Startups – Going Downhill?

By-  Prasenjit Sen (LT MHPS)

I can still remember my Topic of Group discussion in my Executive MBA admission process to be on E-commerce boom. Incidentally all of the participants ( me included) opined in favour of E-commerce. Some people at that time were  very much fearful that these new digital business platforms will put a death knell to local Kinara stores. Today, as news floats around about the de-valuations of Flipkart or Zomato and how difficult it has become to raise fresh capital for these e-based start ups,  I find my local Kirana stores  still selling things  their own way. Thus, my mind started questioning my conscience  . Had we misinterpreted the future in our group discussion?

Well, let us look into the current situation with a deeper insight. The e-commerce ventures are facing an intense competition, be it in terms of market capitalization, revenue growth or raising fresh capital. All the venture capital firms are lending more cautiously than ever before , in the process  raising viability concerns of business models of many start ups. The government  which is supposed to be in favour of start ups  is coming up with regulatory clauses to check audacious competition. Hence, the startups are facing the heat  from all angles. As a result, many of the ventures are reeling with decline in sales and scaling down operations significantly.

Automatically,  the question arises  whether the startup business model is altogether flawed from the outset or  is there something wrong with their operations.

Before trying to find out what is going wrong let us revisit the basics of business. How do we define business? There may be thousand ways to define a business. But I’d simply put it as making money  for the present and the future by ethical means.  And Ladies and gentleman, there lies the crux of the problem for most of the start ups  or e-commerce as a whole. They are in deep  trouble  simply because they are not making money in the present. As the day progresses, the future becomes the  present with the situation remaining same. So, they are not generating any positive cash flow. By giving huge discounts , promotional campaigns and hefty pay packages to executives who are all but going for GMV, there is no way  to make profit. There is exponential growth, but no profit. How long one can sustain with this model?  There is no Midas touch or infinite inflow of cash.  Definitely, there is some problem in business model which says that profit is for the future which is nowhere accounted for.

So  what is exactly wrong? If you look at how the e-commerce firms like Flipkart, Amazon or Snapdeal have been  operating in the past few years  by giving deep discounts on product  like the big billion day sale where one can buy a mobile at one tenth of its current market price, there is no well defined futuristic approach.  Price is the mode of competition. As most Indian consumers are price sensitive, they are flocking to this new platform. By competing in terms of price, the firms forget to highlight what  the basic value they add to the consumer is. Is it the price? Definitely not.  It is ease of shopping and ease of availability of product. Who would’ve thought of buying a Harry Potter book in a tier-3 city in India and have it delivered to their home within a week? This is the most amazing value proposition E-commerce brings to the customer. Obviously, internet availability and other infrastructure augmentation have helped these firms to expand to rural India as well.  The young generation has played a major role in its expansion. They are socially better put up than most of their parents and are not apprehensive to order a product without having a real feel during placing the order like their parents.

Have theses firms succeeded in claiming the true value? On the contrary, the firms are giving price discount and huge payment to executives for generating top line. So, customers forget value and go for the price only.  As we’re aware , but forget often, price cannot be a permanent competitive edge if the firm is not able to keep its operating margin. Price can be imitated very quickly, the most important point being customers are not loyal from price point of view. One has to offer some other intangible benefit which is hard to imitate. For example I will raise $ 100 million and sell  X amount of product at a lesser price than its market value in the hope that tomorrow I will charge a double premium from them. I don’t think I’ll be labelled the wisest man in the world then. The companies must find ways to increase their operating efficiency by better asset utilization, reduced cost and quick cash conversion cycle. Why to rent a Gurugram DLF cyberspace office if one can afford similar  property in Faridabad at 1/3rd the price! Why to build your own warehouse if you can tie up with small distributors who have their own storage places. These are points worth a ponder.

 Looking at the current scenario, I reckon the stand we took in our group discussion is still valid and very much relevant today as it is still offering a unique value to the customer. While the business model needs a tweak or two where the companies can claim the value they’re offering. Those who can find a way to do so will definitely shine in the future.

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