Spiralling losses show Lazada desperately needed Alibaba investment

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We already know that Alibaba’s decision to spend $1 billion to acquire a controlling stake in Lazada, the Southeast Asia-based e-commerce firm started by Rocket Internet, was down to money since Lazada nearly ran out of cash. But now the situation has become all the more clear after Rocket Internet released its latest financial results.

As an early-stage venture builder, losses are to be expected for Rocket Internet’s dozen or so global e-commerce businesses but, as companies reach maturity, the scales need to tip and show signs of a sustainable business lurking to break out. In the case of Lazada, the figures show a company that was undoubtedly growing, but had become too capital intensive to continue on its path.

Four-year-old Lazada reported €275 million ($310 million) in revenue during 2015, a figure that was up 78 percent on the previous year. That’s impressive growth but it came at an unsustainable cost: a €296.5 million ($334 million) loss for the year, more than double the loss it posted in 2014.

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Interestingly, GMV — the total value of transactions made on the Lazada platform — grew nearly three-fold between 2014 and 2015 — rising from $384 million ($432 million) to cross the $1 billion mark for the first time. That figure’s growth is wildly different from the company’s revenue, which suggests that Lazada was offering deep discounts to incentivize both merchants to sell and consumers to buy from its site. As Uber and others can testify, that’s not sustainable in the longterm.

Given its lack of cash and issues raising funding, as we reported yesterday, it’s no big surprise that it entered into a massive deal to preserve the business. The fact that Alibaba, with its deep pockets and interest in expanding beyond China, was available to step in and inject $500 million into the coffers was ideal since Lazada needed massive amounts of capital, and quickly.

The company’s growing revenues and $1 billion-plus GMV show that there is clearly demand for e-commerce services in Southeast Asia — GMV for the final quarter of 2015 almost matched that of the whole of 2014 — but it looks like a long game. (Indeed, we reported yesterday that the company set its initial targets far too aggressively.) Alibaba is the right entity to push things forward since it can bring experience and technology into the business and, most importantly, it has the money to ensure that Lazada can continue on the road towards profitability.

What’s particularly interesting to note is that Singapore sovereign fund Temasek is an investor in both Alibaba and Lazada, and, furthermore, it is the only Lazada shareholder that is not selling its shares as part of Alibaba’s investment. TechCrunch understands that the firm played matchmaker for the deal, which may have been informally planned for some time, or at least since Temasek led a $250 million round for Lazada in November 2014. Given that the Lazada business had become financially unsustainable, it seems that was the critical factor in the deal’s timing.