February 26, 2016    5 minute read

Indian Startup Unicorns Struggle

   February 26, 2016    5 minute read

Indian Startup Unicorns Struggle

FoodPanda, India’s largest food aggregator delivery platform grabbed headlines recently, for letting go of its ~25% workforce (nearly 300 people). The official statement and reason was of organisational efficiency, and workforce alignment. Another e-commerce startup Urban Ladder announced losses of more than INR 58 Crore on the revenue of INR 19 Crore this year. Growing the marketing and advertising business as well as steep wage bill being primary cash-burners.

Such developments lead us to think the viability of e-commerce-based start-ups and whether Indian households and consumers are ready to fully embrace online purchase of everyday essentials or will they continue to be discretionary (as they have been) with their disposable income?

India continues to have a growing middle-class and whilst there is a continuous shift from working class to the middle-income bracket to upper-income bracket, the propensity to go all out and splurge hasn’t yet set in and for good reason. The net effect, aspirations of a first home, first car, and first of everything continues to be dictated by how much of a true net value is there in their purchase.

Consumerism, on the other hand, has seen a sharp rise in the last couple of decades, fueled by the growth of e-commerce and how products and services are bought and sold. Flipkart, Snapdeal, and later Amazon made their entries with big announcements, deep discounts, attractive deals, and exclusive product launches. While these Big 3 have almost 95% plus market share of the Indian online retail market, there are many others started-ups who perished or were gobbled up since they couldn’t sustain the vigor with which they started. What began as a level-playing field for enthusiastic young entrepreneurs with innovative business ideas turned out to be a game of cannibalization in which the biggies either bought out or outsmarted smaller players. The result, a potential monopoly of few; of course, they won’t be able to dictate the rules of engagement since retail is and will continue to be a buyer-driven market.

A typical Indian consumer is most discerning when it comes to squeezing maximum value of every rupee spent. While they might want to grab first-shop discounts, bargains, and other freebies, the likelihood of them becoming loyal and trusted shopper is less since then know that they have the bargaining power. Here is where the perils of plenty start troubling the e-tailers since they find it difficult to let go of the discount war they have embroiled to focus on gaining the maximum possible market share. The current business models of these e-tailers are losing their innovative edge since there is hardly any difference between them; all are burning nearly $100 million per month on marketing and advertising and wages.

Financial disclosures are the testimony to the fact that while VC-fueled e-tailers have seen their market valuation skyrocket in no time, their profitability continues to be in red. There are no exceptions, and they continue to guile the market, stating the figure of their gross merchandise value (GMV) which is the total undiscounted sale of articles! Flipkart, in 2013-14, ran losses of Rs 400 crore whereas Snapdeal lost Rs 265 crore, and Amazon Rs 321 crore. In 2015, Snapdeal loss multiplied by a factor of five  to Rs 1,350 crore. Will they see any blue-lettered profit anytime soon? Amazon saw profit recently after nearly two decades of being in e-commerce industry. In fact, Amazon’s 2014 net profit of ~ $349 million is lower than the net profit of ~$359 million in 2005, even though 2014 revenue was $75 billion compared to $8.5 billion in 2005.

What’s the vision? Being bigger or being more profitable? Revenue today, profit tomorrow?

These Unicorns (sine they pride themselves in being most elusive) who attained their multibillion-dollar valuations in no time are now scrambling to meet both ends while putting a strong picture to the external world. I can’t fathom how the valuation of a market-leading startup from May to Dec 2014 can rise from $1 billion to $11 billion? Did “Achche Din” come? Surely not, in fact, all those joining the start-up bandwagon forgot the cardinal principles of doing business that only those businesses flourish and survive in the long run that are based on the premise that:

  • Their product / services are not easily replicable
  • There is a mature and growing consumer demand
  • Industry dynamics allow enough competition, but not at the cost of cutting each other’s margins

Market analysts point out that for e-commerce companies, there is a longer gestation period to breakeven and hence in the initial year the focus is on achieving a higher topline number (GMV in this case). With these companies expected to automate their processes, cut-down their workforce, and streamline their operations, profitability should become the key parameter in 5-10 years’ timeframe.

India has 243 million Internet users – and this number continues to grow rapidly. By 2020, India will have more than half a billion mobile internet users. Will there be a possibility that every Indian either shop or sell online and mobile internet play a crucial role in achieving this goal?

Lower pricing will be the business driven for sure while a wider variety of products and speedy delivery will supplement the value propositions for e-tailers. It would be interesting to see how long their war chest survives the discount and lower-pricing bloodbath. My take is that there would be only one winner in the end while the others will either be disrupted or bought out. In any case, consumers will be ultimate beneficiary since they can easily Flip their Kart to Snap an Amazon Deal!

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