E-commerce rule changes put off PE/VC investors

Chennai: Private Equity and Venture Capital funds have developed cold feet about investing in e-commerce companies due to the regulatory uncertainties. While PE/VC game in the horizontal space is over, vertical e-commerce players and the larger consumer internet space may still be able to look attractive once the negative sentiments die down.

The numbers say it all. In January 2019 PE/VC investments across industries at $1.8 billion were down by 49 per cent against January 2018 and 43 per cent lower compared to the previous month, as per the data from EY India. Absence of large deals of over $1 billion was one of the main factors that contributed to the decline in investments. E-commerce has been the major contributor of such large deals in the past few years.

“The recent regulatory changes have not sent right signals to investors. The continuous chop and change in policy and regulatory uncertainty will make them cautious before putting their money into Indian e-commerce entities,” said Arun Natarajan, founder of Venture Intelligence.

Though the investor community feels that a large growing market is still enticing, the constant recalibration with the ever-changing policies has become an irritant.

“The sentiments have been affected in the near-term. In 2016, the government had come out with a set of FDI regulations and the industry had adapted to the new changes. Constant changes slow down the growth as the focus will shift toward recalibrating the business. While regulations are welcome, constant changes are real irritants,’ said Srini Vudayagiri, investment director and partner of Peepul Capital.

According to Natarajan, the PE/VC game in the horizontal space is over, with Amazon and Walmart emerging as the winners in the ‘last man standing game’. There are a few other horizontal players like Snapdeal and ShopClues, who are no longer keen on playing the PE/VC funding game. Horizontals are likely to see only strategic deals in the future.

Vertical players in different segments like babycare, beauty and personal care, fashion and furniture have demonstrated stronger business models. FirstCry, the babycare portal was one among very few e-commerce players which received investment in January.

Further, the larger consumer internet space, which includes foodtech, edutech, mobility and hospitality are looking attractive for investors. “The regulatory issues have not yet started disturbing the space. Some of the offline associations have expressed their indignation towards ‘FDI-induced predatory pricing”. Such pressure forcing government to make regulatory changes is a risk factor,’ said Vudayagiri.