EVERYBODY LOVES A GOOD EXIT. WITH THE $135 MILLION SALE OF BUS TICKETING website redBus to South African media company Naspers in June, the e-commerce community heaved a sigh of relief. First, the valuation was over 10 times redBus’s current revenue. More important, after the exuberance of 2011, investors—who were worried about regulation and funding growth—finally had an exit to cite to their limited partners. From entrepreneurs and founders struggling to raise capital last year, to employees in the companies that are moving to more mature stages, everybody had been waiting to exhale. But the past 90 days or so weren’t just about exits. Large e-commerce businesses have also taken positions that will have a profound impact on the $600 million (Rs 3,300 crore) online retail industry.

One thing is for sure: If 2009-12 was the era of developing a base of e-commerce buyers, this year marks the evolution of the sellers’ side.

The biggest shift has been the rise of the marketplace model, perhaps at the expense of the inventory-based model. (See ‘When Snapdeal met eBay’, on page 108.) Over five years, the largest e-retail company in India, Flipkart, has built warehousing and logistics infrastructure to process over 30,000 transactions every day. But questions are rife about the cost of maintaining this model made famous by Amazon in the U.S. The marketplace model, epitomised by eBay (with lesser need for inventory management and lesser responsibility for logistics), is the adopted antithesis. “Supply locally, sell nationally,” as Snapdeal CEO Kunal Bahl puts it, entails lower fixed costs.

The shift to the marketplace model has occurred across the board. This February, Flipkart waded into the seller-centric model. Then Amazon chose a similar path to debut in India in June, as a platform for sellers of all sizes, promising buyers a safe and secure online ordering experience, convenient electronic payments, easy returns, and so on.

Or, for that matter, sample PepperFry, which is a nuanced version of the marketplace model. The portal is a seller’s platform for furniture and home interiors, and calls itself a ‘managed marketplace’. In one year, it has raised $13 million in capital.

PepperFry controls several aspects of service delivery. It has 1,000 sellers across 30,000 products. But it ensures standardisation of services, even though the sellers don’t know one another. So, PepperFry has a common template for presenting photographs, product descriptions, and other information. When the order is placed by a customer, packaging is standardised.

“Customer experience is different across sellers. We have a window to all aspects of the products before the customer receives it,” says Ambareesh Murthy, founder and CEO of PepperFry. While merchants still own the inventory, the descriptions are written in conjunction with PepperFry’s 40-strong merchandising team as per a common standard. The seller shifts the item to a PepperFry fulfilment centre, where it is checked for quality, packed, and shipped through courier partnerships. Nearly half of its team of 150 handles customer support and fulfilment.

PepperFry’s model is significant in e-commerce. While the Amazons, Flipkarts, and Snapdeals manage standardised products from known brands, the furniture portal brings variety, and sources non-standard products. “Demand is still building in our category [where there are no known brands], so we now need to invest in raising awareness,” Murthy adds.

Outfits in new service categories—taxis, restaurants, health care, tailors, parking reservation, etc.—will take e-commerce deeper into the supply side. Just as redBus slowly but surely brought bus operators and travel agents onto its online platform, e-commerce will organise fragmented markets and create healthier valuations than those based on pure scale and size. Remember, e-retail is less than 1% of the $10 billion e-commerce market in India. Online travel, a services business, makes up the rest.

The average deal size was $9 million in 2011. Last year, it fell to $7.8 million. This year, early-stage deals have been in the $6 million range. The past quarter has also witnessed better bang for the buck. This sanity check is good news for investors because even as industry leader Flipkart soaks up $200 million in its latest round of funding, younger ventures like PepperFry, with innovations aimed at sellers, will need a tenth of such capital to grow.

In this winner-take-all economy (think Google, Twitter, and Facebook), “the winner will change from era to era”, says Mahesh Murthy, founding partner at SeedFund, one of the VCs that backed redBus.

There will be new categories, and fresh faces on the podium, which will benefit from the learnings of the first phase of e-commerce. E-retail has now started thinking like a mature industry despite being a mere fraction of brick-and-mortar retail.

