Flipkart-IIM fracas: With no easy money, startups are now more grounded

The once-booming Indian e-commerce sector is losing its shine due to negative news that refuses to subside ranging from top level exits from start-ups, lowered valuations and the recent Flipkart-IIM-Ahmedabad fracas. All the giants in the e-commerce sector are in the news for negative reasons. Growth is on the downward curve and many of them are trimming down their workforce. With high level exits from Unicorns, lower valuations and a fund crunch staring in the face of start-ups, is the shine going off the start-up ecosystem in India? Are we going the dotcom way with exponential growth and sudden bust?

Experts Firstpost spoke to with are upbeat about the sector and say a few more start-ups will fall by the wayside and what will emerge by end of 2016 and next year is innovative products, services from early stage start-ups.

No fund crunch

Representational image

Representational image

The start-up ecosystem is brimming with ideas and funding is available to those who believe in deliverable ideas. It is the Me-Too ideas – who replicate what is being done by established players in the ecosystem --that will not get any traction, say observers. If more start-ups emerge wanting to copy marketplaces, food, groceries, fashion, they can be sure of being singed.

As many as 13 start-ups shut shop in 2015 and before the half-year mark this year, some start-ups have shown they have lost steam. PepperTap – an on-demand grocery delivery service shut down, and so did Flashdoor - on-demand laundry service platform,  MovinCart - grocery app, Klozee - apparel rental start-up,  Zeppery - restaurant food pre-ordering app, Zippon - logistics aggregator  and Frankly.me - video micro-blogging platform. Others have slimmed down operations like Grofers, an online grocery delivery company that shut down operations in 9 cities, Tiny Owl, an online food ordering firm has only retained operations and Hiree - online recruitment firm has laid off its workforce.

Recent surveys and studies indicating that the funding for start-ups is likely to become a trickle with fund managers tightening the scope and flow of capital was needed, say people in the start-up ecosystem.  A joint report by KPMG and CB Insights recently revealed that funding into start-ups has nosedived by as much as 24 percent from the December quarter of 48 percent to $1.15 billion in the first quarter of this year.

There is no shortage of finance to fund start-ups, says Mahesh Murthy, co-founder, Seedfund. “There is enough cash for deals at right valuation,” he points out. But funding is stuck, he says, for those start-ups with founders whose egos come in the way of being realistic about market realities.

There are a number of early stage start-ups that have access to funding, says Ramesh Loganathan, Managing Director, Progress Software, Hyderabad. He says as a mentor himself, he is associated with a number of early stage start-ups that are showing improvement in quality of ideas and their execution. “Start-ups in the early stage are evolving. They have access to mentorship, money, and growth has been good. In the coming year, they will easily go to the next stage of funding and eventually garner VC interest,” he says.

However, some analysts admit that fund raising may have become circumspect because investors are becoming smart about how they want their money to be spent. “Easy money is not going to be available to anyone, though money is definitely available. With crazy valuations that were the norm until sometime ago, no investor wants to invest in businesses without paying attention to fundamentals,” says an analyst.

No big deals

With valuation getting more realistic, there are no big deal announcements. “Money with ecommerce companies has to be conserved for the next two years as the investment climate is bad. No investor will give money to any start-ups at their current valuation,” says Kris Lakshmikanth, chairman and managing director, The Head Hunters India, Bengaluru. He feels this trend will go on till December 2016. This is being reflected with no increase in numbers of CXO-level hiring, he says. “In fact, a lot of start-up executives who came from the old economies are going back to their earlier jobs. The job market is tight. Getting a job is not easy.”

The overall trend seen is a slowdown in hiring by start-ups. "The days of hyper-aggressive hiring by start-ups are gone. The mantra now is to hire only when it is very essential. With VCs taking a more cautious approach to funding, and consolidation being the norm across sectors, many start-ups are finding it tough to sustain their hiring levels. Also, with most of them focusing on their burn rates, the trend of hiring highly-paid professionals from bigger companies, or from premium B-Schools and engineering colleges is on the ebb," says Ajay Kolla, Founder and CEO, Wisdomjobs.com.

A number of high level exits have taken place in start-ups. “Most of them have been asked to go,” says Lakshmikanth. He cites two reasons for it: Some could not deliver on their promises and if they did, it wasn’t accepted by the market; and many were forced to take a cut in salary given the current state of growth of the ecosystem.

While the overall hiring by Indian employers is expected to be around 30 percent to 35 percent, start-up hiring is expected to be around 65 to 70 percent, says Kolla.

Will the Flipkart-IIM-A fracas over deferment of joining dates for 17 recruits take off the shine of start-ups for management graduates? Dr Sunil Guptan, Adjunct Faculty, IIM-A ruled it out. “Flipkart needs to get its act together. IIM-A is not a lala tunkuji college that you can treat its students in this manner. I am inclined to see Flipkart as a blip,” he said.

The future

With the hype of the e-commerce sector being hit by lower valuation and shutting down of operations, a level of maturity can be expected, say experts. “The sector has not lost its potential and there is much scope for growth. What will not happen now is accelerated realizations. Consolidation may be the game-changer, instead,” says Dr Moorthy K Uppaluri, Managing Director and CEO of Randstad.

“Setting up an e-commerce model is about going digital and having a go-to-market model,” says Sanjay Enishetty, Managing Director, 50K Ventures. He says that in the increasingly competitive e-commerce sector, discounts and cash-buys will not work. Offline retailers have caught up with the online discount game and are ready to match online prices, he says.

Irrespective of high-level exits, unicorns are still trusted and lower valuations will not change the game for them. “People go to a Flipkart out of trust. Any new entity that is in the market or plans to enter the market has to acquire the trust of the customer. That is not going to be easy,” says Enishetty.

It is known fact that e-commerce is burning cash. In the current scenario, if they are unable to shore up, then 'Vulture Capitalists' will zoom in, says Lakshmikanth. “Just like vultures that eat up the dead, vulture capitalists will buy out companies with distressed valuation. It is only a matter of time before an Alibaba or Baidu makes its presence felt in India,” he says.


Published Date: May 27, 2016 08:21 am | Updated Date: May 31, 2016 07:50 pm


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