This is a guest post by Ankush Gera, CEO, Junglee Games
eCommerce is positioned as a viable business in India even though companies might take almost a decade to become profitable. While eCommerce companies are reporting growth of more than 100% year on year, the boom is an outcome of relentless advertising spends and deep discounts, resulting in mammoth losses and doubts on their astronomical valuations. E- commerce players are simply in a rush to grab customer eyeballs in the face of mounting competition. The only people that are winning are media and advertising companies, and of course consumers.
An eCommerce business model can be complete only when the companies are able to generate real profits. Unfortunately at present, most of these companies are surviving on private equity money and emphasizing on burning cash than focusing on real growth. No wonder, most of them are not profitable or even close to profitability in the near future. India witnessed its top 22 online commerce startups reporting a 293 per cent growth in losses at Rs 7,884 crore for the financial year ended on March 2015 on combined revenue of Rs 16,199 crore.
Over the past year, valuations of privately held eCommerce companies have jumped up 4-5 times or more because of the investors’ FOMO (fear of missing out). However, many analysts and investors, who are themselves structuring the valuations, have now started questioning the fabricated valuations attached to eCommerce in general. UBS analysts estimate that eCommerce companies in India should be valued at $17-19 billion, much lower than the current implied valuation of $25 billion.
For many eCommerce companies, especially startups, raising a round of funding becomes a matter of celebration. It gives an exhilarating feeling with the first checkbox complete, but raising financing doesn’t mean that the entrepreneurs have built a successful business. Somewhere down the line, most founders forget that they need to create a sustainable and long lasting business that is not constantly dependent on funding. Although the risks are huge in this case, so are the rewards. Many entrepreneurs are under the impression that they can only create a successful business by getting funded right from day one and securing follow on funding. This results in the market dictating rosy valuations for the companies.
Sure – Amazon and many other large, and now profitable businesses relied on large amounts of capital for many years and weren’t profitable. But for every one of those businesses, there are hundreds that failed. In India, investors’ excitement resulted in a landscape of craziness across every vertical big or small. Analysts and rookies alike predicted correction; and it’s here.
I got my early lessons in taking calculated risks as an entrepreneur from my father who saved up while working at a mediocre job at a government office to start his own small exports business that shipped everything from Kodak film rolls to Dubai and leather purses to Moscow. The business growth spurred him to turn in to a private financier at a time when it was difficult to get a 10% interest loan from a bank. He prospered at helping people buy vehicles and homes. This time, he used his savings to invest in real estate to build much of his current net worth from his real estate portfolio. His journey is an example in how one can work one’s way to financial freedom without loans or investors through pure organic growth in life.
Taking a cue from his growth story, I worked my way up to partner and VP of Ace Engineering and Construction in the Silicon Valley while in college. An online calculator that did virtual simulation and aided signing of contracts by printing estimates online was one of the first things I remember launching. This simple tool gave us the technological edge in a traditional industry to sign over 7 figures in revenue within our first year.
My next lesson in building businesses was when I joined two hustlers like me to start a digital agency called Monsoon. We would hit every conference and networking event and sign small software deals. Once the deals were signed, we’d go out and get teams to build it. Eventually we went from building Bob the roofer’s website to doing work for companies like HP, Cisco, Toms, Zazzle which resulted in work that was long lasting and worth millions of dollars. The best part was that we could achieve this without raising finances, and were still able to establish an amazing culture and great lifestyle well within our youth with an in-house team. Last year Monsoon, a 70 person full service digital agency based in Berkeley, was acquired by Capital One. Owning and bootstrapping the company to profitability helped the key stakeholders find financial success without the hassles of investment or credit lines. The acquisition wasn’t valued at an-Indian-ecommerce-story-that-may-crash-level and getting an outstanding home like Capital One made a huge difference no doubt.
What has been crucial is to evaluate every expense, even a $1K spend diligently and avoid frivolous spending. Our marketing experiments big or small get treated the same way with the need for a hypothesis and data to substantiate results. We compensate very well but don’t try to compete with exorbitant venture backed businesses. We continuously audit our financials to find savings and work at making the culture fun without splurging. Our emphasis is on investing on customer loyalty by building a ‘wow’ product. The idea is to let our work speak for itself and not blow our own trumpet. In the end, there might be companies doing better than us but we have taken foolproof steps to scale fast and scale big, which is something every company aims to do.
Entrepreneurs have been getting carried away in this craziness of grab as much as you can get, without realizing that down rounds, where the valuation is lower than the previous round of funding can be lethal to a business. Mature founders understand this and sacrifice inflated valuations in lieu of never having a down round. In the Indian landscape, we’ve seen frothy valuations combined with outrageous investor-friendly term sheets and stock preferences, which end up not making any money for founders even during an exit
Let’s take a learning lesson from the recent news of Flipkart’s overvaluation story that led Morgan Stanley Institutional Fund Trust, a minority investor in the company to disclose a write-down in the value of its holdings by as much as 27%. Flipkart was valued at $15 billion after its fourth round of fund-raising in a year. When the US stock market regulators reported the numbers, they found out that the company now values at $11 billion. Although, one can’t take away the fact that the company still has a solid business, the truth is not every business is as fortunate as Flipkart. The large mega businesses that have, to some extent, hit escape velocity will survive, no matter what. But those are exceptions to the rule. Most of the food tech startups and the fashion startups like Jabong are collapsing left and right.
I’d argue most medium to large ecommerce businesses are being poorly managed where they are constantly spending acquisition dollars knowing very well it is negative ROI over users’ lifetime, just to show shareholders inflated users/MAUs/DAUs to secure follow on funding. Most founders running these companies are well aware that a better economy, better payments ecosystem, and other factors in their future will never make their unit economics positive. Yet, everyone is playing the game. Investors are equally to blame given they’ve been through more than first time founders. This strategy was never sustainable. We witnessed it in the dot com bubble in the late 90s in the US, yet it seemed FOMO trumps historical knowledge and India is learning the hard way.
Anyone can spend ten or a hundred million dollars and get eyeballs. GMVs only matter if KPIs will eventually turn the business profitable. Acquiring customers by giving away cash backs on purchases of brand new phones or furniture at discounted prices isn’t sustainable unless future growth guarantees a turnaround. Founders need to ask themselves if they really expecting to see a 700% change in the customer’s Lifetime Value (LTV) to be profitable on acquisition costs, which unsurprisingly enough is what some of the ecommerce businesses need to turn things around. And if one has found a business where the unit economics will eventually be correct, big question to ask at the top is whether you’re able to stay in the game long enough to see that? Financing isn’t bad and is needed in most cases to grow and build a strong sustainable business, but most founders don’t have it in them to run a business for 2 decades and go through dozens of financing rounds.
Thus, eCommerce companies must choose their investors wisely and look at their history, their reasons for investing and how they can be helpful in the company’s growth. Instead of investors acting as cheerleaders, they must lookout for a mentor who ensures that the business spending is in sync with the unit economics and revenue streams to prevent any sort of cash burnout and operational instability, even if scale takes slightly longer to achieve. Founders should invest their time in data analytics, predictive science, optimizing customer life time values over acquisition costs and building businesses with high retention and strong network effects. This way, by placing a robust business model in position, eCommerce companies can ensure sustainable operations without negotiating on growth and scale.
Disclaimer: This is a guest post. The statements, opinions and data contained in these publications are solely those of the individual authors and contributors and not of iamWire and the editor(s).