Moths to the flame
Indian e-commerce biggies, who started with a bang, have ended with a whimper, notwithstanding Softbank’s $ 2.5 billion sweetener for Flipkart this week

These are tough times for e-commerce. After chasing unrealistic and unsustainable growth and goals for the past 10 years, e-commerce in India is exhausted.

In its nascent stage with single-digit share of the overall retail market, growth in e-commerce has reached a plateau after aggressively doubling and tripling year-after-year till 2015.

In 2015, the gross merchandise value of e-commerce had almost tripled and in Q1 of 2017, the growth was a nominal 5 per cent.

While most of the industry is suffering from losses, the big three – Snapdeal, Flipkart and Jabong - saw their respective falls almost doubling to Rs 11,574 crore in 2015-16.

Quite literally, companies built on billions of dollars are crumbling down to dust.

Snapdeal, which has raised a total of $1.76 billion from private equity and venture capital funds and once valued at $6.5 billion, whisked away from a deal which valued it around $900 million.

Flipkart has seen its valuation coming down from $15 billion to a little over $5 billion. The company has raised over $4.65 billion from investors. Nonetheless, the news on Thursday that Japanese Softbank Vision Fund will invest a whopping $2.5 billion into Flipkart, as it swells the Indian e-tailer’s cash hoard, has come as a huge shot in the arm.

But Jabong, the fashion portal, which had raised $250 million from different investors and was valued over $500 million at a time, was sold out for $70 million.

Freecharge, acquired by Snapdeal for $400 million in 2015, was sold out to Axis Bank for a paltry $60 million.

Erosion of value is by no means just a large company phenomenon. FabFurnish raised $30 million and was packed off for Rs 15 to 20 crore to the Future Group.

Several e-commerce portals were less fortunate in finding a buyer and hence shut shop altogether. Some of venture capital-funded e-commerce companies that downed their shutters in recent times include, Indiaplaza, and Valyoo Tech, which operated Bagskart, Jewelskart and Watchkart, Spoonjoy,, and

The number of companies, which would have shut shop in the past one decade, would run into hundreds.

Financial Chronicle takes a look at what went wrong with the way e-commerce emerged in India - what were the inherent issues and how it burnt out even at its nascent stage.

India is one of the last large markets for e-commerce to conquer. In addition, the country had the benefit of learning from several other larger markets like the US and the China. To a great extent, the Indian e-commerce industry has followed these models as well. But there were some deviations and a few market conditions peculiar to the Indian context that has exhausted e-commerce in less than a decade.


According to some market projections, the e-tailing market, which was valued at $600 million in 2012, had the potential to grow to as much as $76 billion by 2021. There are estimates that project Indian e-commerce to be valued $120 billion by 2020.

Some reports had even estimated the market to be worth $38 billion by 2016. But as per RedSeer Consulting, in 2016, the e-commerce market made sales to the tune of only $14.5 billion.

Says Srini Vudayagiri, investment director and partner of Peepul Capital: “Many projections were slightly exaggerated. Some estimates were moderate while some were optimistic.”

But these projections were the premise for venture capital and private funds to become aggressive in the market.

Most estimates took the Internet and mobile penetration in India to project the e-commerce user base. “Internet and mobile technology was really an enabler and a fundamental business need. These enablers have been growing and have become only stronger. Smartphones are becoming cheaper and their penetration is growing with data become less expensive. Wifi too is more accessible than it was a few years back,” says Vudayagiri.

However, a sizeable portion of Internet users and a fairly large chunk of mobile phone users converse and communicate in the vernacular.

While there are 330 million Internet and 220 million smartphone users, the English-speaking population is just 130 million or 10 per cent of the 1.3 billion population. 

According to an Assocham-Resurgent India study, 69 million people purchased online in 2016. According to RedSeer Consulting, customers e-tailing on a monthly basis account for 15 to 17 million.

Even though all English-speaking people do not transact online, e-commerce companies have not made much penetration into the population who do not use English.

