1. As green shoots appear again in India, read what is spawning the new round of start-ups

As green shoots appear again in India, read what is spawning the new round of start-ups

Even amid all the gloom, some start-ups are going all out to keep themselves afloat. On the back of its probable merger with Flipkart, Snapdeal managed to raise Rs 113 cr in an emergency financing round.

Published: July 2, 2017 3:35 AM

 

In 1975, two childhood friends, Paul Allen and Bill Gates, formed Microsoft, a company that would go on to transform computing.

Gaurab Dasgupta

 

The 1970s was a decade known for the turbulence, innovation and disruption it brought to the world order. It was witness to some of the most iconic headlines and events—the Beatles releasing their last album, Let it Be (1970); then US president Richard Nixon resigning after the Watergate scandal (1974); Elvis Presley, the king of rock ‘n’ roll, dying of an alleged drug overdose (1977); and Margaret Thatcher becoming the first woman prime minister of Great Britain (1979). But amidst all this, the 1970s also brought along two innovations that would change the way technology would be perceived and utilised in the coming years. In 1975, two childhood friends, Paul Allen and Bill Gates, formed Microsoft, a company that would go on to transform computing. And in 1976, Steve Jobs, Steve Wozniak and Ronald Wayne sowed the seeds of what would go on to become one of the most successful technology enterprises in the world: Apple.

These two companies unknowingly kicked off a global phenomenon, the birth of start-ups, which would remain in sweet slumber for decades before finally waking up and reigning supreme the world over. In India, it was after the dotcom burst of 1995 that entrepreneurship really began spreading its tentacles into the mainstream space. In 1996, 20 years after the first-generation technological disruption and 13,500 km away from Silicon Valley, Ajit Balakrishnan registered the first domain in India and launched Rediff.com.

By then, Microsoft and Apple had already become global powerhouses. A year later, Anupam Mittal ventured into the online matrimonial business when he founded Shaadi.com (earlier called Sagaai.com, Mittal changed the name in 1999, believing it to be more marketable). Despite some early hiccups, Shaadi.com saw great success over the next 15 years, as people became more receptive to online matchmaking. The year 1997 also saw the launch of Naukri.com by Sanjeev Bikhchandani, a former Hindustan Milkfood Manufacturers (now GlaxoSmithKline Consumer Healthcare) employee.

The firm, which started as a floorless employment exchange, today has a database of around 50 million registered job seekers. Then in 2000, Deep Kalra, an entrepreneur from IIM-Ahmedabad, founded MakeMyTrip, an online travel company, along with Keyur Joshi, Rajesh Magow and Sachin Bhatia. Today, it’s the largest online travel agent in the country and commands a 41% market share in the online travel space, as per a recent Deutsche Bank report.

It would take almost another decade, however, for start-ups to really occupy prime space in the minds of Indian entrepreneurs. The game-changer was Flipkart. Sachin Bansal and Binny Bansal, two IIT-Delhi alumni, started the e-commerce company in 2007 with the idea of selling books. But in no time, their company transformed into an Internet behemoth, catapulting the start-up boom in India. From bringing the experience of shopping to the desktop to satiating a consumer’s midnight hunger pangs, start-ups started traversing and conquering uncharted territories.

Survival of the fittest

Between 2007 and 2012, the country saw a meteoric rise of start-ups, ranging from e-commerce to hyperlocal delivery and cab aggregators. Flipkart became the first unicorn in India in 2012. Cab aggregator Ola and e-commerce platform Snapdeal followed suit in 2014. Life was becoming simpler for consumers; everything was just a click away. For entrepreneurs, though, the challenge was about to begin. Investors, who had pumped in massive amounts of money into these ventures with great enthusiasm, were now looking for returns.

This posed questions on the sustainability, stability and longevity of these models. Some rose to the occasion and flourished, while others fell flat on their faces. And thus began a consolidation spree in the Indian start-up space. Flipkart acquired Myntra.com, a fashion e-commerce platform, for $300 million in 2014 and followed it up with the acquisition of Jabong for $70 million in 2016. The consolidation left the Indian e-commerce retail space with only three major players: Flipkart, Amazon and Snapdeal.

The entry of global player Amazon only intensified the competition. Jeff Bezos-led Amazon forayed into the Indian market in 2013 and has, ever since, become one of the major players in the e-commerce space, competing neck and neck with Flipkart, with each claiming to be the largest online player in the country. Amazon, this year, has also committed investments to the tune of $5 billion in the country. “Last year, half the capital deployed was in infrastructure. This year, too, we will continue to invest in infrastructure, innovation and technology,” Amit Agarwal, senior vice-president and country manager-India, Amazon, had said at the time.

