market position? Probably two guys must be loving the whole situation – Amit Agarwal, the CEO of Amazon India, and Rahul Yadav, ex-CEO of, for reasons better left unsaid 😉



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