The heat is on: Get set for India’s e-commerce startup shakeout | analysis | Hindustan Times
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The heat is on: Get set for India’s e-commerce startup shakeout

We may be heading into a year of reality checks in e-commerce after a year of living dangerously, when a mish-mash of fancy new expressions clouded young graduate minds in India.

analysis Updated: Nov 05, 2015 16:02 IST
Narayanan Madhavan
Websites reviewing restaurants or helping people to buy groceries are coming under pressure to make money.
Websites reviewing restaurants or helping people to buy groceries are coming under pressure to make money.(REPRESENTATIVE PHOTO)

After the cash burn, there is the asset churn.

Food ordering startup TinyOwl is waking up and smelling the coffee, and it may be just what a wise owl ordered. It fired 30 employees in Pune this week as it shut operations in the city, adding to the 200 it let go in September, while rumours swirled that 100 more heads were set to roll.

If you thought startups were those voraciously talent-hungry creatures that promised cool offices, stock options and other goodies till kingdom come, think again.

We may be heading into a year of reality checks in e-commerce after a year of living dangerously, when a mish-mash of fancy new expressions clouded young graduate minds in India. Such as app-only sales, unicorns, hyperlocal delivery and mobile payments.

While an technology-driven revolution is no doubt a reality, and venture capitalists are pouring money over hot young teams taking India to the next phase of the Digital Age with smartphones expected to double from current levels to beyond 300 million in three years, there’s more to this than a random gold rush.

TinyOwl says it is scaling back nationally and would focus on six major cities. Zomato, born as a restaurant review site and morphing into a combination of technology provider for eateries and a food-ordering platform, was in the news about expectations that it would let go 250 or more employees, mostly in the United States. It also cut back on some work in an acquired company, Pickingo.

Zomato is counted as a “Unicorn” (estimated valuation of more than $ 1 billion), and has even made a series of acquisitions, while TinyOwl announced layoffs after raising a round of funds.

The simple truth: food is easy to order online, but layoffs are difficult to digest offline. Venture capitalists routinely demand their pound of flesh as they build up companies to what they call “exit”--when they sell their stakes in the company either to an acquirer or to the general public through an initial public offer (IPO) of shares.

In the process, investee companies get dressed up to look better to downstream investors.

Fewer employees means higher productivity.

Rationalisation of locations or focus areas means the scene is ripe for a buyout by a giant looking to add a piece or two on its chessboard.

Even acquisitions by a larger startup may imply load-shedding down the line, as Zomato shows.

In plain English, this is what they call consolidation and/or shakeout. While it is common in larger businesses and older industries, young startup folks - founders and employees alike - often get taken in by the whirlwind romance of early stage optimism, when VCs woo them and dreams cloud minds.

There is another twist: VCs in India increasingly include hedge funds and quick-fix funds put together by Smart Alec managers who want to play the “momentum”--which means they spot a trend, quickly create or boost flavour-of-the-season companies, and then force them into gunshot mergers or buyouts, leaving a trail of destroyed dreams.

Rahul Yadav, CEO and co-founder of Housing.com, was sacked by the board. He acquired cult status and fame disproportionate to his company’s performance. (HT FILE PHOTO)

Or, like in the case of Housing.com, where a founder’s bluster gets the better of ambition or technological chutzpah, the CEO gets fired. Rahul Yadav acquired dubious cult status and fame disproportionate to his company’s performance this year when Softbank-led investors fired him. This was after an ugly series of events including a media spat he had with venture capital firm Sequoia Capital’s India chief Shailendra Singh over poaching of staff and then with investors themselves on how to run the company.

There has been market talk that Housing.com may lay off as many as 600 employees by the end of this month. After all, it entered a crowded market late.

It also matters that the US Fed is widely expected to start raising interest rates--as early as December. Increasingly, venture funds are using borrowed money taken at low rates. When the heat is on the rates, some of it turns on startup companies--typically ones that hired or acquired assets in a hurry.

Sometimes, actual execution takes its toll. E-commerce now covers everything from groceries and fashion clothes to laundry services and maid recruitment. In each business, eager founders run into brick walls or hurdles and optimism gives way to realism.

For those concerned, there is more sobering news. Even Twitter, popular as hell with heads of governments and well past its IPO, is expected to lay off employees as it tries to boost efficiency.

The churn spares none.