Investors hunting for the next Pinduoduo in India’s budding social commerce scene

The likes of Meesho, GlowRoad, and Shop101 are trying to replicate their Chinese counterpart Pinduoduo’s runaway success.

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With Amazon India, and Walmart-owned Flipkart emerging as two clear leaders in India’s e-commerce space, signaling a consolidation in the sector, investors have started to hunt for the next big trend in the online shopping sector—social commerce.

According to data compiled by industry data tracker Venture Intelligence, investments in social commerce space has almost doubled this year. While the number of deals has remained the same at seven, Indian social commerce startups till September 2019 have raised a total of USD 157 million compared to USD 82 million last year.

Bengaluru-based Meesho, hailed as the Indian Pinduoduo, is the most funded among the seven with an aggregated USD 215 million raised so far, according to startup database Crunchbase.

The Facebook-backed startup widened its loss to Rs 1,000 million (USD 14 million) in the financial year ended Mach 2019 from last year’s Rs 50 million (USD 700,000), per its regulatory filings. A large chunk of expenses went towards salary, logistics, marketing, and reseller bonus, discounts, rewards, and reimbursements.

However, its revenue in this fiscal year increased to Rs 840 million (USD 12 million) from Rs 60 million (USD 850,000) over the previous corresponding period.

Founded in 2015 by two engineering graduates, Vidit Aatrey and Sanjeev Barnwal, the company provides solutions for product discovery, delivery, and digital payments to enable easier transactions between resellers and buyers.

In August this year, the company raised USD 125 million in its Series D round led by South African telecom giant Naspers, with participation from existing investors including SAIF Partners, Sequoia Capital, Chinese VC firm Shunwei Capital, and RPS Venture Highway.

One of its rivals, Bengaluru-based social commerce startup GlowRoad, in early May, raised USD 11.5 million in Series B+ funding round led by Korean Investment Partners, and Singapore-based Vertex Ventures. This funding came less than two months after it raised USD 10 million from Chinese asset management firm CDH Investments.

Similar to Meesho or other Indian social commerce startups, GlowRoad helps resellers build trust with their offline network to sell online using social media platforms, while buyers enjoy all services of the traditional e-commerce such as door-step delivery, and hassle-free returns.

Investors believe the social commerce model is a good way to tap into the next 500 million users from smaller cities, as the wholesale process is built upon the trust value of resellers’ offline and online networks.

Piyush Kharbanda, a partner at Vertex Ventures SEA & India, said that consumer internet business has a lot to do with changing customer behavior, which is fundamentally expensive and time-consuming.

He believes “companies need to find a way to shorten this behavior, and a lot of companies are trying to do this by using resellers, which means leveraging existing offline social networks to build the trust gap and sort of give the customers, a little bit of nudge to enable online transaction.”

The social selling model

Fundamentally, social commerce is a reseller model where people sell products to their friends and relatives using one of the social commerce apps such as Shop101, GlowRoad, Meesho, among many others. These apps partner with wholesalers and list their products for their users to buy and then resell them among their social networks, using online as well as offline channels.

“Resellers maintain customer relationships, talk to their connections about products, and finally close the transaction. Our job is to get the whole sellers, list their products on the platform, and provide logistics and payment tools for the final leg of the transaction. Money comes to us and we distribute it to everybody,” Abhinav Jain, founder and CEO at Shop101, told KrASIA.

He said resellers use their social media contact like WhatsApp and Facebook to share product catalog directly from the app. A good chunk of resellers also use social media tools like Instagram, Sharechat, and TikTok to create new connections to sell products. “Selling through short video platforms is picking up, as resellers see that as the way to find new buyers,” Jain said.

Shop101 has till now raised USD 16.5 million from Kalaari Capital, Unilever Ventures, Stellaris Venture Partners, and Vy Capital, among others.

According to Jain, although they are yet to break-even on EBITDA, the company is making money on each transaction. “We have been able to show positive unit economics, which none of the other players have been able to do including the large e-commerce companies.”

Pegging social commerce at the trillion-dollar worth economy, he said the products sold on social commerce platforms are much broader and goes beyond smartphones, electronics, and branded apparels.

“We are the first to push and sell unbranded jewelry, apparel and home décor which is used by for everyday consumption by a typical Indian household,” Jain said.

Although media reports say returns of unsatisfied products in this space are as high as 40% to 50%, Jain refused to believe so as he believes that, unlike e-commerce where there is huge frivolous returns, people don’t do that with this model as the sales are done by someone who they know personally.

“Because people are buying from their social contact, people will only return if they genuinely have a problem with the product,” he said.

Replicating the China success story

Investors are hoping social commerce will be the next big thing, akin to how it has shown growth in China. Although, there is a fundamental difference between how social commerce is practiced in India and China.

While Indian social commerce platforms rely on resellers—largely housewives, and students—who share product details to their network of personal contacts through social media platforms, the Chinese social commerce model essentially revolves around group buying, time-sensitive bidding, and lucky-draws.

“It essentially becomes a discount hunting tool. In India, it’s a reseller driven model, where they take effort to show and convince their contacts to buy a product,” Jain said. On average, according to him, a reseller makes a margin of 10% to 15% and, “they see it as their own business thus they have a much deeper engagement with the platform.”

Social buying is still in a nascent stage in India compared to the Chinese market, which is set to become a USD 302 billion industry by the end of this year.

Kharbanda from Vertex Ventures said although, the trend is yet to pick up in India, “we are seeing a few of these platforms now maturing, so I am sure we will start seeing its mainstream adoption.”

One of the learnings, Kharbanda said Indian social commerce companies can learn from their Chinese counterparts, is creating a strong back-end and supply chain.

“The logistics system has to deepen in tier 3 and 4 markets. Large brands have to start recognizing the value of selling on social media, and create a special setup for distribution and delivery. All of this got set up in China because platforms like Taobao, JD, and Tmall existed for a while,” Kharbanda said.