Snapdeal unboxed: Time for startups to get real, the gravy train has long stopped
Year 2017 is considered crucial for the sector as the most of the companies have reached scale and they will have to find ways to turn profitable at the earliest.
The job cuts and salary cuts at e-commerce company Snapdeal is likely to be a turning point in the sector's growth path, which has of late seen quite a few twists and turns. As such the year 2017 is considered crucial for the sector as the most of the companies have reached scale and they will have to find ways to turn profitable at the earliest.
For the uninitiated, Softbank-backed Snapdeal on Wednesday announced the decision to lay off as many as 600 employees saying the company needs to take some hard decisions on the journey towards profitability. Co-founders Kunal Bahal and Rohit Bansal, in an email to the staff, said they were taking a 100 percent salary cut.
Bahl and Bansal earned identical salaries of Rs 46.5 crore each for FY16, making them the seventh highest paid executives in the country, according to an earlier report in VC Circle.
The predicament has been in the making for some time now and many startup sector analysts had warned about the lack of clear business model and goals. It is to be remembered that in 2016 was plagued with many startups shutting shop, primarily due to fund crunch. And these were well-funded startups, too. Think online grocery delivery, Pepper Tap; online groceries, LocalBanya; fashion e-commerce, Fashionara; educational technology, Purple Squirrel.
There have been other allegations against Snapdeal, especially when the company spent around Rs 200 crore on a new logo. “It was like painting the deck of the Titanic” said Mahesh Murthy, Co Founder, Seefund. “You cannot have a copy paste model. That just doesn’t work."
Many feel that Snapdeal and its larger rival Flipkart have been following a business model that is not viable.
“If you buy something for Rs 15 and sell it at Rs 10 continuously, no matter how many times you are funded, you are not going to make money,” said an investor who has invested in several startups across sectors. He says that unfortunately funding has led to some founders losing their sights on the core business. Some have been brash to believe that with funding they can scale up.
This is precisely what Bahal and Bansal meant when they said (in the email), "...a large amount of capital with ambition can be a potent mix that drives a company to defocus from its core. We feel that happened to us."
When business models don’t work, investments or fund flows are bound to dry up. Unit economics have to be right and only then can you go in for economics of scale, the analyst said. However, what is playing out in the Indian e-commerce arena should not be surprising as it is a market in hindsight.
All parties related to e-commerce are happy and profitable, except the e-commerce companies and the investors themselves. Customers are extremely happy as they enjoy the deep discounts and other freebies which they do not get offline. The payment gateways and logistics companies, who facilitate business for e-commerce companies, are doing well too.
“The sector has to take a hard look at what it will take to be profitable,” said Devangshu Dutta, chief executive of Third Eyesight, a consulting firm, adding that if a startup has to stay alive it has to take decisions. “Some of them have to be hard decisions like letting people go but that is the reality,” he says.
However, Nasscom, the IT industry body is optimistic. It says with more startups springing up jobs will not be an issue. "Last year 1,200 startups were created. There will be new ones entering the space this year. In the long run, there will be job creation," said Sangeeta Gupta, Senior Vice President, Nasscom.
Right now the rate of cash burn is not decreasing, and investors are worried. After an almost 10-year period in the sector, investors would like to exit with profit. In that sense 2017 will be a critical year for startups with many trying to approach new investors, like Flipkart is doing now.
Flipkart has trimmed down its employee strength from 33,000 in 2015 to less than 26,000 now, according to a report in the Mint. When a company decides to cut its employee strength, it is not a ‘straightforward solution,” says Kunal Sen, Senior Vice President, TeamLease. He says most companies, be it startup or any other company, it has to look at profitability.
When a company is bleeding and is wanting to stem the flow and also look at being acquired – there are reports that Alibaba is eyeing stake in Snapdeal for its e-commerce entry in India – then it is time to get its right act. Mahesh Murthy of Seed Fund feels that in 18 months to two years, many of these companies that are known as brands now will cease to exist as their business models are not feasible. “If they do exist in the future, it will be in a merged form and will be worth less than their current valuation,” he predicted.
With most e-commerce players having reached scale, it is no longer possible for the players to continue bleeding. The way out for most of the companies in the sector would be to look out for mergers and acquisitions so that they can up the game and not lose out totally. If Amazon continues to give discounts and not focus on profitability, then the other players in the arena will be decimated sooner, said Harish HV, Partner, India Leadership Team, Grant Thornton.
A section of the analysts also feels the Indian e-commerce sector will be completely disrupted by deep-pocketed Amazon and chances are the game could be between Amazon and Alibaba. India will become a playground of these two international majors who will fight it out among themselves and with the home-grown market leader Flipkart, with every player looking at the other to blink first.
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