Last week, social commerce startup Meesho raised $50MM to bolster its product, and fund its expansion into Asian markets.
Meesho’s fundraise comes at an intriguing time when most e-commerce related investing has just being focused on Amazon, Flipkart and other established Indian players. To add to that, Meesho has raised capital at a blistering pace, having raised 3 times in the last year – with a total of $65MM in its bank. To put things into perspective, it took Flipkart 3 years to raise this much money.
What has Meesho done so right to be given such a large war chest?
The answer is three-pronged – it has discovered product-market fit, started business monetization and tapped the hot theme of building for the next billion in India. We will be able to understand why each of these matters now as we travel with Meesho on its very interesting journey.
Meesho was started in 2015 by Vidit Aatrey and Sanjeev Barnwal, two classmates from IIT Delhi. Vidit worked at entrepreneur hotbed InMobi, while Sanjeev honed his technical chops at Samsung and Sony, before pairing to start FashNear. FashNear helped users find fashion stores nearby, and the company curated the inventory the stores through an app catalogue. This was evidently very useful for customers, given they could get fashion products on demand.
But the trouble was, like with most failed startups, you may create value but not capture much of it. The business model demanded instant delivery and yet had thin margins because FashNear mostly sold unbranded fashion. Finding both customers and sellers would be hard, and when branded products would be discounted – already thin margins would be squeezed. The founders decided to modify their business model, but in the process learnt a lot about the journey of customers and resellers that would help build Meesho.
The discovery of product-market fit had begun in earnest.
The company pivoted to allow small businesses to setup an online shop, while facilitating sharing on online media. The two key elements of its future business were now coming together, and the company soon found itself getting through YCombinator in 2016. It was at YCombinator that the founders really stumbled of the neat and clever solution that Meesho is today.
A lot of communication today, especially in India, is done on Whatsapp. It is no secret that most small businesses, and solo entrepreneurs, rely heavily on Whatsapp to manage their transactions. A large number of these solo entrepreneurs are housewives, and are part of the larger group called “resellers”.
There are estimated to be ~3MM resellers in India, some who have been educated by Amway and Tupperware (blast from the past!). The market is not insignificant – it is estimated to be worth $8Bn and is expected to 5x in the next 5 years. Few of these resellers have any formal systems to manage their sales, customers, transactions, products. Additionally, most of them are on Whatsapp. As discerning readers now know, disorganized, large, inefficient markets are ripe for disruption. It seems easy to say this in hindsight, but a clever solution was waiting to happen.
Meesho identified that resellers would do their business on Whatsapp, but usually had a limited variety of inventory, were hassled with collecting payments and had no idea about the status of their inventory.
The company intelligently solved all of these.
As a matchmaker between suppliers and resellers, it onboarded suppliers. It created a variety of catalogs of products (remember FashNear?). It managed inventory and payments. Most importantly, it allowed resellers to set up a storefront, and share their chosen catalogues with anyone they wanted, and haggle by allowing resellers to set their own margins!
Product market fit was established, and the Meesho of today was born.
Meesho didn’t simply digitize information, it converted Indian offline reseller-customer behaviour to a seamless online experience. It was solving a truly Indian problem, in a truly Indian way – and making money in the process. Meesho took a 7-15% commission for each transaction but gave its platform for free to make reseller onboarding easy.
By late 2017, business monetization had thus seriously kicked in.
It isn’t that Meesho didn’t have a conceptual precursor or inspiration. Our dear friends at Alibaba, pioneered the concepts of storefronts through TMall, with a very Chinese look and feel. From solving a fashion problem for few people, Meesho was now solving a much larger problem. Most importantly, it was tapping into entrepreneurial ambition (resellers) as well as customers (buyers) in the “next billion”.
In 2016, the company claimed to have just 1,000 resellers on its platform. By early 2017, this number had grown to 20,000. In early 2018, this number was 800,000, and today it is 2 MM registered sellers.
What growth is that? 20x in year 1. 100x in year 2. Even with a small base, that is some serious growth. Meesho has active resellers in more than 500 Indian towns, and it is no secret that this growth has been fueled by the “next billion“.
But who says building for the next billion is even a big deal for this fundraise (the article doesn’t mention it)? Even if a company doesn’t disclose too much information, investors tell you a lot about the inner workings of a company. The investor to note here is Shunwei Capital, a high growth Chinese venture capital firm, that has utilized its Chinese know how to majorly back high growth Indian startups building for the next billion. This is inspired by their work in understanding the local Chinese ecosystem, with wins such as PinPinDuo.
Product-market fit? Check. Monetization? Check. Building for the next billion? Check.
Ergo, significant capital delivered.
Could we understand if this is a great investment? With the few numbers we have, we can attempt assessing revenue. The company claims to have generated INR 60 Cr of income for resellers ($10MM) since inception. Given its growth, one would reckon a majority of its income (80%) has come in this year.
For $8MM of income generated, given the company had 100x lower topline 10 months ago, it implies ~60% month on month growth (100^(1/10) = 1.58). If you want to generate $8MM of income, utilizing a geometric progression (you can avoid the math), the latest month income for resellers is $3MM. Given the company keeps ~10%, that is $300K of MRR, or $4MM of annual revenue for Meesho. For a deal that is worth $50MM, likely for 25% equity in the business, it values the company at $200MM for $4MM of revenue.
A 50x revenue multiple seems expensive, but if you look at the number of sellers the company has on board (2MM), it is effectively valued at $100 per reseller ($200MM/2MM) . This implies that the expectation is to achieve $100 from a reseller, and assuming the 10% take by Meesho is true – that implies a seller should sell $1000 worth of goods. The average of $140 sold per seller per month makes this achievable if a seller is active for 6-8 months – which seems fairly viable if Meesho really works. The investment is thus clearly into expected growth.
So what does the future look like, and how does Meesho stand v/s the giants in e-commerce (Amazon et al.)?
Meesho has positioned itself well to be tapping a market that cannot be served by Amazon, which serves more sophisticated sellers and buyers. Meesho’s is an alternative form of commerce, “social commerce”, that makes Whatsapp and Facebook bigger threats to Meesho than general e-commerce players. The reseller model puts the onus to acquire customers on resellers, keeping customer acquisition costs low, a significant expense for e-commerce in India.
In terms of expansion, most Asian markets exhibit similar market behaviours, in terms of customers and entrepreneurs. Meesho’s success will be dependent on thus effective localization, of a product that has already established reasonable fit.
Overall, the prospects of the company look healthy as it finds itself in a large market, with a viable business model, facing well-funded hypergrowth and being led by an able team.
Meesho has reimagined Indian e-commerce, and looks poised to win a space left open by the horizontal e-commerce players.