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Why Investing In Snapdeal Doesn’t Make Sense For eBay

Online marketplace, eBay Inc, is in talks to pick up a significant stake in Indian e-commerce site, SnapDeal, according to a report by The Hindustan Times, citing a source as saying that the transaction is still being worked out and that it will likely be carried out through eBay India, and structured to comply with FDI (Foreign Direct Investment) regulations. Another report by The Times of India mentions that eBay might initially acquire only a 5% stake in the company, valuing Snapdeal at around $300 million. Note that both eBay and Snapdeal have refused to comment on the matter.

Why would eBay invest in Snapdeal?

Snapdeal pivoted from being a deals site to an online marketplace model, allowing sellers to offer products across categories such as electronics, fashion, lifestyle among others. This is similar to eBay’s B2B model in India, and both companies essentially operate in the same segment. Why would eBay invest in a competing business, thereby helping it grow? If at all, an outright acquisition would make more sense: eBay would be better off acquiring SnapDeal for its users and vendors, shutting it down to eliminate competition, and shift users and vendors to the eBay marketplace. This is what Flipkart did with Letsbuy. If this investment does go through, it wouldn’t make much sense to us.

FDI in eCommerce a barrier?

The Indian government does not allow FDI in multi-retail e-commerce, although it had approved FDI of upto 51% in multi brand physical retail, subject to certain conditions. The HT report categorically mentions that eBay would overcome this problem by structuring the acquisition through its India entity. We are not sure if FDI restrictions would play a role here as technically, Snapdeal is operating on a marketplace model, and merely enables sellers to offer products. So even if eBay decides to acquire a stake, FDI restrictions will not be a hurdle. Remember that eBay acquired Baazee.com, which was a marketplace. The HT report appears to have gotten the FDI angle wrong.

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Snapdeal had raised $40 million in a series B funding round from Bessemer Venture Partners, Nexus Venture Partners and Indo-US Venture Partners in July 2011. In January 2011, it had raised $12 million from Nexus Venture Partners and Indo-US Venture Partners, as part of its second round funding. The company claims to have a userbase of 18 million, featuring more than 3000 brands and 50,000 merchants, across 200 categories, selling 25,000 units a day, shipping to more than 4,000 towns and cities, as of September 2012.

(With inputs from Nikhil Pahwa)

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