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Unicorns At War We are not Heading Towards a Bubble…It will be a Bloodbath

By Ritu Marya

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L-R: Sachin Bansal, Executive Chairman, Flipkart and Kunal Bahl, Co-Founder & CEO, Snapdeal

Today, e-commerce is not an industry in India, it a small country by itself. And this country is dominated by five big league players and a handful of foreign funds and then by many small e-commerce players, who love taking digs at each other in the universe called Twitter.

Undeniably, ecommerce is a different ball game with disruption at its nucleus, it is anyone's guess when these
companies will turn profitable. Rather than profits, cash reserves are therefore most important in this industry, making their entire structure different yet highly complex in the business world. It is also a world where valuations are first pushed to shocking peaks and then pulled callously down.

We are not Heading Towards a Bubble…It will be a Bloodbath

The start-up cult that takes pride in failure, putting cash flows before profits, discounting as a strategy for building customer habits is going to come under serious pressure with the government's FDI policy for e-commerce and Flipkart markdown.

There is a general consensus in the Indian capital ecosystem that Indian funds are driving the early funding scene while global funds are investing in Series B and C funding and beyond. If Flipkart's valuation topples any further, it will be hazardous for foreign investors to look at signing large funding checks for promising Indian start-ups.

On the other hand, the whole fundamental of start-ups, which is based on building cash flows that comes through funding, will get disturbed. Essentially, it means that Indian start-ups may get seriously strapped for funds beyond Series A level and the next Flipkart story may never happen again.

Early-stage funds will not know where to find their exits either and eventually may change their investment direction. It can kill the start-up sentiments as a whole and the Startup policy of the government can get completely defeated. This can possibly signal the beginning of the end of start-up entrepreneurship cult in India.

Valuations That Matter

The optimism in the start-up e-commerce and tech spaces has been taking a tumble down for quite some time unlike otherwise believed. The investor caution button was pressed in early 2015 with bleeding over $100 million of investor funds.

"Overall, we're seeing a drop in valuations righta cross, from early-stage to growth to late stage. We think, this is a healthy outcome, as companies will be more fairly priced, investors will be investing at more realistic levels – you can term 2016 as a "period of right-pricing,'" says Sanjay Nath, Managing Director, Blume Ventures.

According to TC Meenakshisundaram, Founder and MD, IDG Ventures, "Valuation is like beauty that lies in the eyes of the beholder. In the hands of the person who writes the next round of investment. Valuations are based on company to company and the investor's perspective towards those companies.

In year 2011, and then again in 2014-15, there was euphoria and then in certain categories like local delivery, hyperlocal delivery. Now there is a fair amount of conservativeness. Investors have to be objective. Eventually, it has to consolidate. No country can have five to six established players.

Commenting on the possibility of a buyout, one of the Snapdeal investor on the condition of anonymity, says, "Unofficial conversations have been happening about the possible buyout. It was never held between people who are relevant. At this point, they are trying to get as much capital as possible if it doesn't happen say for the nine months, then these discussions will pick up more steam. Price has to be more flexible to get larger checks in. It need not lead to consolidation right away."

"Markets will determine the true winner. Individual opinions don't matter. The customer will decide who will be the winner. Alibaba was a local player in China, which is a different market. Homegrown advantage will be there, adds Meenakshisundaram on a positive note.

The Flipkart Woes

Sachin and Binny Bansal, who earlier worked as engineers for Amazon, nine years later, the two Bansals find themselves in a situation where they are looking to sell Flipkart to Amazon. What makes the scenario all the more harder is that this is the same Amazon, which was being outbid by Flipkart in every way in 2014 – in terms of customers, investments, market understanding and Indian valuation.

Flipkart took in more than $1.9 billion of outside money in 2014 and 2015, yet it's valuations are back to 2014 numbers of $11 billion. It has upped the pressure on Flipkart from the front that really matters in the e-commerce businesses, i.e. the funding entities Sivaramakrishnan V, Finance Director, I2India Venture Factory, says, "The reason could be the possible fact that Flipkart might have to settle for a smaller market share than it was originally expected to, due to increased competition from the likes of Amazon, Paytm as well as from vertical specific e-commerce players.

We need to understand that PE and VC investments are essentially illiquid, and price discovery is not a continuous process." It is a tide of time and the Flipkart's current situation can even make God feel vulnerable and Bansals are just humans, and with not even a public listed company yet. Such pressures could make anyone to lash out.

The Face-off Between Friends & Enemies

Understandably, the otherwise contained Sachin Bansal could barely control his aggression and bought it out on their favorite playground Twitter. As an editor, I have always thought over the years, Snapdeal was much inspired in their every day working from Flipkart, so this of course is a huge one-up for Kunal Bahl who still is holding steady ground at Snapdeal with his investors and claims to be a true marketplace unlike his competitor whose subsidiary companies are also the largest sellers at Flipkart.

Snapdeal's investor further says, "There is a pressure from Alibaba on its investee firms in India to make its presence more direct. The whole (Twitter) issue was blown out of proportion because of the way it was done." Apparently, Sachin Bansal cannot be singled out for his verbal lash out on Twitter, everyone it seems is running on a short fuse recently in the Twitter world.

Government's Trump card: Opening the FDI in E-commerce

So much for keeping distance as claimed by India's startup policy, the government is making mischief of its own notifying new rules prohibiting the discount levels (and therefore the cash burn) and also capping total sales originating from a group company or one vendor at 25 percent.

The opening up of FDI in e-commerce will only bring more competition, further stressing out the start-ups – which already have enough investor woes on their hands. Whether this policy is to ease out Alibaba's big presence in India or get few other big leagues to set foot in India, but for once the playing field has been leveled in the country for retailers, e-retailers and foreign brands. But for e-commerce giants, it is like a whistle being blown on a boiling pot.

Would India Have More Flipkart Stories?

As Flipkart's markdown has created a stir in the startup ecosystem, industry experts feel this can lead to more devaluations and anemic funding for the rest of the year. It is quite likely that 2016 will see a few more markdowns. Why? Because while the magnitude might vary, the patterns that led to Flipkart surpassing a $15-billion valuation and then seeing a markdown can also be seen in quite a few other companies that have raised large rounds of capital over the last year or two, says Shubhankar Bhattacharya, Venture Partner, Kae Capital.

In such an environment, investors will obviously be much more discerning when it comes to funding decisions, which then has a cascading effect on the bargaining power that a firm has on its valuation.

This effect would be much stronger in the case of a company like Flipkart given the large rounds of capital it has already raised and the relatively lower appetite for investors to continue waiting longer in the hopes of a favorable exit, says Bhattacharya. What is also more worrisome is that founders own stake in companies is no more than 15 percent at the top. It does not leave them with enough skin in the game.

Early Start-ups in Safe Zone...Still(?)

The current global trends suggest corrections, but the domestic consumption story is quite good, hence it seems more a short-term impact. The companies, which will be dependent on cash burn, will face some hardship, says Anil Joshi, Managing Partner, Unicorn India Ventures. If anything, Flipkart's markdown is likely to bring to the fore entrepreneurs that are even more determined, and business models that emphasize profitability as a goal that cannot be ignored, says Bhattacharya.

While such an event would obviously draw a lot of attention because of Flipkart's size and stature, the outlook for early-stage companies in India remains relatively positive. Investors and industry experts feel that this markdown will help eliminate those investors who participate thinking it's a fancy affair.

(With inputs from Punita Sabharwal and Sneha Banerjee)

(This article first appeared in the Indian edition of Entrepreneur magazine April 2016 Issue).

Ritu Marya

Editor-in-Chief, Entrepreneur Media (APAC & India)

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