What Ails E-tail

Do you hear that pop? It’s the soft but unmistakeable sound of a bubble bursting. A bubble named startups. This is how it begins…

Amit Seth (name changed), 32 years, an IIM graduate, had a plush corporate job in Gurgaon. He quit it. With his expertise in digital, he was much wanted at a food delivery startup where the money was flowing in from internet incubators. In less than two months, he quit.

“I was excited when the billionaire investor himself approached me via email, for the position of MD India,” recalls Seth. “But during discussions, he said he was looking for a chief marketing officer for India, and that he was confident that I fit the role.” This was a step down for Seth, but he took the offer. When the appointment letter arrived, he learned that the CMO’s role had been split into two – digital and non-digital – and that he was being hired as the chief digital officer instead. Although taken aback, he decided to give it a try. A plump pay package beckoned, as did a fancy designation and equity that could run up to several crores in a few years, But all this was only on paper. Things changed drastically the day he joined the startup. “On my first day, I discovered that there was already a CMO who was inducted three months earlier, and that there was no clear role defined for either of us,” says Seth. “This led to continuous conflicts and confusion within the team and that, in turn, resulted in an overall negative work atmosphere.” Though the digital head for India, Seth had no control over the digital agenda, and the shots were actually being called by the fund abroad. Seth realised that he had become a victim of hiring sans planning. And that’s when he left.

Tearing Hurry
Businesses that came before the startup explosion will certainly have believed in the old idiom slow and steady wins the race. But startups are by nature in a hurry, rushing to build an app, get surprising amounts of funding, acquire customers by the millions, and set unreasonable targets. They also rush to hire.

The result, as one is beginning to see, is a fair bit of chaos, failure to scale after the first one or two rounds of funding, a mess of logistics, and often no sound revenue source. This is prompting fund managers to tighten their purses and become more wary.

“Six months ago everyone was euphoric and now everyone is predicting a blip. It is not a slowdown in funding, but a correction in ideas that will succeed or fail,” says K Ganesh, founder of GrowthStory, an entrepreneurship platform that promotes greenfield ventures. He adds that it is disheartening to see how much money went into businesses whose ideas were not tested and with which entrepreneurs were expected to scale up in a tearing hurry.

With the stock market collapse in China in August, tremors were felt across the globe. Fund managers instantly curled up into a wait-and-watch position. Nothing that happens in China can be seen in isolation.“This is where the whole slowdown began,” says Avnish Bajaj, co-founder and managing director of Matrix Partners India, whose investment focus is on early-stage software and communications ventures. “Already, too much capital has flowed into the startup ecosystem – now it’s time for a correction.”

That correction will see some companies emerge as winners specially in the mobile and internet space which is seeing healthy growth in India.

Going Rapidly Nowhere
In February 2015, TinyOwl Technology, a Mumbai-based online food ordering firm, raised about $15 million from a clutch of marquee venture funds, Matrix Partners, Sequoia Capital and Nexus Venture Partners. But in less than eight months, the company hit the headlines for all the wrong reasons when it slashed over 110 jobs. “The current strategic focus is to build TinyOwl into a sustainable, profitable and scalable business,” says Harshvardhan Mandad, co-founder and CEO at TinyOwl. He points out that every business goes through its own unique journey, with some hits and definitely some misses.

Pioneering restaurant-finder app startup, Zomato, also announced lay-offs of a reported 300 employees. In other sectors too, a similar story is unfolding. Real-estate search portal Housing.com, which was earlier mired in controversy with the exit of former chief executive Rahul Yadav, is back in the news, looking to retrench 200 employees to cut costs, say executives privy to the company’s plans.

Bangalore-based food tech startup Dazo recently decided to wind up operations within a year of launching. It failed to keep pace with competitors and was short of capital even after raising its first round of funding in April. Similarly, SpoonJoy, an online restaurant, said it would shut down operations in Delhi and in parts of its headquarters city, Bengaluru, but gave no reasons. Founded in June 2014, it raised $1 million in May 2015 led by venture capitalist SAIF Partners. At that time, it had referred to expansion plans in Mumbai and Delhi. This hasn’t happened so far.

