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e-Commerce industry in India came to its own in 2012 when Flipkart and Myntra started showing TV Ads and Online Marketing was not just for the tech-oriented but for the mango people as well. This was the time when Valuations started peaking to 20 times of GMV (currently they are looming at 2~3 times of GMV which speak volumes about the correctness of this method). I will just rewind the clock by 3 more years to 2009 when I took my first job post ISB in a 3rd Party Logistics Company and the world was still recuperating from Lehman fiasco. As part of the strategy team there, I suggested that we should approach e-com companies and my boss replied that we have to be cautious with this segment. So what happened in just 3 years where Online Business status went from ‘Cautious’ to ‘Super-Hot’.
The answer is nothing!. Yeah, right!!! Absolutely ‘nothing’ had happened in these 3 years. Infrastructure sector, headquartered at Hyderabad, was brutally exposed in the downturn, Real Estate, after Sub Prime, was a dangerous proposition, FMCG/Banking/Telecom were ‘stable’ and ‘heavy asset’ model. This left with VCs firm to direct all their attention on Online Industry and this is what precisely happened. Caution was thrown out of window and any company which had a website, tech backend became HOT. To justify the valuations, new terms were coined and adopted (GMV being one of them) and party continued till mid 2015. A company which is 10 years old is still counted amongst start-ups (Like our middle aged ‘yuva’ politicians) and promoters boldly proclaimed that they are ‘NOT’ thinking about profits. Co-founder of a start-up, which started as deal site and then became a full fledged e-com site, said that they will invest 2000 Crores in Technology (Well the cost of sending a Rocket to Mars was 450 Crores!!!!).
It was Year 2014 and I happened to work in a Taxi Start-Up and realized that ‘Burn’ is a word which has been very conveniently added in the lexicon of even mid level management. I could see money being splurged on things which a man of limited intelligence like me totally failed to fathom. A company which did not have even 1 Crore as Revenue had 11 level of Hierarchy between CEO and Call Centre Executive and they called themselves as Start-Ups (Irony died thousand times!!!)
Whatever little I remember of my MBA, I do remember being taught about ‘Agency Problem’ which basically says that if there is no pressure to re-pay and no accountability of funds, managers are bound to splurge on unnecessary items…..Guess our VCs must have bunked their Fin Classes!!!
Through a friend of mine who is a Company Registration Consultant based in Delhi, I know of atleast 10 cases where some people have registered a Private Limited Company, built an App (website is too rudimental now) / back end Tech and have started looking for funds. Yes, no effort to find customers, no effort to see of their model is solving any real problem or not. 80% of them were unable to sell their story to a VC/Angel Investors and shut down the shop in less than 3 months. 20% of whom who raised funds hired a Tech Team and started making various Tech Products, all of them either redundant or not user friendly or not even automating any process (To think of it, the basic purpose of IT is to automate processes). In the process they have ‘burnt’ all the money raised and know are again looking for funds!!!. It does not take Rocket Science to figure out that there is some inherent flaw in the whole schema!!!!
Though a grim picture is looming, there is a definite silver lining too. Company Registration Services are still booming and number of Registration of Company in India is at all time high. Which basically means that there is appetite for new ideas and entrepreneurs but with right basics. I will be touching upon some ideas (which in my humble opinion) would start-ups can follow to build a truly sustainable and scalable business.
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