Flash sales kill biz: Lessons learnt from 99labels-Info Edge story

By Avanish Tiwary

Ishita Swarup has her hands full as the founder of 99labels, a flash sales online portal. Her firm, Ninety Nine Labels Pvt. Ltd., which also runs catalog ethnic wear portal 9rasa.com, is going through some turmoil. This has led to the firm’s investor, Info Edge, deciding to write off its total investment of Rs 29.3 crore in the company. Info Edge says this move is a recognition of asset impairment.

“The value of the investment is less than the value we invested at,” says Sanjeev Bikhchandani, Vice-Chairman and Founder, Info Edge. Bikhchandani says the decision was taken after carefully considering the events of the last 12 to 15 months and the inability of the company to raise money at valuations that were comparable to what Info Edge invested at.

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Analysts say that the approach of Info Edge has been always to invest in early stage businesses. “These early stage investments carry an element of risk. The way they look at it is that 20 percent of the investments will fail over a period of time,” says an equity analyst who tracks Info Edge, but wished to remain anonymous.

Swarup and her firm, part of that 20 percent in a way, are already in talks with other investors, and the company says many are interested in 99labels. The company is also in the process of making some structural changes as its business model is being questioned. “We are now in the process of re-inventing 99labels and hopefully in the next couple of months it will change,” says Ishita Swarup, Founder of 99labels.

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A couple of initial changes that the company has brought in to the website is that they have done away with the members-only policy and the flash sales model. This was an integral part of the brand experience and that has been heavily diluted.

Now the website also has a catalog sales model, where there are no discounts offered as opposed to the earlier version. Swarup says that it’s not just 99labels which is undergoing change, but the entire e-commerce sector. She is of the opinion that there will be a transformational change in this space as investors have now woken up and are evaluating the sector-specifically the online shopping sites, as they require much more capital than their counterparts such as websites offering services.

Good old times

Launched in September 2009, with a seed capital of Rs 1 crore, 99labels.com was inspired and fashioned around Vente-Privee, a France-based flash sales shopping portal which is also the pioneer in the flash model.

“The flash sales model was extremely successful in the world as an e-commerce format. It was popular across the world-Singapore, Brazil, Russia, France, etc,” explains Swarup. The model entails a limited period offer of deep discounts on products to the members of the websites, which Swarup boasts, “gave exclusivity to the website.”

Swarup launched the site at a time when there were almost no players in the e-commerce sector who were selling apparel online and the concept of flash sales was new to Indian online shoppers. But within a month of its launch came its main rival, Fashion and You. The initial success triggered the gold rush and within six-months there were around 10-odd flash sales websites, offering various discounted deals on restaurants, clothes, watches, sunglasses, etc.

After a year of its operations, in November 2010, 99labels was seeking some institutional investment and after talking to a number of investors, Swarup zeroed in on Info Edge. She says, “We were excited about the fact that they were entrepreneurs themselves in the online sector, having created businesses and seen ups and downs.” In April 2011, Bikhchandani invested Rs. 16 crore in 99labels.

Killing the goose

But by 2010-11, the e-commerce space was overcrowded by too many players and ‘me-too’ shopping websites. Even regular e-commerce players were giving discounts and other attractive offers like free shipping, cash-on-delivery, cash-back offers etc.

[caption id=“attachment_812367” align=“alignleft” width=“380”] The freebies and offers set a very low standard for shopping portals as online buyers were pampered and everyone now wanted discounts or at least free shipping, or else they wouldn’t buy, says Ishita Swarup[/caption]

Swarup says that the entrepreneurs and investors were not thinking about profitability and scaling up at that time and decisions were not made keeping that in mind. “None of us, including the investors, completely understood the economics of the business. That was the time of growth when nobody was asking questions related to profitability, break-even or whether it will ever make money,” Swarup says.

The freebies and offers set a very low standard for shopping portals as online buyers were pampered and everyone now wanted discounts or at least free shipping, or else they wouldn’t buy, she points out.

“This set very high expectations from the customer’s point of view and anything less than that was not accepted by the buyers,” Swarup says. According to her, investors suddenly became aware of the problems and started questioning decisions in terms of how those would translate into profitability.

For 99labels, one event in 2011 shook the company and their investors’ confidence even more than the general malaise in the sector. In November 2011, Fashion and You raised a whopping $40 million (Rs 201 crore) from a group of investors led by Norwest Venture Partners and Intel Capital. It is considered to be the highest investment made till now in any Indian e-commerce venture and clearly, Swarup was not in high spirits with this development.

She talked to a slew of investors about the future implications of this investment made in their competitor’s venture. The response she got suggested they weren’t too bullish about 99labels. “The investors we talked to then said you can’t fight a company with this heavy capital,” says Swarup.

Still, in early 2012, another round of investment of Rs 5 crore was made in the company and even as recently as September 2012, when it raised another round of funds, everything was up and fine with 99labels. But then came the questions on the flash sales model from investors.

“The flash model, which was a hero two years back, was being questioned. The questions were on the lines of, can it scale, does it have inherent limitations, how much can you sell and is there enough stock available on discount,” Swarup recalls.

The slow squeeze

For 99labels, everything which could have gone wrong went wrong: The online shopping space became more cluttered, e-commerce as a sector itself was questioned, their strongest competitor got huge funding and the flash model was no longer a customer or investor favorite.

It was also a time when funding in shopping websites had been squeezed and there was scarcity of money in the market in general. Bikhchandani echoes Swarup when he says that the funding environment for e-commerce has become adverse in the last year or so.

“Investors realized that e-commerce companies would require much more capital in order to reach break-even than had been imagined earlier.” He adds, “The government clarified that foreign investment in multi-brand e-commerce was not permitted. This shut out most of the risk capital available.”

Bikhchandani agrees that 99labels is undercapitalized. “The 99labels team is very good. They are simply facing a difficult funding environment.” On whether Info Edge failed as a mentor and investor of 99labels, he says, “We prefer to invest in entrepreneurs who need very little handholding. Startups succeed because of entrepreneurs and not investors.”

Swarup thinks Bikhchandani wants to focus on websites offering services rather than ones selling products. “Info Edge wasn’t sure it wanted to continue investing in a product-based e-commerce website. I think they have decided to look at and invest in service-oriented portals,” says Swarup. This is a point which analysts agree with. “Info Edge investments have a very limited exposure to e-commerce and all other investments are in the online services sector. E-commerce is highly competitive and requires huge investment too. Seen that way, 99labels was a weak investment,” says the equity analyst. “However”, he adds, “they will never agree that they are not interested in product- based e-commerce.”

A step ahead

Bikhchandani says that his writing off the investment has benefitted 99labels since “they can now raise money at a valuation lower than what we invested at. Our valuation will not be a hurdle.” Swarup agrees with him and says, “What happens is, if you have an investor like Info Edge, new investors are also shy [to come in]. So they thought that they should withdraw completely, and we restructure the company so that inviting new investors becomes slightly easier.”

99labels, according to Swarup, is very close to breaking even though that is not one of her concerns, she says. “Our next step is to grow. Unless we pick up some external money, we can’t grow. I think there are people waiting to put in money in the company.”

Retaining her sense of humor, she jokingly adds that her pitching point to new investors would be that “I have been here for three and a half years, making mistakes, and have learnt a lot of lessons.”

Avanish Tiwary writes for Entrepreneur India