“While e-retail doesn’t have scope anymore for dramatic or disruptive innovations, the focus is now on building market share and improvements in business model,” says Sankarson Banerjee, a managing director at consultancy Accenture India.

THE SHIFT TO THE marketplace model has a lot to do with a regulation which is ambiguous on e-commerce companies participating in multi-brand retail. In effect, regulation has become an entry barrier for larger players to step into the inventory model. This is a pity because VCs like IDG Ventures have category leaders in their portfolio, built on the strength of catalogue and inventory management over the past five years. “We built a vertical e-commerce strategy in the country,” says Sudhir Sethi, managing partner of IDG Ventures, citing Myntra (fashion), FirstCry (baby care), LensKart (luxury accessories), Zivame (lingerie), and eShakti (customised fashion).

“Every company of ours is a leader in its category,” says Sethi. FirstCry’s dominance has already forced the consolidation of BabyOye and Hoopos in the baby care category. But, while FirstCry got that right, the co-founders and teams have to now step carefully, even as exit possibilities get entangled in the regulatory maze. Again, the complexities
of inter-state taxation have discouraged large courier companies such as DHL and FedEx from placing large bets on e-commerce.

Meanwhile, entrepreneurs are taking more services online. Bangalore-headquartered JustEat, for instance, is clocking nearly 100,000 online orders for 2,850 restaurants across six cities every month. Restaurant chain owners are glad because it reduces call-centre expenses (Rs 25,000 per operator apart from tele-services infrastructure). Besides, the number of orders is going up several times over.

But this is not an easy task for JustEat. It has to keep updating restaurant menus in its system every fortnight. And unlike a Myntra, where the customer wants his T-shirt in 24 hours, the food-delivery customer wants service in 40 minutes or less. By the same measure, the margin for error is lower when it comes to ordering taxis or any other such service. But suppliers like the promise of transacting online: more customers, lower costs—and they don’t have to spend on marketing online.

Other unrelated developments like the Cable TV Digitisation Act will also help online services ventures. They won’t have to spend on national ad campaigns like a Myntra or Jabong. Instead, they can target cities where they are present by tying up with large cable operators and satellite TV channels. “The focus has to be granular—a Bangalore focus entails focussing on 12 top areas, and leaving 40-odd areas for later. The same applies for other cities,” says Sandipan Mitra, co-founder of JustEat India.

There are other emerging models built around social media. DonebyNone seems like just another online fashion site, except it is a private label focussing on one specific category of girls—those who are making an independent buying decision for the first time in their lives (as opposed to mothers making it for them). Rather than spending high amounts on acquiring customers (think TV), it is building relationships with girls in their late teens or early twenties, on Facebook. The idea is to get one user to share her buying decisions with her friends. This has enabled DonebyNone get very close to cash flow positive.

All this means investors can finally see frugal business models emerge in e-commerce, particularly in marketing.

THE QUESTION EVERYONE asks of the e-commerce entrepreneur is on profitability. While the marketplace model ensures cost control, customer experience belongs to inventory-based ventures. Ask Jabong and Myntra, which are fighting for customers in the fashion and apparel arena. Clearly though, investors have turned diffident about size and grandeur in e-commerce. Gigantic warehouses are nothing to be proud of. An advertisement on national television means more costs.

Profitability is still some years off. There have been all of three IPOs in the past decade: Info Edge, MakeMyTrip, and now JustDial. “There is no M&A market [because of regulation; most of the companies get foreign funding]. Naturally, we want the IPO market to come back and support SMEs. While e-commerce investors are not fatigued, they are awaiting exits on bets made five to seven years ago,” says Prashanth Prakash of Accel Partners, which has 25 Internet businesses in India.

Tip: Naspers picked up redBus not for its size, but its supplier base. That measure will decide tomorrow’s winners.

Follow us on Facebook, Twitter & YouTube to never miss an update from Fortune India. To buy a copy, visit Amazon.