There is a sober side to the e-commerce boom being fired up by eager young startups in India, and it has begun playing out. Food ordering startup TinyOwl fired 30 employees this week as it shut operations in Pune, adding to 200 others it let go in September. As rumours swirled that more heads will roll, its young co-founder faced an angry gherao by disturbed employees. This may be a moment of realisation for the country’s e-commerce industry, running on a heady cocktail of a smartphone boom, young entrepreneurs with an appetite for risks and venture capitalists willing to bet on it all. There’s more to this boom than cool offices, stock options and other goodies as we may now be heading into a year of reality checks after a year of living dangerously.
India’s smartphone population is expected to more than double over the next three years to 300 million, but startups face hurdles in their scaling up phase after hiring away. TinyOwl says it will focus only on six major cities. Zomato, which mixes restaurant reviews with food ordering and technology services, has been in the news about expectations that it would let go 250 or more employees, mostly in the US, where it made a significant acquisition. Venture capitalists (VCs) 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 for downstream investors. This can happen through layoffs, restructuring or a scaling back of ambitions. 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 serenade them. It is equally true that hedge funds are getting into the VC game and often end up cashing out quickly after riding a wave. Or, like in the case of Housing.com, VCs and CEOs confront each other on how to run the company. A new CEO has been named for Housing.com after the previous one, Rahul Yadav, was fired after a spat with investors that turned public. 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. When reality strikes, churns are inevitable.