Why E-commerce Is Going Through Dark Days In India

Six years ago, Flipkart, the poster child of Indian e-commerce, began to scale a new way of shopping in the country. Since then, inspired by a buoyant middle class rapidly adopting the Internet, other e-com sites have started mushrooming.

I distinctly remember placing an order on an e-commerce site in those early days and feeling excited and giddy like a schoolgirl when the order came through in one piece. But the icing on the cake was the innovative cash on delivery (COD) instead of pre-paying for the article through a credit card – something I used to do in the US.

Most of us now realise the opportunity at hand. About 140 million Indians are currently online, which will go up to 350 million over the next 4 years. A rising and aspirational middle class will possess increasingly higher disposable income. Research pegs the current size of the e-commerce industry at $1.8 billion, going up to $13.5 billion by 2017. So it makes immense business sense to start an e-commerce venture today.

Yet, at a systemic level, rare is the venture that has been able to raise Series A funding. The coming together of opportunity and entrepreneurship should have ideally made the perfect combination. Then how did we reach a stage where entrepreneurs are actually hesitating to start e-commerce companies?

Lurking in the shadows of these sites were men who controlled what matters most in developing an industry – money! Investors, seeing early adoption coming along, started funding anyone who ran a dotcom business. In fact, a couple of renowned venture capital firms had put their associates on a brief to contact and meet every founder running an e-commerce portal in the country!

Founders loved it. They were being courted by investors who, trying to follow largely western and Chinese analogies, wanted to pump in money into these ventures even though (and here comes the surprising part) they had no envisaged plan for profitability.

Hence, it became a virtuous cycle – show us customers and early traction, and take away the money. Never in the past had so many young founders (most of them without any experience in growing companies) got access to risk capital in the country. Everyone was invited to the party and everyone wanted to get in.

But by late 2011, investors started realising for the first time that the people investing with them (yes, they have bosses as well) wanted to see, at the least, a path to profitability. Suddenly metrics such as cash burn rate and contribution margins on an order have started becoming important. It isn’t only about customer acquisition; customer retention impacting the bottom line has also come into the focus now.

Over the past 2 years, as an advisor to start-ups in the Internet sector, I have noticed how raising risk capital has become increasingly difficult. Many founders still banked on the easier ride leveraged by their predecessors, but they had been unable to come up with viable ventures. One entrepreneur, who recently contacted me for advice, kept insisting that he doesn’t need to show early traction to raise capital. When I protested, he duly named many entrepreneurs who had, perhaps, raised capital in an easier environment and how he was better than them.

But investors today are wary of anything in e-commerce. In fact, one investor with a leading VC firm confided in me his firm’s efforts to stay away from this sector. As a result, it will be challenging for founders to raise capital until about the end of 2015.

But all is not bleak. There is no dispute regarding the opportunity. While North America, Europe and China have e-commerce websites with significant scale, India is seen as the last bastion. With more people coming online every day and consumption patterns changing, the growth potential is, indeed, immense and entrepreneurs can still start e-commerce ventures that will attain significant scale in the next decade.

This offers immense opportunity to create viable, inherently profitable ventures, which can deeply differentiate themselves from competition. In fact, the heavy adoption of mobile in India presents the greatest opportunity in this respect. So much so that it may be wise to gravitate towards mobile-first strategies, figuring out how to appeal to consumers whose first screen to discover this digital world will be a low cost smartphone.

These are the ventures that will not only find it easier to raise capital but can also develop viable businesses in the next 36-48 months. Innovation around this space and cross-pollination of the changing reality with traditional e-commerce principles could be the need of the hour.

About the author: Jatin Modi runs FrogIdeas, a digital strategy and marketing firm. Earlier, he was also the head of strategy at Yebhi. Twitter@PoornViram.