Forbes India 15th Anniversary Special

India's unicorns feel an icy chill as summer advances

As investors see their cash burn, with no exits in sight, the subcontinent's new-age billion-dollar startups are in a fight for their very survival. Some will surely die

Published: Mar 14, 2017 03:40:32 PM IST
Updated: Mar 15, 2017 01:02:28 PM IST

India's unicorns feel an icy chill as summer advances
Image: Anindito Mukherjee / Reuters (For illustrative purposes only)

It was only a few months ago, in November, that Garrett Kinsman was sitting in the back of an Ola cab and demonstrating the features of Ola Play to a raptly attentive audience.

Moments earlier, Bhavish Aggarwal, co-founder of Bengaluru’s ANI Technologies Private Limited, which operates the Ola ride-hailing network, was concluding a triumphal presentation about Ola Play, its integration with Apple Music, and the related connected-car experience. The venue, in a star hotel, was aircraft-hangar size, and industrial grade air conditioning was on full-blast as a large number of company staff, PR folks, reporters, broadcast crew, photographers and many other guests looked on.

ANI Technologies, Aggarwal and co-founder Ankit Bhati’s Mumbai-garage-to-Bengaluru-tech-park venture, seemed to represent the prowess of India’s new-generation of entrepreneurs, ready to take on global competitors. “India is the largest democracy in the world. It is where things are happening, this just the beginning of a tech explosion,” 21 year-old Kinsman, a college-dropout-turned-software-programmer from California, told Forbes India, thinking aloud on what drew him here.

India’s startup scene had become cool even in the eyes of Silicon Valley’s engineers — not just desis returning after a stint there.

And yet, in February, SoftBank Group, one of Ola’s biggest investors, said it had reduced by $350 million, the value of two of its biggest investments in the Indian startup scene — Ola was one and the other was Jasper Infotech Private Limited, in New Delhi, which operates the online market place Snapdeal.

Ola is recently said to have taken anything between $300 million and $350 million from SoftBank and others, in a deal that valued the company at $3 billion to $3.5 billion. That compared with the $5 billion-plus value that investors had placed on Ola only 18 months ago, when it had raised about $500 million.

There is no confirmation of the new fund raise, either from Ola or SoftBank. However, if it is true, the ‘down round’ — which values a company lower than that of an earlier round — is actually part of the more optimistic aspects of a reality check that India’s nascent startup scene is facing.

The situation is grimmer at Snapdeal, where founders Kunal Bahl and Rohit Bansal admitted that with money came hubris, and that they “painted themselves into a corner” after raising close to $2 billion thus far. They are letting go of a significant number of their employees to try to steer Snapdeal towards profitability over the next two years. They may need a miracle to pull that off.

“What looked like a dream job then has turned out to be a working nightmare today,” a manager at Snapdeal, who had joined the company in more exuberant days, tells Forbes India. The manager, who still works there, didn’t want to be named, and he has been directed to prune his own team as well, he said.

“The fat pay package is only on paper. The equity has not even been realised and is equivalent to tissue paper now.”

“Let’s remember, GMV (gross merchandise value) is vanity, profit is sanity,” Bahl and Bansal wrote in a sobering reflection to employees on how the entrepreneurs allowed their venture to get out of hand. The value of all the goods sold on their site was a source of boastful pride for India’s ecommerce businesses not so long ago — with little regard to the discounts that made that GMV happen.

“With all the capital coming into this market, our entire industry, including ourselves, started making mistakes. We started growing our business much before the right economic model and market fit was figured out,” they wrote in the letter, seen by Forbes India. “We also started diversifying and starting new projects while we still hadn’t perfected the first or made it profitable.”

For the year ended March 31, 2016, Snapdeal posted losses of Rs 3,316 crore on sales of Rs 1,457 crore, as a search on company financial information tracker showed.

What’s happening in India is like a “territory grab,” explains Ramprasad (Rahm) Shastry, who was an early investor in cab-hailing startup TaxiForSure, which was sold to rival Ola in March 2015. “I recall, about two and half years into TaxiForSure, our rivals started to offer discounts like crazy,” says Shastry, who is now CEO of DriveU, a driver-on-demand startup which he co-founded in Bengaluru.

