Paytm, Snapdeal, Ola and Flipkart: India’s Biggest Unicorns Or Loss-Making Startups?
Are Indian Unicorns Just Surviving on Investor Money?
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Most businesses in India are built on the Indian idea of incentivizing or discounting. Its widely understood that people here like to bargain on deals they buy, but who said a company can survive without generating profits ever? If the unit economics is not right, if the business-model is flawed, startups are bound to make losses year-on-year.
Almost all the big and small startups, ambitious ones, innovative ones, disruptive ones and the funded ones, assumed that the traditional way of doing business would work. Hoping that they could fuel growth through funding but the harsh reality hit them when funding started drying down and companies started struggling.
Flipkart- Fights to keep the Lion’s share
Given the maze of companies e-commerce has today, Flipkart was actually founded with the simplest of business model in 2007. Sachin and Binny Bansal in the initial phase of operation, Flipkart sold only books just like Amazon in its early days.
Soon it went on to grow nearly three folds between FY2013-2015 and improved its operating margins significantly in the same period. Further it went on to grab the lion’s share for other products like cell phones, electronics, e-books, stationery supplies, apparels and accessories etc. But despite inching closer to profitability, it was still losing 25 paise on every rupee it made in FY15. The previous year (FY16) also, its revenues clocked around Rs. 13,177 crore ($1.93 billion), up 43% from Rs. 9,226 crore from FY15. Its loss during the period narrowed to Rs. 544.6 crore from Rs. 826.7 crore in the 2016-17. The losses can only reduce but not zero down since Amazon has been gaining market share in the country. This pushed Flipkart to make multiple organizational changes and a top level restructuring exercise, after which Kalyan Krishnamurthy was appointed as the new CEO and Flipkart worked on aggressively to slash costs. In January 2017, its burn rate was said to be $40-50 million per month.
The company has spent copious amounts of money beefing up internal processes, boosting technology and building warehouses across the country, as it strove to reverse market share lost to Amazon. With Amazon India closing in, Flipkart is working to ensure it gains traction by pumping in more money towards marketing and discounting efforts, to ensure that losses don’t spiral out of control. Recently, it raised its 13th funding round from eBay, Microsoft and Tencent Holdings and closed the deal for about $1.4 billion at a valuation of $11.6 billion. Major stakeholders on the company’s investor board are Tiger Global, Accel Partner and DST Global.
Ola- Who will win the race on the roads?
India’s very own cab-aggregator service Ola run by ANI Technologies Pvt. Ltd. came into being in 2010 and took everyone by a pleasant surprise when it became one of the most familiar names on the road.
Today, it is the country’s largest ride-hailing app with about 60% market share in India. It bridges the gap between cab owners and commuters, without getting into the business of buying and renting out their own cars. However, Ola’s accounts saw a setback on account of heavy advertising and promotional expenses and high employee cost. It posted a consolidated loss of over Rs 2,311 crore — about Rs 6 crore a day — during fiscal 2015-16. The Bengaluru-based firm, is also facing stiff competition from US-based Uber, as Ola is slowly seeing its losses widen, almost three times from Rs 796.11 crore in 2014-15, and Ola’s losses touched Rs 1,760 crore at the end of March 2016, according to the filings made with the registrar of companies.
Ola and other cab-hailing companies attracted lakhs of drivers, promising higher incomes. At its peak, drivers made up to Rs 1 lakh a month, thanks to fewer taxis, high incentives and even higher demand. It offered Rs. 2,000-Rs. 3,000 for five to six rides, to up to Rs. 12,000 for 17-18 rides, every day. Ola, in the first quarter of 2017, witnessed fall in rides for the first time, the numbers fell by 5% as compared to the first quarter of 2016, according to market research firm RedSeer. The fall in rides this year follows the cutback of incentives for drivers, which led to strikes. The company seems to be figuring out the right balance between pursuing growth and finding a path to profitability.
And the best part is that the revenues are also rising. Ola’s revenues jumped an eightfold at Rs 421 crore in comparison to last fiscal year, according to the most recent disclosures filed with the ministry of corporate affairs earlier this month. Ola recovered last year after launching Micro, its cheapest offering so far. Ola claims it is twice the size of Uber whereas the numbers disclosed by the latter indicate that the two companies are running neck and neck.
Paytm plans to become profitable by 2019
Paytm and Vijay Shekhar Sharma’s journey since 2010 has been a nothing sort of a fairytale supported by guardian angels. And why wouldn’t it be? Their idea was indeed disruptive!
Founded and incubated by One97 Communications, it started taking its baby-steps into the market in 2010 as a prepaid mobile recharge website. In 2013, the company launched Paytm Wallet, which became India's largest mobile payment service platform with over 150 million wallets by 2016. Their services saw a surge in usage largely due to the demonetization of the 500 and 1000 rupee currency notes. Post 8 November 2016, Paytm's transactions and profits grew significantly. Today, it consists of Ratan Tata, chinese e-commerce firm Alibaba, SAIF Partners as major hands on its investor board. However, despite being the latest Indian unicorn (term for an unlisted company valued at over a billion dollars), after raising $200 million (In March 2017) in a funding round led by Chinese e-commerce giant Alibaba, Paytm has seen net losses climb four-fold to Rs. 1549 crore (FY-16 March end according to the Registrar of Companies), rise of 312% of over the previous year.
VSS who held over 21% stake in One97 Communications, sold 1% of his holdings to raise Rs 325 crore to fund his planned payments bank, having got an in-principle approval from the country's central bank. This reflects that the company is not ready for an organic expansion through in-house profits.
The point to be noted are Paytm, is one of the biggest spenders on marketing and advertising in the digital payments space, has further enhanced its marketing-and-advertising budget after the demonetisation. In future, however, they have plans to become operationally profitable by financial year 2019, as stated by a valuation paper commissioned by Paytm.
Snapdeal- Don’t bite off more than you can chew
The startup world was taken up by raging hysteria when in 2016 Snapdeal’s valuations were slashed. Murmurs became roars when mass firing took place and founders began their quest for profitability. Kunal and Rohit Bansal, Founders of Snapdeal, wrote an open letter to their employees taking responsibility for their tumultuous situation in the company and admitted their bad moves while there was an influx of capital in their early-days in e-commerce.
Snapdeal’s losses more than doubled to Rs 3,316 crore in fiscal 2015-2016, while its revenue growth plummeted. Snapdeal had posted a 150-percent increase in losses from Rs 1,328 crore in the year ended March 31, 2015. Revenue grew by 56 percent to Rs 1,457 crore from Rs 933 crore in the same period, according to documents filed with the RoC.
In the letter, the co-founders’ wrote: "We started growing our business much before the right economic model and market-fit was figured out. We also started diversifying and starting new projects while we still hadn’t perfected the first or made it profitable. We started building our team and capabilities for a much larger size of business than what was required with the present scale. However, a large amount of capital with ambition can be a potent mix that drives a company to defocus from its core.”
As of now, Snapdeal is on the verge of sale itself. The board of directors of Jasper Infotech Pvt Ltd, which runs struggling online marketplace - Snapdeal, are close to agreeing on a distress sale option to its bigger Indian rival Flipkart Ltd. Even as a conflict between the company’s largest investor SoftBank Group Corp and three key shareholders remains unresolved (Nexus Venture Partners, Kalaari Capital and co-founders Kunal Bahl and Rohit Bansal), once the trio arrive on the same page, the terms of sale would be decided too.