By AltG Research On Behalf Of Poornima Vardhan & Taponeel Mukherjee
The recent news of Udaan’s $340 Million fundraise from M&G brings the focus back to B2B startups in India. The funding seems to be some fresh equity infusion. However, we aren’t clear how the conversion of a convertible note into equity leads to fundraising since no new capital is being infused into the company.
Does Udaan Have A Cogent Thesis?
The short answer is no. The thesis of the B2B startups in India is based on the theme that “B2B Distribution” is unorganised in India and that there is a major play for a new player to aggregate and organise this space. We think there are significant questions around the assumptions made and other significant challenges that any B2B platform will face.
Is B2B Distribution in India Unorganised? Similar to the thesis that investors had around kirana stores being “unorganised”, the thesis of B2B distribution being “unorganised” suffers from a similar problem. Simply put, India’s B2B distribution isn’t disorganised. On the contrary, the existing B2B distribution is well structured and has players at multiple levels.
Deep Network Key For A Win: The key to distributing physical products in India is deep reach and an extensive nationwide network. And, at the end of the day, any B2B distribution platform will have to partner with local last-mile distributors to scale, survive and make the economics work.
Is Udaan doing anything significantly different from the existing solutions? We don’t think so. Fundamentally, technology, if used, is, at best, an enabler needed to supplement a mega-logistics business. The question is, how much Alpha is the technology platform generating? If I need to get a packet of Atta moved from the Main warehouse to a kirana store, I am still pretty much doing the same activities that were done earlier. So, where is the differentiation? Essentially, what’s new that’s allowing the players in the ecosystem to do previously done activities Faster, Cheaper Or Better by a margin of at least 3X without the use of discounts. Everyone starts with the thesis of disintermediating the middle man to become the middle man themselves and recreating the wheel, perhaps?
Reluctance from brands to stop working with their existing distributors and sign up with B2B platforms: Reluctance of brands such as Parle, Marico and ITC has been an issue that B2B platforms such as Udaan have already faced. Fundamentally, a platform like Udaan works well when there is fragmentation on both sides of the platform. That is, there are 1000s of sellers (brands) and 1000s of buyers (kiranas) say on a platform such as Amazon. However, Udaan’s suppliers are mega companies across the spectrum from FMCG to White goods. This is where platform dynamics fail. You get squeezed by your supplier. Additionally, your supplier is also reluctant that you will launch a product that will compete with theirs. This is also an issue Udaan has faced.
Is There A Scenario Where A B2B Platform May Work? Yes, there might be specific large enough verticals with fragmentation on both sides and enough margins in new emerging categories to build out a business. Would that be worthy of a Multi-Billion USD Tech valuation? That’s questionable!
Substantial Valuation Reduction:
Given how public markets are valuing new-age technology businesses, a valuation reduction was always on the cards. For Udaan’s IPO ambitions, three questions will need to be answered:
Can Udaan deliver Margin accretive Growth in what is structurally a low-margin business?
What is the “Technology-Edge” that Udaan delivers that gives them a “Tech-Crown?
What valuation are Udaan’s investors in their Capital Structure willing to IPO at? MamaEarth slashed its IPO target by almost $2 Billion.
Future Growth Concerns:
As mentioned above, there is potential for a B2B platform catering to specific verticals; however, multi-billion dollar valuations are questionable. Regardless of the merits of their valuation, moats and cash-flow sustainability, one thing the listed new-age tech companies Zomato, Paytm and Nykaa had in common was that they created new-business models and profit pools that did not exist earlier. For Udaan, however, it seems much more about recreating the wheel.
Disclaimer: In the article "$340 Million Udaan Fundraise: A Lifeline In Distress Or More Than Meets The Eye?" above - Any views, comments or communication (above or in the past) should not be construed to be investment advice by Alternative Growth (hereafter referred to as “AltG”) in any form whatsoever. AltG does not make an offer to sell or solicit to buy any securities.