Neither China nor the US has encountered a language barrier. The e-commerce companies too have not done much to break this barrier.

“E-commerce growth was capped by the vernacular speakers. This is a real bottleneck for e-commerce. The venture capital and private equity players in India have overlooked this vernacular angle while assessing the growth potential of this market,” says Rahul Sethi, a veteran of the industry.

The current average spending of an online customer is not sufficient for these many VC-funded e-commerce companies to make profits.

Tejasvi Mohanram, founder, RupeePower, finds that the per capita spend on Internet in India does not support such huge inflow of capital into the market.

“An average Indian customer spends Rs 15,000 to Rs 17,000 on e-commerce and this is not enough for so many players to make large revenues. In a market like the US, the per capita spend will be six to seven times higher and hence cash burn is justifiable for gaining market share,” he points out. 

Exuberance of private equity/venture capital funds

For private equity (PE) and venture capital (VC) funds, India was the last large market, which had the potential to see unicorns emerging within a short period of time. Most of them had missed the bus in China. When the Amazon and eBay were being built in the US, many were cynical about the potential of e-commerce. But India was their last chance to become part of the Alibaba of India.

PE/VC funds could sell the India consumption story to their investors using optimistic growth projections for the sector. The disclosed value of PE/VC transactions in the e-commerce sector is estimated to be $25 billion. There are several transactions whose value has not been disclosed.

Neither China nor the US has seen such a flow of money from PE/VC funds as in the case of India, considering the size of its GDP and the time span it took to make these investments.

Interestingly, these funds have not been as exuberant about any other sector in India. “There are sectors, which have growth potential and sectors that are immune to down cycles. But no sector can promise such huge growth as e-commerce and we have seen it in other markets. There is an element of risk involved in venture capital investments and funds were willing to take the risk for high returns,” states Vudayagiri.

Points out an industry insider: “The game of e-commerce was overplayed in India. In the US, companies like Amazon had grown and made headway when PE funds realized the opportunity. The same has been the case of China. So e-commerce in these markets enjoyed much more freedom to grow, to make mistakes and learn from them without being pushed by PE/VC funds.”

Familiarity was another factor, which made these funds work closely with e-commerce companies. The IIT and IIM graduates or Silicon Valley-returned professionals talked the same language as these fund managers. This familiarity provided a lot of comfort for them to remain invested.

The kind of money these funds were pumping in was unprecedented in size.  Series after series - and in rapid succession - they flushed the market with funds.

Even when one deal was being closed, at least two or three were in the process of being made. Deals were announced within spans as short as three months. Most of these funds dealt with e-commerce players directly, without investment bankers in between.


“As money flowed in, the focus of most of the e-commerce companies shifted from managing business to securing funds. Industry observers say that promoters and later investors were only concerned about how much they had raised, how much they are raising, how the valuations are going up and how much money was left in the banks. No one seemed to be bothered about how to build customer loyalty, repeat sales, revenue growth or sustainability.

In India, as in the case of other markets, e-commerce was a startup phenomenon. Established businesses never found an opportunity in e-commerce at that time. In fact they were cynical about e-commerce and viewed it as something that would eat into their sales.

Starry-eyed technology graduates found this a fertile ground to make it big in no time. They had a lot of passion to build businesses on a technology platform. We have seen the Bansal-duo of Flipkart delivering the books themselves when they started the company. They had the backing of smaller venture capital funds, which did some handholding. They were credited with bringing innovations like Cash on Delivery to expand the market. Such initiatives grew the market as well.

But as the organizations grew large and money kept flowing in, priorities changed. This also has to do with the entry of large private equity funds, which look for big returns in short duration. These were not strategic investors who could steer the business. The race towards becoming No 1 became aggressive. They were chasing unrealistic numbers and getting into cutthroat competition.

By then, organisations grew and became large corporates with several ancillary services, allied businesses and large number of employees.

