Whenever we order food from one of the popular food ordering apps like Foodpanda or TinyOwl and have PayTM or PayUMoney facilitate an additional 50 per cent cash back on top of the discounts, do we realise that our dinner may be actually subsidised by a hedge fund or a VC firm 10,000 miles away?
How crazy is that? It makes me wonder if we are in the midst of a bubble that may burst soon and drag the economy down with it, akin to the dot com disaster.
At the height of the dot.com craziness, I moved to India and sold my first IT company. I decided to stay away from the mad rush and started a chain of coffee shops instead. Jim Collins, author of the run away best seller Good to Great, blogged in 2001 that the high-flying IPOs of dot com companies felt like a ‘remarkable moment in history when the whole idea of trying to build a great company seemed quaint and outdated.
The number of VCs and hedge funds entering India is growing at unforeseen pace. According to ‘Tracxn!, a research platform that tracks startup funding activity in India, the number of VCs in India grew from 49 in 2010 to 222 in 2014. India’s startups, especially the mobile focused Internet companies, have raised a record-breaking $3.5 billion in the first half 2015. That’s more than they raised during all of 2014, which by itself was a record at that time. The euphoria is not all too unjustified.
The number of online shoppers in India is expected to increase from 20 million in 2013 to about 40 million by the end of next year. That’s a combined annual growth rate of 25 per cent. According to a ComScore report, three out of every five internet users in India are shopping online. Plus, the massive growth of smart phones and the mobile payment options are adding further fuel to the fire. The number of mobile wallet users is estimated to jump 500 per cent from the current 3 crore to 15 crore by 2019. But there are a few chinks in the armour too.
The Indian consumers seem to be more loyal to the discounts. Discounting to attract new customers makes sense. But discounting to bring them back may spell trouble. For the fiscal year 2013-14, the three largest e-tailers in India, Flipkart, Snapdeal and Amazon, lost a combined $160 million on sales of about $85 million. That’s a loss of about Rs 1.80 for every rupee sold. The main reason for these losses is the deep discounts, sometimes up to 80 per cent coupled with cash back offers.
The other reason is the cost of logistics, delivery, returns and COD charges. For an item costing Rs 200, if the customer returns it, it costs the seller Rs 80-100. It is not clear if the customers will continue to buy if there is no sales promotion. In fact, all of the sites are experiencing low volumes when there are no discount offers.
Billions at risk
Unlike the last dot com crash, where unsuspecting retail investors lost their hard earned savings, the current betting game has billions at risk from VCs and hedge funds. So, why should an average investor or entrepreneur care if this party crashes?
Because, what is at stake is not just the money invested by the VCs but the potential negative impact it could have on the newly found entrepreneurship momentum in India.
Further, investments in startups may begin to dry up and some of the players may be forced to sell out cheap or shut shop [Taxi For Sure and Indiaplaza]. Investors will push the founders to conserve cash and focus on operational efficiency and profits.
Uber recently doubled the prices for longer rides. Ola’s prices have also quietly crept up. New funding in food tech startups has already slowed down. Sounding a cautious note, Nikesh Arora, CEO of SoftBank, recently tweeted: “Time for entrepreneurs to strap down, don’t waste cash, not going to be as abundantly available as before. Build advantage, focus.””
Until recently, the young and aspiring entrepreneurs in India had no home grown role models. But, today our youth is drawing their inspiration from Flipkart’s Bansals, Ola’s Bhavish Aggarwal and Snapdeal’s Kunal Bahl among many. These are our present day heroes but a not so happy ending to what has been a thriller ride so far, could prove more damaging to the freshly sprouting entrepreneurial spirit of young Indians.
(The writer is Executive Vice-President, National Entrepreneurship Network, Wadhwani Foundation)