From ecommerce to ride-hailing, companies were trying to quickly get as many millions of customers as they could grab, by offering discounts subsidised by money from the investors. In a shopping mall, one might come across a discount sale, where a merchant will still make some money because he has a large enough margin. In the ecommerce world, the discounts pushed the margins well into the negative territory, making the startups lose money on every transaction.

“The whole idea was, at some point, we’ll raise the prices, the customers will be attached to us, they will buy more product, blah blah, blah, but the problem is, they needn’t. They could go somewhere else, and they do,” Shastry points out.


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The market didn’t expand fast enough either, and barring a category or two, such as mobile phones, the scene remains very nascent, with utterly laughable penetration levels — about 0.2 percent to 0.3 percent for groceries, for instance — and customers didn’t change their behaviour fast enough either.

Shastry adds: “So they are in a downward spiral now, and they can’t do anything. They have already sold the customer the story that ‘it’s cheaper to go online’. Now things are coming to a head, because they can’t keep on discounting like crazy, they have to raise money from investors (again).”

Unfortunately for the Indian companies, they are in a winner-takes-all fight against some of the most well-capitalised companies in the world — Amazon, in ecommerce, and increasingly in entertainment — even before an Indian startup can consider disrupting that business — and Uber in ride-hailing. Uber has a large war chest, Amazon is making money at the consolidated level, so they are willing to take the hit in India — a market that both the established ecommerce giant and the most valuable startup in the world see as vital to their long-term interests.

Investors who have been saying, “How much more can I keep on putting money, because I don’t see how I’m going to get my money back?” are even more careful today, Shastry says.

“The crunch started in mid-2015 itself, first it hit the smaller guys, but it has now caught up with the unicorns as well,” a senior executive in Bengaluru at a well-known venture capital and private equity company told Forbes India. “And it’s still not looking great or anything.”

The time between 2011 to 2014 “that was a crazy phase, where most people got money — whoever had a plan got money, but it’s not like that anymore. Investors are really looking at scalable, more realistic, models. At times they are even asking ‘when are you going to come through?’”

For a good 2-3 years, they kept investing on the promise of more revenue generation, thinking that at some point there will be returns. “Then you can’t keep giving, without any sight of profit. The money is still there with the funds, but the point is, the guys who would have put money in the series A, for instance, they would be looking at an exit and very rarely has someone got an exit,” the VC firm executive says.

Worldwide, there were 25 companies that found unicorn status in 2016, research firm CB Insights said in a report in January, based on its survey of publicly disclosed funding of ventures. That was a 68 percent decline in “unicorn births” over 2015, the researcher said. CB Insights also tracks ‘down rounds’ and showed that of the 109 such transactions it had monitored in 2015 and 2016, 69 were in 2016 alone.

Funding deals to unicorns were lower in 2016 than any year since 2012, CB Insights said in January. There were 144 such deals in 2016 compared with more than 200 in 2015. And only 23 percent of the present set of unicorns joined the club in 2016, versus 42 percent getting there in 2015, the research firm added.

Even where there have been ‘up rounds,’ “it’s all valuation; that’s it, but not exits,” the senior executive in the Bengaluru VC firm pointed out. As investors initially started being more circumspect by backing market leaders, the crunch bit in. “Now the leaders are also being asked tough questions. They’re being asked ‘where is your money?’” he said.

“The Indian consumer is also the smartest of the lot. You think he will start paying you, but the moment you start showing an indication of collecting, he will move to someone else. There’s no loyalty at all,” he says. And as competition intensified, the brick-and-mortar companies struck back. Today, a Samsung Galaxy S7 32GB version is listed for Rs 43,400 on Flipkart, but it is also available for the same price at Spice Retail Ltd.’s chain of stores, for instance.

And where the salesman senses a potential customer is serious about the purchase, he’s willing to go further and offer additional benefits. In one store that Forbes India checked, “we’ll give you a flat 1,000 rupees off from our side, if you buy now,” the salesman said. And with leading banks, there are “no-cost EMIs” on offer, with additional “cash-back” plans.

Online commerce in India — defined as purchases of products and services via the Internet, excluding travel and event tickets — is only at 2.5 percent of all retail in the country, research firm eMarketer estimated in August 2016. It is only expected to double to 5 percent by 2020, putting India well behind China, for instance, where ecommerce was estimated at 18.4 percent of all retail sales in 2016.

