Shopclues, venture debt, India, e-commerce

Venture debt is often sourced by mature companies, but some startups can use debt to cushion their margins. Source: VAKSMAN VOLODYMYR/Shutterstock

ShopClues takes on venture debt to continue growth plans

INDIAN unicorn ShopClues has made itself even more rare with the announcement it had INR500 million (US$7.7 million) in venture debt, funded by InnoVen Capital, with which to use primarily for day-to-day operations.

It’s quite unusual for homegrown unicorns to opt for venture debt capital, especially so for Shopclues, an online marketplace that’s become a household name and been valued at US$1.1 billion.

Livemint reported that the company received the fresh capital infusion from Singapore’s GIC Pte Ltd. When the company broke the US$1 billion barrier and officially joined the ranks of technology unicorns, Tiger Global Management and Nexus Venture Partners also gave them another pump of cash.

A Snapdeal worker scans the barcode on a packaged order at the company’s warehouse in New Delhi.
Business Today writer Rajeev Dubey says the likely deal for Snapdeal could spell trouble for Flipkart. Source: Reuters/Anindito Mukherjee

Less typical than investments gained from fundraising, venture debt tends to be used for mature companies seeking to grow or make acquisitions, though occasionally some startups will use it as a cushion.

Glen Mello, the managing director of Silicon Valley Bank, explained to Next View Ventures that venture debt may be a “good complement to equity… It’s generally got a low cost compared to equity capital and can help support growth.” Usually companies that take venture debts are looking elsewhere for further funding, especially as venture debt, as the name implies must be repaid.

“A company which is getting close to profitability has the option to raise either equity money or debt,” said ShopClues CEO, Sanjay Sethi, to LiveMint.

“Equity will lead to dilution, but you can pay off debt through your balance sheet. Debt is a good instrument to meet working capital requirement or any gaps to plug to achieve profitability.”

“We are profitable on a contribution margin level, but need to achieve a scale where we can cover our fixed costs,” he added.

Livemint further noted that ShopClues has a much lower burn rate than their rivals Flipkart, Amazon and Paytm.

SEE ALSO: Flipkart prepares to pounce on Snapdeal after $1.4 billion funding round

Despite the obvious success of ShopClues, many watchers of the technology scene are still skeptical about the actual value of ShopClues’s business. The e-commerce market in India has stagnated in recent years, with little change in the overall value, despite analyst estimates that the country would see e-commerce sales reach around the region of US$100 billion by 2020.

India, despite the flourishing startup scene there, has relatively low Internet penetration (26 percent) and many people still depend on brick-and-mortar businesses for their purchases.

The lackluster performance of e-commerce businesses suggest that some players will soon drop out of the market, and there’s already signs that consolidation is occurring. Softbank is current in the middle of negotiations to sell Snapdeal to Flipkart, and there’s speculation that Flipkart may merge with ShopClues, as both are part-owned by Tiger.

That being said, some factors differentiate ShopClues from its competitors in that they do not share a customer base, and are specifically targeting markets left unattended by Amazon and Flipkart.