Say you were a betting man: would you place a significantly large bet on an entity that is looking to be the third horse in a two horse race, with the other two competitors well capitalized and backed, and one of them having actually built out the market? Is there room for a third, especially one that has almost never been heard of (outside of the Times of India Group readership/viewership). Canaan Partners appears to have done just that.

It has invested in Naaptol, a business which began as an e-commerce play, and is now trying to find its feet in the Home Shopping business. The investment is of Rs. 33 crores, according to Centrum Capital, which advised on the deal, reports VCCircle, adding that the investment includes a fresh issue of shares, and the acquisition of shares held by the Times of India Group, which had made a Times Private Treaties (TPT) ads for equity investment in Naaptol. A Private Treaties investment allows companies to build a brand using advertising inventory in exchange for equity. Details of the way a TPT deal is structured, in Planet41’s TPT these are structured, from a DRHP filing by Planet41, here.

Competition

Not much is known about Naaptol’s performance, but it intends to expand its shopping services on television channels; it will have to buy airtime on TV channels in India (given the number of channels, this inventory is getting commoditized), usually shows in the mornings, and late at night targeting mostly housewives and middle aged men, once prime-time is over. The two competitors: market leader Homeshop18 and recently launched News Corp owned business Star CJ, both now have their own TV channels. Both STAR CJ and HomeShop18 have equity relationships with successful Korean home shopping networks, with access to their knowhow, the option of bringing their products to the Indian market, and significant funds at their disposal. For Naaptol, there’s a cost attributed to buying airtime on these channels, which Canaan knows well by virtue of another investment, in Cellcast, which runs the reverse auctions show Bid2Win.

Naaptol Will Need More Money To Scale

It’s a growing business in terms of transactions and topline, but the margins really don’t appear to be covering costs right now: in FY10, HomeShop18 introduced 857 new products as a part of its offerings, and reported an increase of 92% in orders executed. However, it doesn’t appear to be profitable: the company “TV18 Home Shopping Network Limited” reported revenues of Rs. 54.33 crore for the financial year ending March 30th 2010, up from Rs. 23.9 crore, but reporting a loss of Rs. 28.39 crore (albeit, lower than the Rs. 49.34 crore the previous fiscal). Agreed that competition will help build the space out, but don’t be surprised if Naaptol needs another round of funding a year from now, if it intends to scale the business to be anywhere close to Homeshop or STAR CJ in the near future.

We’re not saying that there’s no business opportunity for Naaptol in being the number three player in this space, but it’s a risk, and they certainly are competing against some heavyweights. Then again, Canaan Partners is known for risks – Chakpak, TechTribe and Cellcast come to mind, though Consim Info and iYogi appear to be well entrenched.

Related:
– Naaptol Raises Rs. 25 Crore From Canaan: Report; Home Shopping?
– STAR CJ CEO Paritosh Joshi On Distribution Plans, Costs, Changing Perception
– STAR CJ CEO Paritosh Joshi On Programming, Languages, HomeShop18, Digital