Interestingly, Chinese giant Alibaba, which has offerings across e-commerce, digital payments, Web content and online ticketing, is also expanding its footprint in India. Two years ago, Alibaba made its first major investment in the country when it backed mobile wallet company Paytm. Today, its stake in Paytm is about 60% (20% held via investment arm Ant Financial). In fact, Paytm recently separated its wallet and e-commerce businesses following Alibaba’s model. It also launched an online marketplace, Paytm Mall, and now competes directly with Flipkart and Amazon. Last year, it was rumoured that Alibaba would start selling in India via Alibaba.com, but that is likely to take a while, as per reports. It is evident, however, that the Chinese tech giant is actively seeking a share of the Indian e-commerce pie.

As far as Snapdeal is concerned, the e-commerce platform is in the final stages of its merger with Flipkart. Run by Jasper Infotech, the firm posted a loss of Rs 3,316 crore in FY16, an increase of 150% compared to the loss of `1,328 crore it incurred in FY15. The merger is being orchestrated by SoftBank, Snapdeal’s largest investor, and Tiger Global, Flipkart’s biggest backer.

Sreedhar Prasad, partner, Internet business, e-commerce and start-ups, KPMG, believes consolidations are inevitable in the Indian start-up space. “I would look at most of the consolidations as strategic acquisitions of a specific technology or product category by larger players. At the same time, independent identity is a challenge for many categories beyond a threshold and that, too, can lead to acquisitions, especially in vertical businesses in a larger category,” he says.

DD Mishra, research director, Gartner, differs, “A number of factors like threat from bigger players, access to bigger capital, sustainability challenges, cut-throat competition and an overcrowded supplier market are driving consolidation. It would be wrong to consider it as a crisis of independent identity because consolidation has various triggers, impacting a wide range of organisations, including start-ups,” he offers. Turbulent times

In the past two years, more than two dozen prominent start-ups have shut shop. Some have had to ‘trim’ their workforce. In either case, thousands of people have been rendered jobless. Food ordering start-up TinyOwl, for instance, started with much fanfare in March 2014 with an investment of $15 million from Sequoia Capital and Matrix Partners in the US, and Nexus Venture Partners in India. Two years down the line, however, it stopped its services in all cities except Mumbai. This was after it was forced to carry out mass layoffs (much like Zomato and Foodpanda, two of its biggest rivals). One of its founders was even detained for two days by laid-off employees over post-dated cheques. TinyOwl was eventually acquired in June 2016 by hyperlocal delivery start-up Roadrunnr.

Another start-up, AskMe, a consumer Internet search platform, shut shop in August 2016, six years after it was launched as a classifieds portal. Severe cash crunch was considered to be one of the reasons behind its failure. Many considered the unplanned exit of its principal investor Astro Holdings as the major reason that triggered its downfall. About 4,000 employees lost their jobs. So what did the first-generation innovators do that these failed companies couldn’t? One notion says they kept things simple and covered one block at a time.

In their hysteria to maximise profits and rise up the ranks, millennial entrepreneurs forgot to take note of the instability it brought along. KPMG’s Prasad considers many of these cases to be scenarios where the firm was a ‘me too’ company, with not much of a differentiated business model. “These companies were just winning business by spending money. Having an identity alone will not help companies grow today. They need to have clarity in their value proposition to customers and a clear way to make profits,” he says. Gartner’s Mishra considers a variety of challenges such as funding, sales and marketing, value articulation, access to information, ecosystem support, family pressures, legal framework, market maturity and cultural barriers behind this downtrend.

The shock is not restricted just to India. Globally, too, many companies have had to face the heat. Recently, there was news of Uber CEO Travis Kalanick, the man who metamorphosed a small start-up into a gargantuan entity, resigning amid investor pressure. This comes after the ride-hailing app was exposed as having a workplace culture rife with sexual harassment and discrimination. The turbulence at Uber began this year when a former employee complained of being sexually harassed at the firm. Uber is already fighting an intellectual property lawsuit against Waymo, the self-driving car business of Alphabet, Google’s parent.

