Analysing the decision of eBay to invest in Paytm

• eBay’s investment in Paytm
• The e-commerce industry of India
• The future prospects of the deal

In a major positive development in the start-up ecosystem and e-commerce industry of India, the American e-commerce multinational, eBay has decided to invest in Paytm Mall. eBay is investing around USD 165 million to acquire 5.5% stake in the company. Paytm Mall is the online retail segment of the Indian start-up One97 Communications Limited (commonly known as Paytm). Paytm was founded by Vijay Shekhar Sharma in 2010. It is recognized as a mobile payment application and widely accepted as a medium of payment at most of the merchant locations of India. Additionally, Paytm is also a highly diversified e-commerce venture which is into various services such as online retail, travel bookings, movie tickets, bill payments and mobile recharge amongst others. The present valuation of Paytm stands around USD 18 billion, making it one of the most valued start-ups in India. It has investment from leading global venture capitalists such as Ant Financial, SAIF partners and SoftBank.

In fact, eBay’s stint in India is not new- the company had launched its services back in 2004, however owing to persistent losses, the company sought to exit from the Indian marketplace (owing to the nascent stage of the e-commerce space back then). Further, eBay then invested in Snapdeal in 2013 and again exited. In fact, just last year the company exited from its stake in Flipkart for USD 1.1 billion, by selling the same to Walmart. This makes eBay’s latest move in fact its fourth direct/indirect entry in India.

The entry into the Indian market for eBay comes across as more of an obvious path and this time it has found its way through Paytm.  The company realizes the tremendous potential the Indian market has to offers. The Indian e-commerce market was worth USD 38.5 billion in 2017 and is expected to reach USD 200 billion by 2026. This growth is supported by a soaring internet user base in India which is growing at a CAGR of 11.1% from its present value of 604.21 million users. This optimism has already led to massive investment in the e-commerce and consumer internet start-ups of India, especially during the last few years. In 2018, USD 7.35 billion were invested in start-ups in India by private equity and venture capital firms. There were 200 deals out of which USD 5.9 billion was in early stage start-ups and USD 1.3 billion was invested in expansion and growth stage start-ups. If we closely look at the size of Indian e-commerce industry, it is continuously rising and many players (start-ups and multinationals) are aspiring to benefit from it.

The valuation of the Paytm Mall segment is USD 3.3 billion. The company reported sales of Gross Merchandise Value of USD 188 million in 2018. Alibaba, the global e-commerce giant, also has investment in Paytm Mall. However, when compared to its peers in India, in terms of monthly visits, Paytm Mall lags far behind at 5.9 million. Until recently, it had been operating on an inventory-based model similar to that of Amazon and sold its goods through its warehouses. However, the company is now planning to transition gradually towards a lean inventory model wherein it will act as a marketplace for buyers and sellers and in line with this, it has started shutting down warehouses to cut costs. The company has already acquired more than 300,000 sellers on its platform. It already has Alibaba on board to help it with the expertise to meet this goal. The decision to bring eBay on board was strategic for Paytm Mall to meet this goal.

eBay’s brief stints into Indian markets have not been very fruitful till now in spite of the company trying different strategies and investment modes; although it may be argued that in some cases it was ahead of time while in a few, one can say it exited early. It seems eBay has been unable to analyse its strategic decisions beforehand or perhaps it has found it difficult to implement the same. This time it has found a company whose peers are far ahead of it in terms of traffic and active users. Paytm Mall is gradually changing its business model as a result of certain operational strategies not working out in its favour. Paytm is into many businesses, however up until consumers know it more as a payment application than as an online retail store. This clearly reflects that the retail arm of Paytm has not had the same impression on Indian consumers in comparison to competitors such as Amazon and Flipkart.

While the Indian e-commerce space has a lot to offer, it’s a tough space to operate in. The market is growing and opportunities are plenty but entry barriers are low. Customers are spoilt for choice with competitive prices being offered by different platforms eliminating any level of customer loyalty. Such a brutally competitive landscape will only allow for survival of the fittest. With eBay again trying it’s luck the Indian marketplace, it’s a wait and watch to see if the fourth time will be a charm for the company.