It was always predicted.
It was always on the cards.
But it would come so soon – probably, no one had predicted. Anyways, out of the 200 or so eCommerce startups founded in India in 2012 – 100 so far have gone bust. Most of them finished (read burnt callously here) the amount of capital (funding) received from the VCs, a few decided to close down and not play the ‘last man standing’ game, whilst others were forced by VCs/Angel Investors to ‘get acquired’ and merge with a category leader (of some respect) which has a higher chance of survival in the near future. 2013 will be the year, wherein, 80% of the currently standing eCommerce companies would be wiped out. Boys separated from the Men. Was always predicted since end of 2012, now, confirmed by the report from investment bank Allegro Capital (the report can be accessed here).
52 eCommerce companies have raised around $700 million in VC funding in past 3 years.
With around 80% of the total number of companies including these above mentioned 52, in dire need of additional money; and high chances of going bust.
The question then comes up obviously is – Why this bust? We’re hearing so many stories on eCommerce all day long, then why this suddenly.
The reasons are many. But here’s the top reasons -
1. Be conservative when it comes to spending money. Whether bootstrapped or VC/Angel Investor funded, go easy on:
. don’t waste too much money on infrastructure. Have a small office, don’t show off too much.
. don’t waste too much money on models/parties/drinks/incidental expenses.
. don’t waste money on fat-ass actors, models, celebrities and most importantly, sportsmen. I worked with one fat-assed bowler, he was more interested in eating parathas sitting at home, rather than actual playing on the field. We burnt crores on him, promoting him, meeting him, and wasting precious time, resources & money; which practically counted for nothing.
2. Do branding, but measure the bottom-line. Measure spending vs. CPAs every hour. Flipkart, which has raised about $250 million till now, is still burning cash and is not yet operationally profitable. This means, at the unit-transaction level, its still not making money. None is making money, in fact in India. Jabong, Deals&Your, Fashion&You and others had once spent around 10-15-20 Crores per month on branding, CPC ads, Banner Ads and so on; bringing millions of total visits, and clicks, and sales per day. But since CPAs went through the roof, and kept rising, most of these companies have lost millions and sitting bust. “Most e-commerce start-ups follow ‘the last man standing’ approach in a potentially large and under penetrated market. But one cannot keep losing money on unit sales,” said K Ganesh, a serial entrepreneur with investments in smaller rivals of Flipkart.
3. Build up a brand slowly, but steadily. Work hard, focus on the right things, and build your product/service such that, CPAs are low, and at least some measure of unit-level transactional profit margins are maintained. Over time, this is extremely important, otherwise you will be like Flipkart – huge like a mammoth, but no one wants to invest anymore, since chances of them breaking even in forth-coming 10 years looks low. Which in other words mean – the VCs are fucked, cause if there’s no exit for Flipkart, how on Earth will they get ROI on their investments? Overall, its a completely fucked up situation for all. The biggest issue in the India eCommerce space is ‘lack of loyalty’. Customers come, shop and then go. Never come back. Or, if some one else is offering the same product/service for a mere 10/- off, they switch boats. Avnish Bajaj, managing director, Matrix India, explained that e-commerce in India has a lot going for but most customers are coming in because of the low prices, there are no loyal buyers.
4. Logistics fuck up. Most of the eCommerce companies selling some stuff online – whether baby diapers to chocolates to books, suck in delivery timings. Logistics and SCM was a real pain in the ass – 2 years ago. Still is.
5. Strategic fuck up. Have spoken to CEOs, Marketing geniuses, Board Members on boards of 10 Public companies, Harvard educated Investors, and practically anyone and everyone. None has any fucking clue as to what strategy one can use to “increase basket size or move to segments with higher ticket size or margins, without increasing CPAs, yet building loyalty over time”. Have spent hours and hours and hours, weeks and weeks and months discussing, brain storming and debating ideas – but none could ever provide any solution. A few tactics here and there, yes; but long-term strategies, no.
On the good front, India’s 150 million Internet ready people is growing. But the eRetail basket of 10 million is extremely low compared to China, US and UK. In fact, penetration levels are so low, and not improving, which is hurting the cause further. A few other things that you can do RIGHT, if you’re launching your new startup is here.
Conclusion is simple. Unless you have deep pockets, or can stand out the ‘last-man standing’ theory; chances are you’re in for a long haul. “Building a brand like Amazon.com is not simple. Experts cited in media reports have reiterated that for some brands, the cost of customer acquisition can touch Rs.4,000-5,000 while anything above Rs.350 per customer is not sustainable. Add to this the high cost of inventory since most online retail stores store goods in warehouses that increases their real estate costs in a weak economy when unsold goods pile up.” (source)