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  Date : 23-01-2015   Platform/Online Media:: Your Story Source

With the news of possible acquisition of Jabong by Amazon gaining ground, the focus is once again back on e-commerce enterprises and their valuations. If Flipkart - Myntra generated its own share of news bytes, moves by the global ‘big daddy’ Amazon are being watched more closely than ever.

There are several good names which are smaller than Jabong and Myntra, but have strong market share in their respective niches. Some of these are Ekstop and Big Basket in online grocery, Lenskart in eyewear, Zivame in lingerie, Blue stone and Cart lane in jewellery, Zovi and Koovs in fashion accessories, Home Shop 18, Crafts villa and Roomstory in Home & Kitchen accessories, Crossword and landmark on the net in books , Firstcry and Babyoye in online new born baby products and Shopclues and Naaptol in electronics.

In some respects, the acquisition of larger and established Indian e-commerce companies by Amazon is inevitable, as competition is intense for acquiring market share in the Indian online retail market. While there are companies which will go about acquiring market share through the ‘conventional’ organic route, larger companies like Amazon will be active acquirers, since they place a premium on 'time value' and will be open to acquire market share inorganically. This trend has been seen in practically every industry and e-commerce is no exception to this rule of 'consolidation'.

Promoters and investors of smaller niche e-commerce companies are watching this space with interest. E-commerce is the current 'flavour' in the investment community and valuations are 'hot', since there is plenty of capital wanting a piece of the 'action'. Given the simple and evergreen economic logic of 'demand-supply' gap, investors are willing to reduce their investment return expectations (or increase their return period horizon), which automatically translated into better valuations for shareholders.

Niche e-commerce companies are now in a 'sweet spot' where they have the opportunity to shop around for attractive deals and to invite capital from the investors who are 'highest bidders'. While all of this makes the situation sound like a dream for small e-commerce companies, there is also a need for a reality check.

Smaller companies that will get funding at attractive valuations will need to be enterprises that have got their fundamentals right. Critical factors are size of the customer base, average size per transaction, time spent per web page by customers/ visitors, customer conversion rate , reduction in cost and time of delivery, strong IT backend, repeat buying by customers( loyalty) including the cart size per repeat customer, reduction in goods return , optimization in cost of acquisition, growing direct traffic and natural search etc.

While it is tempting for promoters to take capital at the terms most favorable to them, they need to keep an eye out for the quality of money. Money taken at a lower premium from an investor who shares the Promoter's vision for the business and who has proven past experience in having scaled up themselves in the past is a far superior option to taking money from the highest bidder.

The other and probably larger caution, for smaller players is to raise money for the right objectives. All investments need to finally return cash to their investors. While burning cash in the short term may, arguably, be necessary to build and scale up a loyal customer base, Promoters need to have a clear plan to generate positive cash flows within a reasonable period of time. Raising money because it is fashionable to do so is a risky thought process.

This is an exciting time for the Indian online industry. Smaller companies must use the opportunity to raise capital wisely and stay true to time tested mantras for success in the long term: "excellent customer experience at affordable prices, while generating sustainable profits for shareholders."