India’s largest e-commerce company Flipkart has seen a steep 27 percent cut in its valuations over the weekend. US financial services giant Morgan Stanley now values its stake in Flipkart at $103.97 per share from over $142.
In a literal sense, this means losing close to $4 billion in a flash!
While, experts may call it a ‘value correction’ and a layman may call it a loss, it begs the question – what went wrong at Flipkart and what does it mean for other Indian startups?
Indian E-commerce: The Rise Of The Dark Horse
- 2002: India’s first interaction with e-commerce via IRCTC
- 2003: Broadband connections, smartphones, deep discount models kickstart e-commerce growth
- 2004-2007: eBay acquires Baazee.com, enters Indian market. Flipkart founded.
- 2010: Flipkart pioneers Cash on Delivery (CoD); cures ‘trust deficit’
- 2012: ‘Junglee’ marks Amazon’s baby steps in the Indian market.
- 2013: Flipkart launches its own payment gateway PayZippy
- 2014: Flipkart acquires Myntra, raises $1 billion at an enormous $7-bn valuation.
- 2015: eCommerce becomes India’s fastest growing sector
‘Growth-Story’ Without ‘Growth’?
Sky-rocketing valuations of startups in the absence of a profit-generating revenue model is what ails the Indian startup ecosystem. Companies like Flipkart have made it big through a ‘deep discounting model’. And as customers remain loyal to their discounts, any move to depart from that model is something no one wants to experiment with.
These downgrades will happen in e-commerce till there is a proper business model. The euphoria of fundraising at high valuations need a reality check. The current model of business is unviable because of the discount-led approach.Mohandas Pai, Ex-Infosys Board Member & Founder, Aarin Capital to YourStory
Global Meltdown in Startup Valuations
The phenomenon is not limited to India, and there has been a global meltdown in startup valuations. Public listed companies like Dropbox, Twitter and LinkedIn have seen a 10-25% drop in share prices. Valuations of multi-million dollar companies like Snapchat have been hit. Speaking on the condition of anonymity, a finance head with one of India’s top logistics companies says:
VCs are pouring money into these companies because everybody is investing in them. As these companies grow large their losses are growing larger because there is no business model. It is then the market starts asking, what is the end point? The problem is, for many of these companies the market doesn’t know how long they will continue, and how investors will get their money back?Source
Everybody Loves a ‘Clone of the West’
A major drawback for Indian startups is the lack of focus on innovation and customer experience.
It is easiest for the VCs and founders to focus on ‘clones of the Western models’. It lowers the risk, offers comfort and strategic success rates are higher. But what it takes away from the market is capital. The money is sucked into clones and replicas that offer solutions to the problems that may not exist! In the process, the ones who solid business ideas may end up with lack of funds. A correction in Flipkart’s valuations is a step forward in solving this problem.
VCs are long known to not keep all their eggs in one basket, but there is no denying that for a long time money was flowing down a few sectors that looked more favourable and a lot of good startups might have lost their chances due to this.Paula Mariwala, Executive Director, VC firm Seedfund
What This Means for StartUps
Industry watchers and insiders believe investors will pull back for a while. This may lead a few mid to large-sized companies to their death bed but that may help weed out ‘wannabe’ entrepreneurs. Flipkart may lose its market leadership to Amazon, but all in all, these corrections were long overdue.
There are no shortcuts. It’s not about starting something that’s the flavour of the season but finding an idea that will sustain. A lot of good VCs hold the money sometimes to get in at the right time in the market and Flipkart’s correction might set the right tone for them.Paula Mariwala, Executive Director, VC firm Seedfund
What Lies Ahead for Indian E-commerce
It’s tough to predict who will emerge on top at the end of this churn but Flipkart’s devaluation definitely does not mean the start of the end road for e-commerce in India.
I don’t see this as the obituary of Indian e-commerce. It is simply a rationalisation and correction...There has been a trickle-down effect. When these companies got high valuations, everybody wanted high valuations, without thinking about the profitability part of it. Such corrections are good for the ecosystem.Paula Mariwala
Kormangala, a small neighbourhood in Bengaluru, has twice the number of startups per square kilometre, than Silicon Valley. Startup is the new ‘in-thing’, and a lot of what is being ‘founded’ in India, is ‘inspired’ if not a ‘copy’.
Flipkart is yet to respond to the news but experts believe this is just the beginning. In coming weeks and months many such ventures from food startups to review sites may join the ‘correction’ list.
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