How LimeRoad hit a bump and left its VC investors with a lemon

For every successful startup story that grabs the headlines, nine fail. While most failures never get reported, some do, precisely because they were, well, not supposed to fail in the first place.

A case in point is LimeRoad. The fashion ecommerce startup was acquired earlier this week by value retailer V-Mart Retail Ltd for just Rs 31 crore. This is a tenth of the Rs 350 crore it had raised from globally recognised marquee investors such as the New York-based venture capital investor Tiger Global Management.

The direct-to-customer startup, which was founded by chief executive officer Suchi Mukherjee, was left with assets worth just Rs 14.61 crore while it was saddled with liabilities of Rs 36.26 crore, which V-Mart will assume.

The distress sale gives V-Mart an opportunity to strengthen its presence in the country’s tier-II and tier-III Indian cities, where most of LimeRoad’s shoppers come from. V-Mart has a network of 450 stores across the country, including many in smaller cities and towns, while LimeRoad is said to have achieved a gross merchandise value of Rs 700 crore.

Little wonder, then, that V-Mart is now looking to invest as much as Rs 150 crore into the ecommerce firm. “V-Mart is one of the strongest players in the value retail segment fulfilling the fashion needs of masses across India. With this acquisition we aim to not only acquire digital-first millennials but build our omni-channel expertise,” said Lalit Agarwal, Managing Director of V-Mart Retail.

For LimeRoad, which will continue operating as a separate entity, V-Mart might be the knight in shining armour it needed as it battled increasing competition from biggies like Flipkart, Amazon, Myntra and Reliance’s AJIO.

Tasting a lemon

LimeRoad’s investors—Matrix Partners, Tiger Global, and Lightspeed India Partners—though may have lost out big time.

Things were not always so bad for the decade-old LimeRoad, which in its heydays between 2012 and 2015, raised as much as $50 million across three rounds, followed by a smaller infusion of $1.5 million in 2020 from undisclosed investors, according to Tracxn data.

But as Flipkart and Amazon ramped up their fashion e-commerce business and Reliance Industries’s AJIO entered the market, smaller players like YepMe, Voonik, LimeRoad, Koovs, and Jabong (acquired by Flipkart’s Myntra in 2016) started losing out.

Not finding many takers for its womenswear segment, LimeRoad ventured into menswear and kidswear, added non-fashion categories like home and kitchen utilities, and even opened physical experiential stores. But, a Business Today report noted, none of these forays were successful.

Nothing succeeded and the company’s losses kept mounting, even as revenues declined and its funding dried up. In FY22, LimeRoad reported sales of just Rs 69 crore, down 61% from two years earlier.

Offline to online

For V-Mart, a largely offline retailer, entering the ecommerce fashion market makes perfect sense because the segment continues to be one of the drivers of the e-commerce boom in the country. The fashion segment alone is expected to grow to a $30 billion industry in the next five years. 

At present, online sales account for just 2% of V-Mart’s total sales, and it wants to change that. For building its omnichannel capabilities, V-Mart had planned to invest Rs 100 crore over the next three years. This deal is a step forward in this process. 

Moreover, there are other synergies that V-Mart wants to tap into. Like a report in the Mint newspaper noted, apparel contributes 86% to LimeRoad’s sales. Contribution of apparel for V-Mart stands at 80%. Further, 30% of LimeRoad’s stock-keeping units have an average selling price below Rs 499, while 56% of V-Mart’s stock-keeping units are under Rs 500. Also, LimeRoad has a strong customer base in Uttar Pradesh, which will synergise with V-Mart’s offerings.

While all of this looks good on paper for V-Mart, the listed company may see its profitability get impacted.

LimeRoad has been in the red at the Ebitda level with a loss of Rs 15 crore in FY22, according to analysts at a brokerage firm.

V-Mart along with LimeRoad aims for online channel to account for more than 10% of combined sales in FY23. This is expected to grow to over 20% in 24-36 months, the Mint reported.

What perhaps also works for V-Mart is the fact that LimeRoad has an asset-light platform with zero capex, zero inventory and negative working capital cycle. LimeRoad derives about 65% of its revenue from women’s categories and has a strong presence in the Rs 500-1000 price point.

This acquisition could give a fillip to the V-Mart stock, which is down almost 34% from its 52-week high of November last year.

V-Mart wants to scale LimeRoad’s revenue to Rs 50 crore a month and make it profitable. “As of now, it (LimeRoad) has Rs 10 crore plus run rate per month, but we will scale it up, within the next 12 months, to the pre-COVID-19 level when it was doing around Rs 50 crore per,” Lalit Agarwal, Founder and MD of the retail chain, told CNBC-TV18.

Agarwal said that V-Mart products will soon be available on the LimeRoad app. “We will continue with the brand LimeRoad. We will bank on that and that can become a digital arm for all our V-Mart customers,” he said.

The deal makes perfect sense for an established offline retailer like V-Mart. For India’s online fashion retail market, which is still looking to find its footing, this may be a red herring. It signals that a phase of consolidation may be on the anvil, with several big offline and online retail chains gobbling up smaller, unprofitable competitors.