Spiralling downward

Indian e-commerce companies are in trouble. Recent reports indicate Snapdeal will issue the proverbial pink slip to 600 people over the next few days. In an email to employees last week, co-founders Kunal Bahl and Rohit Bansal were brutally honest while underlining the quagmire in which the company has found itself. They admit to some fundamental mistakes in running the company. "We started growing our business much before the right economic model and market-fit was figured out. We also started diversifying and started new projects while we still hadn't perfected the first or made it profitable. We started building our team and capabilities for a much larger size of business than what was required with the present scale," Bahl and Bansal said in the email. Delving further into the email one indeed sees the writing on the wall for not just Snapdeal and their peers, but even some startups outside the e-commerce sector.

"A large amount of capital with ambition can be a potent mix that drives a company to defocus from its core. We feel that happened to us. We started doing too many things." Both Bahl and Rohit have also reportedly told their employees that they would take a 100% salary cut in a bid to turn their business profitable. Another e-commerce major Flipkart, meanwhile, has closed down their courier service and on-demand grocery delivery service less than a year after launching it, besides ordering massive layoffs. Even the likes of Zomato, Housing.com, and TinyOwl have resorted to mass layoffs. Companies are on a major cost-cutting spree while trying to save the money they have raised from investors. There are numerous other examples as well beyond Flipkart and Snapdeal. A bigger worry, however, is that major investors have made a spate of markdowns to their investments in these start-ups. Softbank, a major Japanese investor in start-ups, has written off around $475 million in the combined value of its shareholding in Ola and Snapdeal. What do these developments indicate? The answer is pretty clear.

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. In his book, "Standard Deviations: Flawed Assumptions, Tortured Data and Other Ways to Lie With Statistics", leading economic professor, Gary Smith, wrote of the inherent logic that drove the dot-com bubble in the United States. "A dotcom company proved it was a player not by making money, but by spending money, preferably other people's money... One rationale was to be the first-mover by getting big fast... The idea was that once people believe that your website is the place to go to buy something, sell something, or learn something, you have a monopoly that can crush competition and reap profits," he said.

Indian e-commerce companies have seemingly run their operations with the same logic. 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. However, this does not hide the fact that their business model was evidently unsustainable from the start. Since the turn of this decade, what drove e-commerce players was an ambition to exploit the vast market opportunities available. In the past five-seven years, they have managed to formalise informal markets or aggregate fragmented ones. Besides ambition, however, it was a truckload of funding, which indeed drove their operations. Online retail has taken the lead as the most-funded segment in India's e-commerce space. Flipkart, for example, has raised a total of $3.15 billion from investors.

After securing all that funding, these firms 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. Over and above profits, what mattered to these players in e-commerce market was funding, valuation, and something called gross merchandise value--the total value of merchandise sold over a given period of time. In an interview with Business Standard, Snapdeal CEO and co-founder Rohit Bansal and COO Binny Bansal, said: "Profitability is not a focus area. It's a strategic decision. We can be profitable from today if we want. We can stop investing in one area and start making profits; it's definitely possible. But we don't want to remain as a small profitable company. That is certainly not what we are aspiring for when the market opportunity is so huge. If one wants to focus making profits quickly, then e-commerce is not the place for him." Evidently, their investors thought otherwise. As funding has dried up, the lack of a solid foundation—sound business model—has become more apparent. The subsequent layoffs come as no surprise.

In December 2016, there were reports of several Indian entrepreneurs and prominent investors coming together to create a lobby group that will represent the interests of Indian consumer Internet start-ups. Backed by the likes of Flipkart, Snapdeal and Ola, their claim was that the consumer Internet market is currently "being distorted by (foreign) capital". It's no surprise that this clarion call to the government for greater protection from foreign competition comes at a time when the shining examples of home-grown tech startups like Flipkart and Ola are in a fierce battle against international players like Amazon and Uber respectively for greater market share. They believe that the presence of foreign competitors is suffocating the domestic market.

In response to growing competition, major domestic players in the start-up habitat want the government to introduce greater protectionist policies. Questions about the validity of their claim notwithstanding, they can forget about government protection. The Centre's ambitious Startup India initiative has managed to disburse only Rs 5.66 crore of the promised Rs 10,000 crore a year after its launch, said a recent Business Standard report. Indian startups need to up their game.