While startups may be the future, the present scenario is a bed of roses with the thorns untrimmed. Recent layoffs at start-ups like Zomato, TinyOwl and Housing.com have led rumours that the dot-com startup scene in India is about to collapse hence, the startup bubble is about to burst.
Wealthy foreign investors, invigorated by low interest rates in India, have pumped in millions of dollars into the Indian startup market, especially in the dot-com sector. With the Government led by Prime Minister Narendra Modi has urged the entrepreneurial spirit in India to surge, under the vision of “Make In India”, in order to promote self-sustainability and to encourage people to make their own jobs. Could it be that their faith in the online start-up sector was misplaced?
The dot-com sector has been getting millions in funding. However, most of the companies are yet to turn profits, and investments are usually based on speculative earnings. If we have a look at the recent startups, they are funded heavily to last for the next 12-18 months. Also, most of them are working on the “unicorn” model instead of the “cockroach” model to gain market dominance. And wait, they are not alone. They have innumerable counterparts who are giving them a neck to neck competition.
Certain experts feel that investors have lost objectivity when eyeing the startup sector, where they are showered with golden promises of opportunity by the Government and a few success stories, and thus they overlook most of the failures.
Recently, TinyOwl laid off around three hundred employees in Mumbai, which led to large-scale protests since their severance packages had not been paid off. Housing.com too reportedly fired about six hundred employees, and the “unicorn” start-up Zomato reportedly fired 10% of its staff globally.
It is not only layoffs, the world also witnessed a lot many billion dollar startup deaths in the recent years. As of now, only thing startups are eyeing is growth. Profitability is not in the picture. But how long can they ignore profits? Consider the case of Housing.com. It incurred loss of Rs 48 Cr on revenue of Rs 1.48 Cr in the fiscal year, 2014. Flipkart has incurred losses amounting to Rs 2000 Cr. Numbers like these are bound to dishearten investors over time. Sooner than later, the investors will ask for the path to profitability. So, it is high time that startups started focusing on making profits.
Investors are also questioning if e-commerce in India can be considered a bubble or not?
One of the reasons that justify the apprehension is that startups are trying to acquire customers mainly through selling anything and everything at a discount. Moreover, they are adopting accounting methods. They are amortizing discounts that they provide on sales as capital expenditure, instead of accounting for this in the year of sale. This leads to inflation of their balance sheets. Another reason is the dismal success rate of tech startups world over, which is bound to blight the Indian success story.
Valuations are on the rise for the better part of two years and this questions the veracity of the valuations and its metrics employed to arrive at the enterprise value.
So, are they just an asset bubble? Let us first explore what an asset bubble really is.
An asset bubble is considered a periodic phenomenon which occurs when the value of assets increases much faster than its real value. Sooner or later, the high prices become unsustainable and they fall dramatically until the item is valued at or even below its true worth. In this case, because the e-commerce companies are still not publicly listed, the underlying is the book value of the business as against the sky high valuations that are doing the rounds today.
“If a company is losing money on every transaction, then the business model is not sustainable.”
– Devangshu Dutta, Chief Executive Third Eyesight.
So, will the startup bubble really burst? And what should entrepreneurs do before the startup bubble bursts?
The chances of startup bubble bursting are minimal but there can be other consequences. This time, since the startup bubble is prevailing in privately held Indian e-commerce companies and that the valuations here are also closely linked to the soaring valuation of US tech startups, five types of events may result in an investor pullback and there can be several endgame scenarios, for the small as well as big players, alike.
One – Small players will eventually run out of cash and shut down operations
Two – Declining valuations of startups like Uber and Dropbox
Three – Companies may start struggling to raise further rounds of funding
Four – Startups may get acquired by bigger players in the long run, with only three-four major players existing in the market.
Five – Industry saturation and consolidation underway
To control the impending damages due to bursting of startup bubble, startups will have to rationalize their costs and move towards a profitable business model. Also they should start focusing on providing better customer service to build brand loyalty. To keep up with growth experienced, startups should continuously remain engaged in innovation to exploit the market/audience. Layoffs and devaluations are painful, but these may be considered as the much-needed course correction for the Indian start-up ecosystem.
Most of the major e-commerce startups are looking for filing an IPO in the next 12-24 months, thereby seeking a much higher valuation than what they currently command.
But will that be possible?
An IPO is not only about money. It is also about significant amount of information that needs to be made public with the consent of the investors. That’s where they are very creative in curbing their companies. Most of them will not be able to open up to the scrutiny that an IPO brings. With these underlying facts, it is quite difficult to procure an IPO, at least in the next 12 months for any of the e-commerce giants.
The time for IPO, if not so early, is highly probable to come in future. Upon going for an IPO, company’s listed price shall not match the company’s valuation at the last round of funding. This is going to cause a major crash where early exits will be lauded and a lot of investors are going to be an unhappy lot. We can still expect one or two major players to make successful IPO exits for their investors and founders and eventually turn into industry stalwarts.
Therefore, the cynicism around the future of Indian startup ecosystem – the fastest growing and third biggest in the world – is misplaced. The startups are here to stay, for the potential of technology penetration in the lives of more than a billion Indians is unparalleled. All the startups that move towards a better implementation with an impactful idea in mind will be reaping the rewards.