And while reducing cash transactions would likely help ecommerce in the long run, India’s demonetisation initiative couldn’t have come at a worse time for online retail. Cash-on-delivery is a very Indian feature of ecommerce, and the demonetisation move in November has hit sales. In December, eMarketer revised its estimates for ecommerce’s growth in India in 2016 by 20 percentage points to 55 percent, over 2015, from its earlier forecast of 75 percent.

Investors are increasingly circumspect about putting in more money and certainly not at higher valuations, as the path to an exit becomes a lot less clear. CB Insights data showed that while there were 18 unicorn exits in 2016 via mostly M&A, but also some IPOs, there wasn’t one in India. And of the eight or so unicorns in India, no company is charging ahead towards an IPO.

The drop in valuation is even more dramatic at Flipkart Internet Private Limited, India’s biggest ecommerce company, and widely seen as India’s most celebrated startup — it’s now in its 10th year. Some investors have slashed its value from about $16 billion only a year ago to about $5.5 billion currently.

“Any way you look at it, Flipkart would be best served by being less distracted by markdowns of paper valuations and be more concerned about growth and the increasing competition,” Marcelo Ballve´, research director at CB Insights told Forbes India in an email in December. This was in response to a query after Morgan Stanley had just reduced Flipkart’s valuation.

For context, e-commerce startup, which was sold to Wal-Mart Stores, Inc. in September 2016 for $3 billion in cash and $300 million in Wal-Mart shares, had reportedly a $400 million annual revenue run-rate in November 2015. That meant the sale was closer to an 8x multiple, Ballve´ pointed out.

That multiple pretty much aligns with Flipkart’s $16 billion value, at Rs 15,129 crore in revenue (about $2.2 billion) for the year ended March 31, 2016. It also, however, had losses of Rs 2,850 crore. And while multiple media reports say the company is looking at a ‘down round’ to raise as much as $1 billion, “We are well-capitalised for the next two years,” COO Nitin Seth tells Forbes India.

Certainly the company is talking to investors, but Seth is confident Flipkart will do this largely on its own terms. And in the two-year time frame, even an IPO isn’t an option to be quickly dismissed.

Ola will break-even in the next 2-3 years, Aggarwal told reporters that day in November, after launching Ola Play, but declined to offer specifics. Since then, there have been at least two high-profile exits at the company, including CFO Rajiv Bansal and Raghuvesh Sarup, Ola’s chief marketing officer and head of categories.

Ola has also, however, made fresh senior hires, notably former PepsiCo executive Vishal Kaul as chief operating officer, while elevating former COO Pranay Jivrajka to the position of founding partner — he was the company’s earliest employee.

The bottom line, however, is that the current business model requires Ola to subsidise a significant chunk of the cost of each ride with investor money, in order to keep rates low and attract users. Changing that will be a challenging task, partly because Uber Technologies, Inc. has the money to wait Ola out and also because, consumers in India aren’t going to stop buying cars to switch to ride-hailing. Nor will they continue to use cabs if they’re made to pay the actual cost of the ride themselves.

For the year ended March 31, 2015, ANI Technologies, which runs Ola, reported revenues of Rs 418 crore, but losses of Rs 755 crore, a search on Tofler showed.

“In the US, a family may decide to opt out of a third or a fourth car and use Uber or Lyft, but in India it is still an aspiration, a status symbol, with private car ownership at about 20 for every 1,000 or so,” Shastry points out. And in February, Ola cut its rates by a fifth as competition intensified for its home market Bengaluru.

Experts such as Avnish Bajaj, founder and managing director at Matrix Partners, an early Ola investor, believe that India will be a large enough market for a duopoly to exist. And whatever that steady-state tension evolves into, Bajaj believes it will be in Ola’s favour.

K Ganesh, a VC investor in Bengaluru and a promoter at India’s largest online groceries store, Big Basket, echos that: “They have deep-pocketed investors who should be willing to back them up. Doing a flat or down round is painful but by no means the end of the world.”

“There can be two players in the (ride-hailing) space. Several new features, new services all augur well for the future,” he adds.

