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Last updated: June 16, 2016 at 16:58 pm

What Every VC Funded ECommerce Startup Might Just Say to Their Investors

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Have you seen the Walt Disney box office grosser ‘Honey, I Shrunk The Kid’, where Wayne Szalinski, an inventor, accidentally shrinks his and his neighbours’ kids to ¼ of an inch with his electromagnetic shrinking machine?

Well, everyone (the audience, producers, Walt Disney, etc.) got their penny’s worth out of it. I could not help but draw an analogy between this movie and Indian e-commerce start-ups. The direction in which etail is going in India, it is a matter of time that some of them hang up their boots and said to the investors

‘Honey, I multiplied my losses…”

If you haven’t got the punchline already, let me arrive at the point. For the last financial year 2014-2015:

Now, let’s talk of the rest:

(*All the above figures are for the FY 2014-15)

There’s a common thread in all these pieces of news. They are all e-commerce start-ups. They are all booking major losses year after year and as they grow, they are already setting the expectation of multiplying their losses!

The e-commerce industry was touted as the next big game changer after the IT industry. Well, to give the credit where it’s due, it has brought a shift in the Indian customer buying behaviour. Customers have started going online to meet their every need. However, the above figures on losses suggest that although e-commerce firms are tempting the customers, the business dynamics is somewhere severely broken.

You will often hear folks defend all this by the usual cliché “the market opportunity is huge in India.” However, for someone coming from the old school who believes that businesses are run to deliver profits and thereby take care of their employees, it looks more like an “opportunity to ride on VC money and deliver perpetual losses is huge” in the etail market! The writing is on the wall – e-commerce firms will keep on struggling for a very very long time to come and the reasons are crystal clear:

Flawed business model: In the marketplace model where the e-com companies can’t buy directly from manufacturer to leverage from large volumes, there are no fundamental cost savings by cutting out the distributor/retailer margins. So, where is the extra money to offset the additional expenses of pick-up, delivery, warehousing, COD, no-questions-asked returns, and not to forget, mind boggling salaries!

In the end , all discounts offered to lure customers are not because of savings in the delivery chain but directly from VC funded money. Needless to say, the more they grow, the more they burn!

Severe competitive dynamics: Instead of charging a premium for the convenience etail provides (like makemytrip and bookmyshow do), on-line companies are doling out discounts to lure customers to scale-up and outsize their competitors. It was a war before and every time a player receives a new round of funding, the war only becomes uglier..

While in recent past Amazon has scaled down on deep discounts and started to focus on customer service and support, PayTM enters (funded by Alibaba) to offer 10K cashback on an iPhone 6 purchase! The customer loyalty shifts and the war starts all-over again!

Irrational valuations: Maybe this is the root cause of all what is going wrong. Whenever a sector is extravagantly funded with easy money, it builds into a bubble with operational efficiencies and basic business acumen takes a back seat (remember the .com bubble burst in last decade!). Irrationality sets in, skewed metrics are defined (GMV transactions) to sweep the dirt under carpet and founders get into the mode “Once I make my money, I am outta of here….”.

All the e-commerce companies are commanding astronomical valuations while their business models are severely broken – they are neither posting profits or showing signs of posting them anytime in near future, nor able to claim customer loyalty. I am sure that if this sector was not so extravagantly funded and founders didn’t have access to VC money to throw in deep discounts, they would have been far more innovative. As the founders of all these start-ups are amazingly smart people, they would have still solved the problem of customer buying habit, stickiness and loyalty using technology, user interface and other means, instead of just throwing discounts from their own pocket!

The industry by large is slowly opening its eyes to the fact that this is not a sustainable or a profitable business model in the long run. The effects of which can already be seen –

  • Several big brands have delisted their products from on-line portals due to uncalled for price erosion. Others have implemented strict controls on on-line pricing and as a result physical retails is rebounding back as it is fairly price competitive for majority of products. Some e-tailers, like Flipkart, have flipped the model and opened physical stores so that they can create some consumer loyalty!
  • International brands are joining hands to track sale of fake products and have legally sued almost all of the popular on-line portals. This was about to happen when you run a loose marketplace model where everyone is fighting on only one parameter..price, price and price. Someone will throw in a fake or refurbished product to set a new pricing low!
  • Small and private equity players are already feeling the heat and are ready to exit e-commerce companies to cut their losses. Funding seems to be drying up. As a result, companies are firing employees. No wonder, a few of the smaller e-commerce companies have shrunk their business or have already shut shop. Some big names are up for sale!

Though it still remains to be seen whether ‘e-commerce is a bubble which will burst soon’; it’s high time they get their act together. Or else, they will have no other option, but to say to their investors – Honey, I multiplied my losses.

And though in the movie, the protagonist could undo his mistake, what if e-commerce start-ups can’t. We can expect a follow-up movie from VCs “Honey, I burnt a big hole!”

[About the Author: The guest post is written by Suresh Kabra, Founder of Pricemap, a mobile based product search & shopping app.]

Image: Shutterstock.com

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