Promoters found it difficult to manage large organizations and keep up with the race at the same time. They brought in professionals to manage the show. But here again, they were the same kind of people who talked the same language.

Says Meena Ganesh, serial entrepreneur and investor: “Not all our problems can be solved by an app or technology. In India, we have to contend with several obstacles and entrepreneurs need to solve unique Indian problems such as lack of infrastructure, poor connectivity, worsening power and water availability etc. Safety and transportation of employees round-the-clock, lack of reliable logistics, lack of supply chain including cold storage solutions, traffic and mobility issues etc., are all factors that require attention. This requires experience and maturity on the part of entrepreneurs to handle the `old economy’ and real-life problems.”

However, there is also a contrarian view. “Getting people experienced in handling large businesses and those who could steer towards sustainability could have been better. But it was not absolutely necessary. Jack Ma or Jeff Bezoz did not have prior experience of handling businesses. That is something one learns on the go. But things were different in the Indian context,” said Ankur Bisen, senior vice president of Technopak Advisors.

By the time startups became large, promoters had become minority shareholders. They just had single-digit share in the company and their voices had become feeble. Investors were now managing the show, whose motive has been to build up the valuations and leave with handsome returns.

“Jeff Bezoz in Amazon and Jack Ma in Alibaba still call the shots. There are investors backing them, but the promoters have a say and stake in the company. In India, the promoters cashed out their stake much early, even before the companies stabilized and became sustainable,” Bisen explains.

No differentiation, only discounts

In this race, nobody had time to think about sustainability or to differentiate himself or herself in the market. All the marketplace players had the same vendors and the same products. The only differentiation was pricing.

Discounts were and are still galore. The money that was being pumped in went towards providing discounts and offers as a means to acquire customers. But no one could buy loyalty.

“Discounts are necessary for a new industry like e-commerce. People had fears and inhibitions about buying virtually and waiting for the product to arrive. Discounts were meant to lure the customers to a new channel,” says Vudayagiri.

However, this bait traffic was fickle minded. They browsed through sites and went for the best deals. They were never loyal to any e-commerce company. The sector should have set a time frame as to when they will stop bleeding and start making money. But they never were serious about or they could not be because of the cutthroat competition.

Explains investor Ganesh: “I think we need to differentiate between inducing trials or changing consumer behaviour by discounting and constantly offering lowest prices to get customer loyalty. The former is fine but the latter strategy is unsustainable. The party gets over when the music stops – when funding runs out, and you can no longer discount. Companies will need to move to a sustainable model, while ensuring growth in the initial time period, which can last between one to three years, provided the company has enough capital.” It is a pretty big if.

Discounts negated online benefits

Discounts actually wiped out the entire benefits of a company getting into the online business. An online business will have higher margins, as they need not spend on real estate costs or the long supply chain.

An inventory model has better margins, but even with comparatively lower margins, the marketplace model has worked well in other markets. The FDI rules of the government mandate that foreign funds can come only into the marketplace e-commerce companies. This move was taken to safeguard the small traders who felt threatened by e-commerce.

“Real estate costs actually double in marketplace model. The vendor, who is a mom and pop storeowner, has his own real estate costs and when the e-commerce company goes for fulfillment centres, the real estate cost doubles. Similarly, the supply chain cost too goes up as the vendor has to maintain his supply chain apart from the logistics cost involved in getting the products shipped at the customers’ door,” explains Vudyagiri.

Adds Ankur Bisen: “Marketplaces have worked in other places even with their thinner margins. But discounts on the top of it erased all the benefits of being online.”

Vanity metrics

The promoters who were back to back in the private equity market for funds and the fund houses who were getting the money from their own investors, had to justify themselves for the huge money that was being pumped into the market.

According to Bisen, this `postering’ made the valuations and funding in e-commerce unrealistic.

Gross Merchandise Value (GMV) for Gross Transactional Value was one of the earliest and most popular metrics used to gauge the growth of the company. While GMV helps one understand the growth of e-commerce sector, it does not give a true picture about the individual company. GMV is not something that enters the books of the e-commerce company; instead it goes to the vendors.