In China, a far bigger market than India, Uber got out, ceding control to Didi Chuxing, also a company backed by SoftBank Group, which already had a dominant market share. In India, Ola’s lead over Uber is far more slender than the crushing lead that Didi Chuxing built up in China. In India the market is wide open, and Uber has the window of opportunity and the money.

In the Indian ecommerce space, it’s not that the realisation that things would be much harder, and take much longer, has just sunk in. “Realisation had sunk in long ago. I just think that it’s been compounded by over-extension,” the top executive at a well-known Indian internet company said. “There is a huge straying away also from the core focus on what we needed to do to win with users.”


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What’s also happened is that the Indian unicorns tried to emulate the models outside the country very fast before their own ability reached maturity — they failed to recognise that they were still very much at the growth stage.

“We declared victory too fast. People thought they had already won, and now it was time to look for new frontiers, which is what happened when these companies made investments like eKart or Freecharge or Zomato went to 20 countries,” the executive says.

“Frankly, it’s no different from what’s happened in the US. It’s a classic bubble.”

However, the early-stage chaos isn’t surprising and was also expected, Bajaj says. What everyone agrees on, is that India’s unicorns do need more money to raise their game. And “new investors will demand their pound of flesh,” says Mohandas Pai, chief advisor to Manipal Education and Medical Group, and co-founder Aarin Capital in Bengaluru. “They will dramatically dilute existing investors and their rights, change the management; refocus the business strategy.”

“There is also a possibility that they could push for the startups to be sold off or merged,” Pai says.

Exits for investors depends on not just profitability, but on “hyper growth,” as the internet company executive puts it. That is why becoming a successful “platform” is the holy grail of every tech startup. Few, ever, succeed. Platform is industry jargon for a clutch of backend tech that combine to serve up a whole host of services that are very convenient, even addictive, in one place via a smartphone app and a website on the customer-facing front.

Amazon has that, from shopping to entertainment. And Paytm is attempting a rudimentary version, initially by adding more categories and services. For instance, one doesn’t need a standalone movie tickets app, because Paytm offers movie bookings also, even more conveniently since the wallet is already integrated. Paytm is India’s largest mobile wallet, and an eponymous online market place, operated by Gurugram-based startup One97 Communications Private Limited. China’s Alibaba Group is its largest investor.

“Once you are a (successful) platform business, you can switch on profitability when you want,” the industry executive says. The catch is, history shows that this is incredibly difficult to achieve. Therefore, if the Indian unicorns can’t find the hyper growth, they will be left weaker against the genuine platforms.

Therefore many feel that the end game could be Amazon versus Alibaba Group, the Chinese ecommerce giant that is also the largest shareholder in Paytm. As to Flipkart, the Bengaluru company isn’t to be discounted because it has been such a central force in India’s fledgling ecommerce market.

Even though co-founder Sachin Bansal’s awkward call for government protection, at a conference in Bengaluru in December, got wide publicity, his articulation of how Flipkart had the know-how to become the ISRO of Indian ecommerce, a couple of weeks previously, got less attention than it deserved.

He was referring to India’s frugal, but world-class space programme, while pitching the idea that Flipkart has earned a similar ability to frugally build something of high value for the country. That remains to be seen, but it isn’t an idea that can be dismissed easily.

And any permutation-combination of Amazon versus who — because no one is betting that Amazon will lose in India — Flipkart will likely remain the central part of the rival force, Ankur Bisen, senior vice president for retail and consumer products at Technopak, a consultancy told Forbes India in November. Flipkart may even retain its leadership.

“Alibaba once made an offer to invest significantly in Flipkart, but they didn’t like the valuation at which the offer was made,” a VC investor in Bengaluru said, who didn’t want to be named. In any case, the Chinese ecommerce giant is poised to expand its operations in India.

Alibaba has invested in Paytm’s market place, which was spun out as a separate company — Paytm Ecommerce Private Limited. That business is now gearing up to take on Amazon and Flipkart, with its Paytm Mall online commerce site. And Flipkart itself has been reported to be in talks with eBay, Inc., Wal-Mart, China’s Tencent Holdings, and even Microsoft, with whom the company entered into a cloud-infrastructure deal recently.

The Indian internet company executive, cited earlier, adds this: “Everyone is talking to everyone … five people having a conversation in an airport could lead to a deal or remain idle talk, but everyone is having conversations… that much is clear.”


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