Story Highlights

• By Sunday, July 30, it was clear: Snapdeal's merger with bigger rival Flipkart, being pushed by the former's largest investor SoftBank, was not going through
• Over just 12 months, Snapdeal’s value sunk to $1 billion from $6.5 billion. Flipkart’s best price was $950 million. The valuation offered made several Snapdeal investors unhappy
• Bahl’s new pitch was simple: he did not want any more money from investors. The money it raised from the sale of FreeCharge to Axis Bank — Rs 385 crore in cash — would help in building the new Snapdeal

Kunal Bahl and Rohit Bansal had a sleepless night on Thursday, July 27. The next two days were crucial and would not only decide the fate of Snapdeal, once India’s second-largest ecommerce company, but also its founders and school buddies Bahl and Bansal.

On Friday, Snapdeal’s board, which comprises the founders, two representatives of its largest investor SoftBank, a representative from Nexus Venture Partners, and independent director Akhil Gupta, got into a series of meetings, calls and emails, which lasted for almost 48 hours. (It’s not clear if Kalaari Capital was represented on the board. The venture capital firm’s managing director Vani Kola resigned from the Snapdeal board recently.)

By Sunday, it was clear: a deal with bigger rival Flipkart, being pushed by Snapdeal’s largest investor SoftBank, was not going through. Flipkart wanted all of Snapdeal’s shareholders to give their assent to the merger and sign an indemnity agreement taking on liability for anything that may arise — something that wouldn’t pass the required muster.

In hindsight, it should have been clear that the deal wouldn’t go through. Bahl and Bansal had never bought into the merger. But, with 6.5% equity, there is little they could have done; SoftBank was calling all the shots, even if it meant a distress sale to create a bulked-up entity in the Flipkart-Snapdeal combine that can take on industry No. 1, Amazon India.

When B-schools do a case study on the complex deal, the lesson will be simple: get the support of all stakeholders, even it is two-and-a-half dozen investors as in the case of Snapdeal.

Not enough money on the table

Over just 12 months, Snapdeal’s value sunk to $1 billion from $6.5 billion. Flipkart’s best price was $950 million (an earlier offer was pegged at $800 million). “That is where the problem started… If the deal was anything at $3 billion, it would have been sold,” said a source close to the merger.

The valuation offered made several Snapdeal investors unhappy, including Ratan Tata, Bessemer Venture Partners, and BlackRock, among others. Snapdeal has 30-odd investors, all of whom are not represented on the board.

“Kalaari wasn’t (initially) supportive of the deal. Nexus, too, wasn’t in favour… The board cannot be at odds with the shareholders,” said the source quoted above.

According to an investor close to Flipkart, “Nobody wanted the deal to happen except for SoftBank. There isn’t a single customer Snapdeal has and Flipkart doesn’t.”

The Snapdeal board did what any board in a similar situation would have: it decided to send the final agreement of $950 million to the shareholders to seek comments, and simultaneously start discussions between the two teams, while lawyers would have worked on drawing up the agreement.

But before doing so, the board members wanted to have a discussion among themselves, also because Flipkart had put in a long-term indemnity clause, which would require the Snapdeal board to solve every problem with shareholders, including in matters of differential payments.

Differential payments? Except Kalaari and Nexus, all the other investors were getting only shares in Flipkart, not cash. Kalaari was getting a stake in Flipkart and an additional $30 million to consent with SoftBank. Nexus was getting $40 million in addition to shares. Investors such as PremjiInvest were reportedly unhappy with this differential payments structure and had written seeking details of the deal.

Also read: Death of a Unicorn: Inside the fall of Snapdeal, once a $6.5 bn startup

“Flipkart wanted every single shareholder to sign the agreement… The writing was on the wall — it wasn’t possible,” said a second source.

The winds had changed. Even SoftBank had turned wary and there were doubts whether the merger was worth it. According to sources, SoftBank didn’t think that the “time the deal was taking was worth a battle.”

SoftBank said as much to The Economic Times, though not in as many words. “I believed that this (the merger with Flipkart) was the right thing to do. But once the company and the founders have decided on a different path, we will support them,” Kabir Misra, managing director, SoftBank Group International, told the newspaper. Misra sits on the Snapdeal board. “We look forward to the results of the Snapdeal 2.0 strategy,” the Japanese conglomerate said in a statement.

At least one other investor was unhappy: Kola of Kalaari Capital didn’t mince words. “I was extremely disappointed in the founders and their disregard for investors and employees’ interest. I had no prior information of this action; this was not discussed with us and has not received our support,” Kola told business news TV channel ET Now.

Bahl had planned well…

The deal was taking too long to happen — negotiations were on for over six months. That gave Snapdeal CEO Bahl, never in favour of a sellout, a lot of time to plan his next move. He had told the board early on of a Plan B he had for Snapdeal, but the board was not warm to the idea. Then, early in July, he presented to the board what he called Project Sunrise. FactorDaily was the first to write about Bahl’s Plan B in two separate stories. If Snapdeal has to survive on its own, Bahl wanted it to be the TaoBao of India.

