In yet another setback to two major homegrown e-commerce firms, Ola and Snapdeal, Japanese investor SoftBank Group Corp has written down the value of its investments by $1.4 billion, as per reports earlier this week.
The two firms are among SoftBank's largest investments in India. As discussed in these columns earlier, Indian e-commerce companies are in serious trouble. Besides Snapdeal, a whole host of other Indian e-commerce firms have laid off hundreds of employees because of their inability to generate profits. "After some of its expensive initial bets in India soured, Japan's SoftBank Group Corp. is making another attempt at finding attractive investments in India's internet business by selling its also-ran portfolio companies to bigger rivals, some of which it turned down in the past. SoftBank, which invested nearly $2 billion in five Indian start-ups in the year to November 2015, is trying to sell struggling online marketplace Snapdeal to bigger rival Flipkart," reports Mint. Many of the e-commerce companies are on a major cost-cutting spree while trying to save the money they have raised from investors.
Earlier this year, SoftBank wrote off around $475 million in the combined value of its shareholding in Ola and Snapdeal. What do these developments indicate? These start-ups have failed to fulfil the expectations of investors, who have pumped in a lot of money without any real returns. Given these circumstances, they have been writing down the value of their investments. Critics argue that these companies had no clear business strategy in the first place.
They were blinded by investors who wrote large cheques in the hope that by spending more money, they would make more. It has apparently blown up in their faces. With efficient e-wallets built into their mobile apps, the likes of Flipkart and Ola have been life-savers for a section of the Indian populace with access to digital payments. More importantly, their stupendous growth in the past decade has inspired young entrepreneurs from across the country to establish innovative products that have brought much succour to segments of urban consumers. Besides ambition, however, it was a truckload of funding, which indeed drove their operations. After securing all that funding, these firms went overboard with their operations. They began over-hiring, acquiring other businesses at inflated prices, spending lavish sums on advertising and rebranding, without breaking the profit barrier. A lack of focus on profit often spells the end of any business venture. As funding has dried up, the lack of a solid foundation—sound business model—has become more apparent.
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