Flipside of funding Flipkart

Flipkart’s latest heart-stopping round of funding, which is incidentally the second biggest fund-raising globally this year, has yet again sparked questions and criticism that need to be addressed.

‘Is this for real?’ seems to be the predominant question, which is understandable.

The problem with e-commerce industry is not that it doesn’t turn a profit but that investors have no way of knowing whether its cash-burning can eventually come to an end.

There’s little use of looking at Amazon in this regard, which is in constant investment mode and has become a Wall Street enigma of late.    Flipkart, like any other good e-commerce company, is constantly reinvesting and investing any profit or funding it has into infrastructure, marketing, market expansion and pricing.

This insatiable need to constantly funnel money into expansion has led to two views of the company and the overall e-commerce industry.

The bull argument is that Flipkart and Co will eventually be able to gain enough market share or build enough infrastructure to flip a ‘profitability switch’ of sorts. The switch in this case will include an immediate cessation of capital expenditure, and the company hiking prices, which will, hopefully, lead to the company making a profit.  The bear argument is that this isn’t possible—that the e-commerce industry as a whole is a sort of Ponzi scheme that requires constant investment to stay afloat. In this version, the only way for Flipkart to stay alive is to keep prices down forever while investing in marketing and advertisements till the end of time.   

Only time will tell which view will be correct. In the meantime, this $1 billion round of funding has saved Flipkart from the IPO noose while giving it even more breathing room. But this time should be used to make smart technology investments.

One of the reasons Amazon is an enigma is that it is actually ten businesses in the form of one, with interests ranging from cloud services (Amazon Web Services) to smartphones (Fire Phone). Jeff Bezos is constantly playing around with a number of different balance sheets, funnelling profits from healthy verticals into loss-making ventures. 

Flipkart, on the other hand, is floundering after failures in the digital music space and an unimpressive foray into tablets. If it wants to prove the bears wrong, it needs to use this $1 billion to transform itself from an e-commerce company into a technology titan like Amazon.