As funding gets tough, e-commerce giants are lowering ‘cash burn rate’

Because of investors tightening the ropes of their money bags, consumer internet companies are trying hard to save as much cash as they can. They were earlier used to spending their way from everything from market leadership to consumer engagement.

However, start-ups are now dropping popular phrases like 'growth over profit' and 'winner take all', as they look forward to adopting new ones which would help them get their 'unit economics' right and reduce the 'cash burn rate'.

Not only have investors made it hard to get money out, they are also constantly fretting about returns, making start-ups remember about the bottom line. This is why, wiser start-ups are reducing the amount of money they spend in growing their business, which is called the burn rate, and are sharpening their focus on the core business.

"Across all companies both within our portfolio and outside it, it is twice as normal to see burn rate levels in January and February that are half or one-third of their peak levels," Mohit Bhatnagar, MD at Sequoia Capital told ET. Sequoia Capital has backed hyper-local delivery startup Grofers, restaurant listings service Zomato and budget hotel aggregator Oyo.

In a wider perspective, 'Cash burn rate' is the measure of negative cash flow in a company. Earlier, start-ups used it as a weapon to outgun their rivals in a bid to gain the maximum market share and pump up growth. This was possible because investors were pumping in huge cash into the company. However, gone are the days of such glory.

India’s e-commerce giants Flipkart and Snapdeal have already started to take this into consideration, by reducing the cash burn rate by over one-third.

However, when it comes to smaller start-ups, it leads to some drastic changes, which could either mean shutting down operations in some cities or laying off staff.

"The cost of running a business has to be reduced as there are innate inefficiencies that have crept in," said Sreedhar Prasad, a partner specialising in ecommerce and start-ups at KPMG. "Costs will have to be cut in areas like salaries, duplication of work within departments and reducing cost of operations."

To raise more capital, companies are also monitoring costs and improving unit economics. "Focus has completely shifted from top line & revenues to sustainability. Across all costs like operations, marketing and recruitment we are carefully evaluating return on investment," said Taskbob CEO Aseem Khare.

Talking of online retailers, they bring down burn rates by cutting discounts, reducing dependence on low-margin categories, building efficiencies on logistics and reducing cash returns through online wallets.

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