It is also reeling under a federal inquiry into a software tool that it used to dodge law enforcement. All this makes it a perfect example of a start-up story gone wrong. Then there is Yahoo. One of the pioneers of the Internet revolution, it faced a similar downturn before being sold off to Verizon for $4.48 billion earlier in June this year. The spiral that engulfed the two-decade-old tech giant included concerns raising from a data breach in 2014, which the company disclosed only in 2016.

It saw information of at least 500 million user accounts being leaked online, making it one of the largest data breaches reported till date. The firm was also dragged into a courtroom tussle when Scott Ard, a former senior editorial director at Yahoo, filed a lawsuit claiming a job review process—implemented by Yahoo president and CEO Marissa Mayer—was used to cut men from executive ranks and lay them off illegally. The complainant said the company violated federal civil rights and employment regulations.

Insufficient funding

There’s no doubt that the Indian start-up sector is going through a dry patch when it comes to investor funding. As per the 2016 VCCEdge Startup Deal Report, start-up funding activity slowed down drastically in the first quarter of this calendar year, with deal-making slipping 47.45% against Q1 CY2016. The cumulative deal values dipped 45.76% quarter-on-quarter. Angel and seed investments fell both in volume and value terms, with deal volumes reduced to half—120 deals in Q1 CY2017 in comparison to 245 deals in the year-ago period. M&A deals, however, witnessed a 75% jump quarter-on-quarter.

A recent study by the IBM Institute for Business Value also paints an abysmal picture. It states lack of innovation, non-availability of skilled workforce and insufficient funding as the main reasons for the high rate of failure among start-ups. In fact, 70% of venture capitalists believe talent acquisition is one of the biggest challenges faced by Indian start-ups.

Clearly, the Indian start-up space today is looking for a new face to propel it to the next wave of success. KPMG’s Prasad is optimistic about the prospects: “Looking at the novel ideas start-ups today are coming up with, there could be many a unicorn in the medium term. The sector is still young in India and we will see many names going global.”

The road ahead

Even amid all the gloom, some start-ups are going all out to keep themselves afloat. On the back of its probable merger with Flipkart, Snapdeal managed to raise `113 crore in an emergency financing round from existing investor Nexus Venture Partners and the company’s founders. The latest capital infusion might not provide Snapdeal a fresh lease of life, but it speaks volumes about the never-say-die attitude of these entrepreneurs. Take, for instance, MobiKwik, a digital wallet company. It recently withdrew its cashback offers, something that drove its popularity during the initial days.

The firm, however, does not see such a move to be a sign of turbulence within the fintech space. “The company is adding over four million users every month… even the merchant network is being strengthened by 10,000 per day,” says Vineet Singh, chief business officer, MobiKwik. “Cashbacks have been discontinued by MobiKwik to introduce a loyalty programme called SuperCash,” says Singh, adding that the fintech space has grown about 3.1 times over the last year. “Cashbacks aren’t sustainable, as they lead to cash burn and don’t deliver significant value. SuperCash, on the other hand, benefits the user and the company alike. Since its launch, MobiKwik has witnessed a 28% growth in transactions per user and a 32% improvement in customer retention.”

Other existing start-ups, too, are leaving no stone unturned to cement their positions in an already crowded space. Sudhir Pai, chief executive officer, MagicBricks, says the online real estate platform is the leading player in the space, with over 40% market share. “We have numerous drivers for growth such as product innovations, deeper market penetration, pricing, deepening market segments, etc. When developer marketing spends are under pressure, choices would be made in favour of portals, which aggregate the largest audiences and deliver superior return of investment. We would be at the top of the heap on these fronts,” he says.

Another factor that might weigh in is the upheaval the IT sector is going through currently, with job losses to the tune of 60,000. Factors such as the rise of automation, the Trump administration’s crackdown on H1-B visa policies and major economies turning towards protectionism are hitting the IT sector hard. But this might just give a fillip to the start-up space. Experts are of the opinion that start-ups will have significant opportunity during these challenging times and might benefit by getting good talent in the short term. “The demand for more automation and innovation, and the impact on build-versus-buy could have some indirect impact over a period of time, depending on the value proposition,” Gartner’s Mishra says.

KPMG’s Prasad believes having a core team is very important for a start-up to ride on to the next wave of innovation and come out on top. “A clear nimble business model and a set of investors who are willing to be with you in the long term and provide strategic guidance will hold the key in times to come,” he says. The trajectory start-ups take from here will heavily bank on the experience they have gained and the technological developments that have taken place over the years. It remains to be seen, however, how entrepreneurs will take these failures into their stride and chalk out new strategies.

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