VCs back India SME group-buying service
Despite there being around 47 million small- and medium-sized enterprises (SMEs) in India, the segment has not yet participated in the country's e-commerce boom. While 51% of online SMEs use the internet to advertise, a mere 27% use it for trade, according to a report by Google and the Federation of Indian Chambers of Commerce and Industry.
"Normally there is an assumption that SMEs will not adopt technology," says Vani Kola, managing director at Kalaari Capital. "But that is not the case in our experience - if you can offer the value for adopting the platform."
When Kola met the team behind group buying website Power2SME in 2012, the company already had a database of active users doing transactions worth INR500,000 per month.
Power2SME is a free platform that aggregates demand for raw materials from SMEs, negotiates the best prices directly with suppliers and handles payments to them. It cuts out distributors and wholesalers by then selling the materials directly to SMEs and delivering the goods to them. Its profit is the difference between the buying and selling prices.
The company handles everything from chemicals and additives to metals and polymers, dealing with suppliers such as Indian Oil and Arcelor-Mittal. By bringing SMEs together as a single bulk purchaser, it is easier to negotiate with these giants.
Kalaari and Inventus Capital invested $2 million in Power2SME in a Series A round in October 2012; Accel Partners joined them in the $6 million Series B round last week. Since October, monthly transaction value has risen to INR50 million. The firm has generated INR370 million in revenues to date, has 13,000 registered users, and expects to break-even in the first quarter of 2014.
According to R. Narayan, Power2SME's founder and CEO, the margins are much smaller than for a service-oriented business, but what changes is the scalability. "When we start a certain vertical it will be at 1-2%, but as we grow the buying power improves and margins start to jump up," he says. "For example, in steel we started with a 1% margin and now we are doing 3,000 tonnes of steel in a quarter so our margins have gone up over 7%. This is despite giving savings of 5-6% to the SME."
Power2SME operates out of Delhi and the surrounding National Capital Region but plans to start offering services in Maharashtra, Gujarat, West Bengal and Tamil Nadu. It will also enter new sectors and expand sourcing channels to include direct imports. Another plus of the B2B model is that SMEs are used to paying for transportation so no part of the transaction has to be subsidized, unlike B2C e-commerce websites that offer free delivery.
Power2SME is also in talks with four NBFCs about appraising potential customers and providing credit for payments. "We're trying to solve the need for capital and for cheaper procurement prices - those are the two biggest pain points for SMEs," Narayan adds.
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