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India E-Commerce: The Depths Of Winter

It has been a very interesting few months for Indian entrepreneurs focused on e-commerce.

Between October (when I pointed to the hype yet again) and December,  a lot transpired:

  • Almost every major e-commerce company in India was in the market raising capital, some purportedly enticed by unsolicited indications of interest.
  • Investment bankers and investors flocked to the sector and investment opportunities became more competitive.
  • Valuation expectations for companies that were less than six months old exceeded $50M.  The more established companies were unapproachable for less than 10 times as much.
  • It was impossible to watch 20 minutes of television without catching one or two “dot-commercials.”
  • New e-commerce startups were being created every day.

And then sometime in December, investors went cold – just as quickly and unexpectedly as the winter chill crept up on me in New Delhi.

  • Some of the most talked about e-commerce transactions failed.
  • Almost every funded startup was operating on bridge financing after running through large amounts of money on a marketing push around Diwali.
  • Existing investors bravely put up new money at questionable. valuations in some cases.
  • In others, investors just folded: some shut shop, others sold their assets.
  • In yet others, companies pivoted: e.g. deals companies became e-commerce companies, others went from flash-sales to online brands

Yes, a few transactions did get done in December, January and February but the mood is decidedly sour today.   There has been enough written about market events and I dare say some amount of Schadenfreude has set in among those who were not beneficiaries of the precedent hype.  Instead of recounting symptoms of the downturn, I want to focus on what I have learned in the process of meeting over 50 e-commerce entrepreneurs during this period of tumult.

E-commerce is Real

  • E-commerce serves a very important function in India; it is at the forefront of organized retail in a country that sees a lot less of it than other markets (US, China, Japan, Europe etc).
  • E-commerce extends the reach of brands to over 20k postal codes; to places where people can see the brands on TV and in the movies but cannot walk down the street to buy what they see on screen
  • India is not a homogeneous market: urban, semi-urban, tier-2/3, male, female, north, south, north-east, west, middle-aged, young, aspiring, conservative – so pick your target segment carefully.
  • There is demand out there and there are real people buying real goods on India’s e-commerce sites
  • But do not rush to quit your day job to start an e-commerce venture, not yet anyway.

The Future is not Now

  • Do not believe the hype in the numbers; all reports of Internet users in India are “extrapolations” based on sampling.  And sampling is one part of the problem; the other is whether the universe that the sample represents is reasonable (ask a statistician).
  • My 95% confidence interval for Internet users in India is between 50M and 150M.  What matters is that there are very few of them actually buying online.
  • Active users are probably between 20M and 50M depending on who you ask but then you have to wonder where are these users coming from?  There are far fewer broadband subscribers today.  Believers point to workday/weekday usage patterns implying that India is a “shop at work when the boss is not looking” market.
  • Less than 8M have ever bought anything online (not counting travel tickets) as per some educated estimates.
  • Registered buyers at major sites probably do not exceed more than 3M (my estimates)
  • The Internet shows a lot of promise but e-commerce is still in its early days here

The Challenges

  • Profitability: Online retail is still retail and as in any trading business, margins are thin and will remain that way.
  • Capital:  Retail businesses have always required capital to scale; do not assume you can reach break even with $30M of capital.  It will take much, much more.
  • Competition:  Irrational customer acquisition strategies have resulted in shifting investor money to consumers wallets.  We have just come out of a period when we could buy dollar bills for $0.80 (metaphorically) on these e-commerce sites and that is not sustainable.
  • Google is not your friend: The customer is fickle and irrational competition abounds.   You will likely have to acquire him/her over and over again unless you can get him to you directly (every time).
  • Category mix: Some categories are better than others so pick your entrepreneurship strategies very carefully
  • Inventory: Carrying inventory is expensive and requires serious expertise.  Drop-shipping and consignment models are more attractive but very difficult to manage and in many cases impossible to put in place in India.
  • Logistics:  Third party couriers are seriously lacking in capacity to service demand.  They hold on to your cash for way too long and there is no control over the customer’s experience with your brand.  Building out your own logistics network requires a new competency to be developed in house.
  • Talent:  There is not enough.

Where we are today is that both investors and entrepreneurs have become more aware of the challenges than they were 6 months ago.   This is a good dynamic – both expectations and valuations are retreating to healthy levels – so everybody can go back to the basics of building good sustainable businesses.

I am curious to hear from my readers (especially entrepreneurs who are running e-commerce businesses) if they think they are running profitable businesses at least at the contribution margin level.  It would be great to test a few prevalent models for profitability.  But then again to quote one e-commerce major in India

If you are concerned about profitability, you are the wrong investor for us.


Shyam Kamadolli is with a private equity fund investing in India where he focuses on growth and early stage investments in technology, media and telecommunications.  Previously, he founded several entrepreneurial ventures in the Boston area before joining a venture capital fund there.  He can be followed on LinkedIn or on twitter (@kamadoll).

This post was reproduced with the author’s permission from his blog which features further coverage of e-commerce entrepreneurship in India among other topics.


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