Indian e-tailers' funds will disappear in a flash

The cost of luring buyers and sellers to its platform means the new funds won't last long, notes Una Galani. 

Snapdeal's latest fundraising reveals how the cash pouring into India's e-commerce industry will disappear in a flash.

The online marketplace is raising $500 million from investors led by China's Alibaba and a Hong Kong-listed unit of Taiwan's Foxconn at a valuation of almost $5 billion. Securing more big-name backers is a coup for the Indian start-up.

But the cost of luring buyers and sellers to its platform means the new funds won't last long. 

The investment provides a rare insight into how quickly the industry that includes Amazon and Flipkart, which is backed by the Qatar Investment Authority, is burning through cash.

The Foxconn subsidiary's filing shows that losses at Jasper Infotech, the company that owns and operates Snapdeal, ballooned to $206 million in the year that ended in March, up from $41 million a year earlier.

Given the fierce battle for market share among online retailers, there's every reason to believe that losses are still rising. 

The cost of offering promotions to web shoppers is at least partly to blame. India's online marketplaces are not legally allowed to fix prices.

Instead they encourage sellers to cut prices by waiving commissions, or give customers instant cash-back or credit.

In a recent two-day sale, Snapdeal offered discounts of up to 70 percent on electronics.

The arms race shows no sign of easing up. UBS reckons it will take until 2020 for the industry to be profitable. 

Alibaba and Foxconn are investing at a time when others are turning cautious or cashing out. SoftBank President Nikesh Arora recently warned that start-up valuations in India had raced far ahead of where they were a few years ago.

Snapdeal's valuation has more than doubled since October when the Japanese group invested $627 million for a roughly 30 percent stake.

It was a much smaller investor in Snapdeal's latest round. Meanwhile, U.S. e-commerce player eBay sold down part of its shareholding. 

For Snapdeal, the investment helps it keep up with rivals and gives it more deep-pocketed backers to turn to when it goes shopping for its next cash call. On current evidence, that might be sooner rather than later.