It is only a percentage of this transaction that comes to the e-commerce company. But initially the investors valued the company based on GMV. The companies looked huge and they could justify the money they were putting in.

Points out Ganesh, no doubt from the benefit of hindsight: “I think everyone has learnt the lesson that these are “vanity metrics“. People are far more realistic now and are looking at fundamental metrics like unit economics, real revenue, cost of acquisition and Life Time Value net of all discounts, among others.”


Hiring people in large numbers was another metrics to show the size and growth of the company they were invested in.

Flipkart had 8,000 employees and Snapdeal 9,000 at one point of time. Queries an observer: “Why should a technology platform have these many employees, when they can drive efficiencies using technology? Even a future growth projection does not justify these large numbers.” 

These employees were lured with hefty packages and perks. As per various reports, Flipkart paid more than Rs 1 crore to 101 employees in 2015-16, with six people getting more than Rs 10 crore each. In all, Flipkart’s employee expenses for 2015-16 were Rs 1,077 crore, double that of the 2014-15.

During fiscal 2016, Softbank-backed Snapdeal’s payout under the “salaries, wages and bonus” head rose 210 per cent year-on-year to Rs 673.4 crore or $101 million.

Besides salaries and bonuses, Snapdeal’s spending on overall employee benefits increased by around 150 per cent in 2016 to Rs 911.1 crore.

While discounts and employee cost was draining the companies’ money, they had to put up a show of prosperity by moving into large swanky offices. All this cost a lot of money.

The Amazon factor

The entry of deep-pocketed Amazon made things worse for the domestic startups. Amazon was better equipped with the experience it had acquired from operating in different markets and the learning that came from observing the e-commerce players in India.

Once Jeff Bezoz announced large investments for the Indian market, things started changing. But then, Amazon had already toppled Snapdeal for the second slot in the industry.

However, the entry of an experienced player was good for the market. “Amazon’s entry significantly raised the bar for standard of service, brought unique offerings like Amazon Prime, real customer service etc. Its entry has also helped expand the total e-commerce pie – lots of people have become online shoppers. Other players have also grown in size and transaction volume. So, the total market has expanded,” explains Ganesh.

Meanwhile trouble was brewing for the domestic players. Third-party auditors of several investors marked down the valuations of these companies. GMV was not acceptable anymore. Money became scarce and as a result, discounts became nominal. In the absence of artificial demand created by discounts and offers, bait traffic left the platforms. The growth rates flattened in both 2016 and 2017.

In order to cut costs on employees, companies started laying-off staff. Snapdeal’s employee strength shrunk to 1,200 from 9, 000 and the attrition levels in many companies touched never-before levels.

By this time, losses across the industry had shot up to unmanageable levels making even consolidation efforts long and difficult. Investors started consolidation talks to save whatever they could and some of them did not even materialize.    

This kind of cycles of boom-and-bust – huge euphoria followed by deep gloom-and-doom in sentiments - has been new to the Indian market.

But the last-man-standing game played out in the Indian market, is not yet over. Both Flipkart, with this week’s Softbank deal behind them and Amazon, are preparing themselves for another showdown with the start of festive season. It has been kicked off with Independence Day sales. Money will once again flow in the form of discounts and offers. There will be claims about transactions revenues and who beat whom till a clear winner emerges.

“In e-commerce, unlike other sectors, the winner takes it all. There will a clear leader with over 60 per cent market share and a second one with around 20 per cent. The remaining 20 per cent will be claimed by several smaller companies,” states Vudaygiri.

However, there are companies, which have started thinking about sustainability. Infibeam is one of the companies that is profitable in the e-commerce universe. ShopClues is moving towards profitability in stages.

After the current phase of consolidation, more sustainable models have to emerge to conquer the untapped markets. The companies will realize that they have to bank upon convenience and not offers to earn customer loyalty. That’s the point.