It isn’t just food aggregator startups that are in turmoil; its is across sectors. Talentpad, an online recruitment company based in Bengaluru, and online healthcare venture DocTree, wound up operations because their ideas could not build revenue.

Then there are ventures that are still operational but are going slow on expansion. And there are also a handful of them who have already decided to shut shop as the second round of funding gets harder to come by.

The Worst is Yet to Come
If the current situation is any hint of what lies ahead, startups in e-commerce may soon be in for a shakeup as sales plummet. This would spark off massive layoffs in the nascent digital economy. BWBusinessworld was among the first to warn of the e-tail bubble (issue dated 30 June).

Indeed, the startup community in India has undergone a massive makeover in the past year, paving the way for a large number of young, budding entrepreneurs to come forward and join in on the domestic consumption story. In the first half of 2015, the total number of venture capital deals had surpassed the total number of private equity deals. Venture funding refers to investments in startups, while private equity is growth capital raised by mid-sized ventures. In the January-June period for instance, 363 VC deals were sealed – more than three times the number of PE deals, which stood at 99, according to data available with accounting firm Grant Thornton.

While the number of startups is mushrooming in India, some early-stage businesses are not able to translate initial consumer interest into revenue flows. Today, most startups are gripped by similar issues: adequate margins, competitive pricing, and controlling customer acquisition costs.

A bright idea must also serve a need that is strong enough to make a customer go online and transact. For many, the monetary leap did not happen. However, this does not mean all of them will fail. While money has flowed freely into sectors such as real estate, ad-tech, food delivery, hyper local grocery and logistics, only the top two or three in each sector have understood the consumer. It’s they who have the biggest chance of survival.

“The nature of the startup business is such that even if one of ten becomes a blockbuster, the purpose is served,” said Arvind Mathur, President at Private Equity and Venture Capital Association. However, for all the failures in the new entrepreneurial landscape, the impact will directly be on job losses. Up until a while ago, numerous senior and mid-level executives quit cushy jobs for challenging assignments in startups, which not only offered milestone-linked compensation but doled out stakes and equity. Besides these, many were drawn by the excitement of flexible roles replete with challenges. What they did not anticipate are the growing risks associated with job changes. Rajeev Menon, Global Head of Corporate Business at MeritTrac Services, an assessments firm, explains that job losses in startups will be inevitable, since only one in ten will succeed. “Employees and fresh graduates should constantly get certifications to ensure reemployment in the industry,” he says. A study conducted by MeritTrac shows that India is falling behind on competitiveness benchmarked against a global average when it comes to fresh hires. India needs to provide 300 million jobs by 2030 and if startups are to provide 5 million jobs by then, the competitive index must go up.

Next Year Is Critical
Failing and being fired are not particularly uncommon when one joins the startup fraternity. “Chaos in startups is absolutely normal and those who ride through it emerge as winners,” says Bajaj of Matrix. However, for both employers (especially first time entrepreneurs) and employees, the emotional toll is significantly high. Perhaps that describes why the employees of TinyOwl held their co-founder Gaurav Choudhary hostage for over two days when the news about retrenchment broke out within the company.

Even as companies are increasingly working with their investors to help laid-off employees find new jobs, many executives may have a difficult time coping with such situations in the months to come. “About 70 per cent of the startups will fail in the future,” ace angel investor and former Infosys Director Mohandas Pai said in an earlier interview to BW Businessworld: “Many startups will fail. But those that survive will make an impact on Indian society.” The way startups are coming up, labour disturbance may become a reality over the years to come, with both white and blue collar jobs being at stake.

Not everything is doom and gloom because with every startup failing there will be several more starting up. “India just needs to make sure engineers are certified by competency and corporates should look beyond the top 100 colleges,” says Rajeev Menon of MeritTrac.

Looking back into history, the biggest job losses happened in the paper and textile mills in the eighties, amidst political pressure to settle disputes with the owners. One must not ignore the socialistic roots of the nation, which influence the youth who don’t always come from the affluent sections of society.

paramita@businessworld.in; vishal@businessworld.in

(This story was published in BW | Businessworld Issue Dated 28-12-2015)