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Indian Startups Are Going From ‘Stupid To Sensible’, And It Hurts

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Kunal Bahl, co-founder of SoftBank-backed online retailer Snapdeal, has admitted that a “potent mix of a large amount of capital and ambition” led the company astray. Facing mounting losses and fund crunch, the e-tailer is looking to lay off up to 600 people.

Indian startup investors BloombergQuint spoke to agree with Bahl, warning that far worse is in store as consumer-internet companies can no longer tap funds at will.

“This is a good news because we are going from being stupid to sensible. The only thing is the journey from stupidity to sensibility is going to be painful too, and that is happening,” says angel investor Ajeet Khurana, who has backed smaller startups like furniture e-tailer Stitchwood, online jewellery seller Leaf Wearables, and subscription-based e-commerce venture RainCan.

Tightfisted Investors

Several consumer-facing startups, including on-demand grocery delivery player PepperTap, e-grocer LocalBanya and e-commerce and listing website AskMe, shut shop in 2016.

Mohan Kumar of Norwest Venture Partners, an investor in classifieds portal Quikr and restaurant aggregator and delivery startup Swiggy, says a large number of startups will either shut down or lay off people in this year.

Investors have become tightfisted and are asking tougher questions as profitability and unit economics takes precedence over valuation. Big players like Snapdeal, its rival and India’s largest online retailer Flipkart and cab-hailing startup Ola, all of which are reportedly looking to raise funds, have seen investors mark down their valuation multiple times.

And it’s not just the big startups that are feeling the pinch. New ventures looking for the first and second round of funding are also finding it tough to raise capital, says Karthik Reddy of Mumbai-based early-stage venture fund Blume Ventures, which backed missed-call marketing startup ZipDial that was acquired by Twitter Inc.

“But we will also see a new set of entrepreneurs emerge and replace the market, who understand the dynamics that you don’t need large amounts of money to build business in India, and you could do it frugally,” Kumar said.

Also Read: Zen and the Art of Surviving India's Startup Crash

Employees work in an office at the headquarters of Flipkart Ltd. in Bengaluru. (Photographer: Namas Bhojani/Bloomberg)

What Went Wrong?

The reason why some of these “blue-eyed companies” in the Indian startup space are struggling is misplaced priorities, says Ankur Bisen, senior vice-president at management consultancy Technopak Advisors. Investors were betting on the idea and not necessarily on execution, he says.

Ankur Bisen, Senior Vice-President, Retail and Consumer Products, Technopak Advisors.The exuberance of too much money took over the real problem-solving ability of the startups, and that is the problem with the startup industry in India.

While the Indian market is still growing, companies ended up spending capital to compete with other players while ignoring the need to put the building blocks in place for a startup to grow, says Bisen.

Kumar of Norwest says investors must also share some of the blame for the mess. “Investors poured in millions where the business model doesn’t allow to create a multi-billion-dollar company. And companies were given unrealistic valuations of $4-5 billion. You can generate profits from American consumers by putting so much money, but that’s not the case in India,” says Kumar.

India’s per capita income does not support such an exponential growth, he adds.

Mohan Kumar, Executive Director, Norwest Venture PartnersWith only 50-100 million consumers, the question is how much profit you can yank out. Even investing a couple of billions is high by any standard and this is the reality no one understands.

Even the smaller players looking to raises funds got carried away. “We are chasing outside funds, outside outcomes, without focusing on unit economics. Because of the excess capital that has come in, everyone wants to chase the elusive billion-dollar (tag),” Reddy of Blume Ventures said.

Jack Of All Trades

India’s top e-commerce companies may have burned their fingers by trying to do too many things at the same time. Flipkart tried to venture into grocery but pulled the plug after five months. Ola dabbled in the food delivery business with Ola Chef, but shut it down within a year of launch. Snapdeal has made 13 acquisitions since its inception in 2010, according to data compiled by CrunchBase, which collates information on startups.

“At one time, there was the perception in the market that you open any e-commerce company, you will get an acquisition offer from Snapdeal. You do certain things when you have unlimited amount of capital,” says Ajeet Khurana.

Snapdeal has already downed the shutters on two of its acquisitions, Shopo.in and Exclusively, in the last 10 months as the e-tailer looks to cut costs and conserve cash. It also comes at a time when the unicorn, a privately held venture valued at more than a billion dollars, is said to be struggling to raise funds at current valuations.

“When the valuations are higher, you do certain things to justify the money pumped in and you try other people’s ideas and try to maintain leadership on all fronts,” says Reddy of Blume Ventures.

The losses have been piling up for Indian consumer internet startups. Flipkart and Snapdeal’s combined losses were around Rs 9,085 crore in the financial year 2015-16. Ola hasn’t yet reported its results for the financial year 2015-16.

Khurana says startups’ primary business had become fund raising, and that’s come back to bite them now.

Ajeet Khurana, Angel InvestorWhen the startups got fat checks, they started hiring more than required, paid more salaries than reasonable, and did whole lot of other things. Now the wind has changed...