I read with great interest the 'breaking story' of letsbuy.com getting acquired by flipkart.com.
This development is in complete sync with my article on vulture commerce and many others.
This is what I believe, happened behind the scenes:
First the Basics:
Let's go with the report that letsbuy.com did raise $6 million of funding from Tiger and Accel as Series A.
Any decent Series A round valuation dilutes the promoters by at least 30 per cent.
So, $6 million in Series A made letsbuy.com worth $20 million.
Hmmm... feeling a bit charitable? Ok! Let's say that letsbuy.com at the end of Series A was worth $25 million.
Time and Burn
If letsbuy.com raised the money even a year back, and given the massive amounts of burns required to survive in the e-Commerce space in India, it would be safe to assume that the company was nearly out of cash or had a few weeks or months of cash left.
In fact, this is exactly what Sudhir Syal had told me two weeks back, at the WAT Conference (that letsbuy.com had very little cash left).
Now, this is true for any Internet business. Cashburn runways for a business may last for one year maximum (if you are burning).
Most Internet businesses do burn because they are growing. So there is nothing to be frowned upon on that.
They assumedly raised $150 million at a $850 million (post or pre) valuation. That means post money the valuation is at $1 billion.
Now, the last financier is hoping to sell the business for at least $2-3 billion if any reasonable returns* have to be earned.
* 2-3 X in the case of Tiger would actually translate into a a much bigger IRR, since Tiger has been investing in flipkart.com from the early stages, so its net cost per share of flipkart is so cheap, it can afford to fund the last round at high valuations.
Now the deal:
Imagine you are Tiger Global. You have the biggest bet of your investment portfolio in India on flipkart.com.
That company has to exit and exit big.
Now, while flipkart.com is scaling and doing its best (and let's not deny, a great job), some silly e-Commerce cowboys have begun riding on horses they cannot manage, and have started publicly falling down and making a fool of themselves.
What do I mean?
Imagine the situation:
No one invests in letsbuy.com for Series B (as per the reports, they were struggling to get funded for many months).
They collapse - have a fire/distress sale!
The entire stack of cards of the Indian e-Commerce story comes falling down! Investors are alarmed. Valuations (always a function of sentiment) tumble hard.
Who gets most affected?
So, the marriage proposal:
Let's play a Marwari groom!
I am sitting on a great business like flipkart.com and have made a massive impact on the social behaviour of how Indians buy online. I am a case study in every business School in the world.
I am the No. 1 brand in India. I get a fab PR story every other day.
I have received enough in funding from my father (VCs) to make myself very very marriageable.
In my dreams, I hope that one day, a Rich Girl's father (acquirer) will come calling on the best groom in India - that is me - and propose marriage of his daughter, in return for lots and lots of Dahej - Dowry (acquisition price) for the same!
Wow! This is what life is supposed to be all about!
Suddenly, a marriage broker calls me and tells that some silly, drunk and homeless girl is about to commit suicide and the only way to rescue her, is that I marry her!
So, please say yes!
What do you think I will say?
I will say - get lost!
I mean, flipkart doesn't need letsbuy.com.
Like it doesn't need so many other e-Commerce sites on the brink of failing!
Who wants the pain of marrying two start-up cultures?
Imagine trying to get headstrong co-founders of competing businesses together!
Who would want to buy an identical business that is barely one year old (and hence not at all that mature in processes and standards etc) and then spend precious time and energy figuring out how to reduce parallel costs; who to fire etc?
What's the need to do so?
If I were Flipkart and a distressed deal like letsbuy.com came to me, I would say, let them die.
After they collapsed and went away, I would simply hire their people. Rent out their godowns. Switch their suppliers to my network.
Advertise, 'Missing letsbuy.com? Don't go the cemetery - come to flipkart.com'
Acquisitions (usually) happen when two great value propositions come together. Not for other reasons.
On the other hand, vultures feast on the dead. But start-ups like Flipkart are not vultures! They are growing scaling businesses that are chalking their own path!
What happened in this case?
The common investors must have really figured out that 'adopting' this girl, rather than letting her commit suicide, was the better bet!
Look at the deal:
If Flipkart is worth $1 billion ($850 million + $150 million), and the letsbuy.com deal was done for 30 million, then that's barely 3 per cent of Flipkart shares!
Obviously this is a shares swap deal, with the promise that the next few months' salaries of letsbuy.com will be paid. Now, think about it ... if you were the letsbuy.com promoters - why would you wash yourselves out like this?
If you are selling your company at par value, that means that that after ratcheting and adjustment for liquidation preferences, you will get nothing!
Also, can they work under two other co-promoters? Can they take orders from the Bansals?
Note: For the VCs who have common equity in letsbuy.com and flipkart.com, it's a minor adjustment of equity positions. For the VCs who were not invested in flipkart.com but in letsbuy.com, this is a nice way of earning some small esop quanity of shares in Flipkart!
If Flipkart sells for 3 billion, then in effect, the letsbuy.com promoters will 'have' sold for $90 million! Wow! Such an amazing promise in the skies!
As Flipkart, if I have to spend 3 per cent of my equity to make the e-Commerce bubble in India still look holy, I just might (or rather did) take the bait.
In short - this is a marriage made in hell.
My question is, how many other marriages with suicidal women will flipkart.com, or for that matter, any other healthy business start-up manage to consumate?
Alok blogs at http://therodinhoods.com/