TaoBao is an open marketplace of Alibaba, Chinese ecommerce giant, which allows any and every seller to list its products. It caters to the long tail of retail, unlike TMall (also an Alibaba subsidiary), which is a marketplace for brands.

“Snapdeal 2.0 is about being frugal and self-sufficient,” said the second source. Bahl has showed the board Snapdeal’s path to profitability in March 2017. “The board had approved the plan and allowed Bahl and his team to reorganise the business,” said the first source. In the days and months to come, the board will have to approve several changes for the Taobao-like model to emerge. “That will take another 90 days,” said a third source.

Bahl declined comment for the story. A Snapdeal spokesperson, too, did not comment.

In a letter to its 1,200 employees (down from 6,000 last year), Bahl and Bansal wrote: “We will be continuing the Snapdeal journey as an independent company… And after the last few months of tumultuousness, it is time to focus on the business and leverage all our strengths to progress towards our vision of building the best marketplace to connect buyers to sellers in India.” Bansal is the COO of Snapdeal.

“There isn’t going to be one successful model for ecommerce in India. In every market, there are multiple successful ecommerce businesses, and as long as one’s strategy is differentiated and has a clear path to success, there is a great company that can be built,” Bahl and Bansal wrote.

The founders want to run a profitable business. The first source in the story said that Snapdeal has made very small amounts of gross profits in July. In the next one year, Bahl wrote that Snapdeal will make gross profits of Rs 150 crore.

Snapdeal, like most of its ecommerce peers, has largely been run on investor money in the past. In 2015-16, the last year for which Snapdeal’s financial numbers are available, the Gurgaon company saw its  losses rise 150% to Rs 3,316 crore — more than double its revenues of Rs 1,457 crore (an expansion of 56% from 2014-15), the Mint newspaper reported in January this year.

No frills ecommerce

Bahl’s new pitch was simple: he did not want any more money from its investors. The money it raised from the sale of FreeCharge to Axis Bank — Rs 385 crore in cash — would help in building the new Snapdeal.

It won’t do logistics, so it has put Vulcan on the block, and expects to raise another Rs 100-120 crore from its sale. The first source said that Snapdeal is already in talks with Gati, a StanChart Equity Fund, TVS Logistics, among others. “But this deal will take another four weeks to conclude,” the source said.

At its peak, Vulcan had 210 warehouses, but the numbers have fallen. FactorDaily couldn’t verify the exact number of warehouses Vulcan has. But the second source said that it fulfils 35,000-40,000 orders every day. That’s nearly 80% of all Snapdeal orders.

Snapdeal will also not process loans for sellers, or connect buyers and sellers to pay through an offline channel. “We firmly believe in our new direction — Snapdeal 2.0 — part of which is a laser focus on being a champion for all sellers in India, enabling anyone to setup a store online in a few minutes and focusing on providing large selection of products at great prices to consumers,” Bahl wrote in his letter.

Snapdeal 2.0 should be called Snapdeal 5.0 or so, really — the company has pivoted more times and pursued strategies that would qualify as flip-flops to most outsiders.

Bahl and Bansal started Snapdeal in 2007 in Bahl’s bedroom as MoneySaver, a physical coupon-selling company. But as more Indians started using the internet, MoneySaver became Snapdeal, an online deals website, in 2010. There were 70 others in the space modelled after US’s deal platform Groupon. Snapdeal became the largest. But the deal business was short lived — just two years. After a visit to China in 2012, Snapdeal became an ecommerce marketplace selling products, modelled after Alibaba. Others like Flipkart, Yebhi.com, among others were still carrying inventory.

Also read: It’s early days for consumer internet in India, but here’s why Amazon and Uber will win the market

Next, Snapdeal started doing everything — yes, almost everything. It invested a large amount of money in logistics business GoJavas, started Vulcan Express and owned warehouses. It also invested in the third largest e-grocer PepperTap, which shut down. It continued buying more — mobile payments business FreeCharge, luxury goods marketplace Exclusivity, financial services marketplace RupeePower, and Shoppo, which helped buyers connect with boutiques, offline.

It wanted to build the Facebook of ecommerce. Bahl wanted to bring offline consumption online. That was the problem: too many things, too early, and with too little money to build scale in each of the businesses. This meant a large open tap from where large amounts of money was gushing out without profitability in sight.

In 2016, funds became scarce. Amazon was growing fast, at times overtaking Flipkart in some of the months. Snapdeal struggled for money, and when it convinced new investors to come on board, SoftBank didn’t let it raise monies. The investor wanted to merge the company into Flipkart, the process for which started in February.

To be sure, this isn’t a story of rising from the ashes. Snapdeal could well fade away into oblivion in the race to the finish. Still, it is early days for Snapdeal and its founders. As Jeff Bezos, founder and CEO of Amazon always says, “It’s Day 1 in ecommerce.”

It might be Day Zero for Snapdeal. “Success is never final, failure is rarely fatal; it is the courage to continue that counts. Let’s work together to make Snapdeal 2.0 a super success,” Bahl ended the letter to his employees.

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