Had put up the following post in April this year.
A bunch of people wrote to me saying I was being alarmist and that there ‘was nothing wrong with the online business models’!
Now here comes the next debacle for ze Germans – Jabong!
Its no secret that Germany-based Rocket Internet has been trying to exit its India businesses for a while. From a under-negotiation valuation of 1bn$ in 2014-15 with Amazon, today Jabong (co-owned by Rocket Internet & Sweden-based Kinnevik) is looking at a valuation of less than 100mn$. That is a 90% drop in valuation in just 12 months. I have a feeling it will be bought for approx 85-90mn$. This is quite hilarious actually, since from October 2015 onwards, Rocket & Kinnevik have been infusing almost 5mn$ a month, just to keep the company from shutting down. So, they have infused approx 45mn$ just in the past year to sell a company at 100mn$ with almost all the earlier investments being flushed down the ‘lets gain marketshare by incurring losses’ toilet.
If you look at Jabong as an example, it is fascinating how the ‘new age’ online businesses are actually finding profitability in traditional business practices, but the ‘valuation market’ (devoid of logic) actually seems to think the opposite.
Between 2014 to 2016, Jabong’s topline has receded but their profitability has gone up, which means they have deleted the low / no margin brands from their business model. Focus on value, focus on margin, less focus on volume – this is old-school traditional business – ‘Every transaction should earn a profit, no matter how small it is!’.
The funny bit is that Jabong’s valuation expectations have matched its topline, not its bottomline. So a high topline Jabong in 2014-15 with massive losses was pegged at a higher valuation than a Jabong with a lower topline but with meagre profits. Bizarre!
Some trivia: Jabong was founded by Arun Mohan, Praveen Sinha, Manu Jain, and Mukul Bafana – ALL of them have sold out to Rocket Internet & exited. Never a good sign when promoters exit.
I don’t understand how valuation works. Flipkart (India’s most valued internet company) has lost 2000 crores last year yet was valued at 15bn$, just on the basis of its ‘goods sold through the platform’ number of 12bn$ instead of its revenues of just 2bn$. When a company talks about reducing their ‘burn rate’ from 80mn$ a month to 40mn$ a month, I don’t get it. You should aim to have ZERO ‘burn rate’. The word burn should never be used with respect to money unless you are burning money to keep yourself from freezing to death. Like I said – I don’t understand this business model and how this is considered of any ‘value’ at all.
The other aspect of these businesses that nobody really talks about is personnel. Where do these people get their employees / workers / back-end staff / marketing & sales boots-on-the-ground people from? They poach them. Often-times at a signing bonus that ranges from 10% to 50% of their current CTC. So they are paying that much more just to overcome a demand-supply gap, not for talent, quality or productivity. Since it is not their money and organisational structures in such businesses are yet to be clearly defined, there is massive over-spec-ing of personnel needs. Once the business plateaus, suddenly they realise that they have over-employment. Between Housing.com, Zomato, FoodPanda, PepperTap & TinyOwl, they have let go of over 2000 employees just in the quarter ended March 2016.
One of the biggest signals of the ‘valuation bubble’ deflating came in early 2016. Morgan Stanley Mid-Cap Growth Portfolio fund marked down the value of its stake in Flipkart (India’s highest valued start-up) by 23 per cent in the last quarter of 2015 in the quarter ended December to $59 million from $77 million in September 2015. Pl note that it was a 23 per cent mark down in just 1 quarter. That brings Flipkart’s $15 billion valuation down to $11 billion overnight. Come to think of it, Amazon does 107bn$ in revenues and its market cap is 2.7 times its revenues. So if Flipkart is doing $2 billion in revenues, its market cap by the same yardstick should be closer to $6 billion than $15 billion. So, Flipkart may be soon devalued down from its $11 billion valuation as well.
Has the (darling-of-the-media) Indian e-commerce start-up industry, which has now floated more than 19,000 companies (in around 4-5 years) overestimated India’s short-term potential? Should they have waited for more skilled personnel to emerge, for some macro-economic conditions to enable per-capita income of Indians to increase a little before committing so much money into businesses many of which sought to ‘buy’ market-share using ‘loss’ as the currency? The least they could have done was looked at the Kingfisher Airlines business model, which was sort-of the same and which went belly-up so badly that a decade-old Indian business conglomerate is not owned by Indians anymore!!!
The investment momentum in Indian start-ups rocketed over the past five years. According to a Grant Thornton report, investment values increased at a CAGR of more than 57 per cent between 2011 and 2015, while investment volumes grew over 62 per cent. PE activity in 2015 touched an all-time high – investments totalled 1,049, over 600 of them in start-ups. The stars of Indian e-commerce became super stars. Flipkart and Snapdeal as well as taxi aggregator Olacabs raised funds in excess of $500 million. Paytm, Zomato, Quikr and ShopClues became unicorns – with valuations of more than $1 billion. Even when losses for some of these start-ups mounted, VCs played along, presenting more money and gifting higher valuations. Losses for Flipkart more than doubled in the year ended March 2015 to Rs 837 crore. Jasper Infotech’s (Snapdeal) losses doubled, too, to Rs 265 crore in 2014. One97 Communications (Paytm) entered the marketplace business in 2014. It went from profits of Rs 6 crore in 2013/14 to a loss of Rs 372 crore in March 2015.”
Start-ups of all shades cashed in. The ‘me-too’ models as well. Look at the long tail of food-tech companies, for instance. Just the ordering and delivery segment had nearly 10 established players at one time, including Foodpanda, Zomato, Swiggy, and TinyOwl.
Realisation needs to set in that each of the e-commerce sectors, just like food-tech, have a long tail currently. In the grocery vertical, over the past three to four years, about 60 multi-city start-ups and six prominent ones that included BigBasket, Grofers and PepperTap, mushroomed. China, in comparison, has just 3 three prominent players – Alibaba, Yihaodian, and Fields China. In fashion, there were at least 10 established names, including Myntra, Jabong, Yepme and Limeroad. China has just two – vancl.com and Meilishuo. Similarly, there are five prominent players now in the Indian furniture e-tailing category: Pepperfry, Urban Ladder, FabFurnish, Homelane, and Livspace. This is not sustainable. It is clear that each sector will end up supporting just one winner – that’s the nature of the Internet markets where the winner takes all. The party – of lofty valuations, of raising fast money, of chasing reckless growth at any cost needs to end, NOW!
There is, of course, a brighter side to all this. And that could take the industry to ‘Phase 2’ of its evolution. There would be more real businesses, less copycat companies and new entrepreneur heroes. How much money one raises will not be a sign of success!!!
P.S. Globally there are issues too. Analysts have questioned the business models of global poster-boys such as Twitter and online file sharing company Box. The values of some of these unicorns got marked down. Worse, the public markets discounted the valuations private tech companies commanded. Payments company Square, for instance, was valued at $6 billion in 2015 in private financing. The value halved when it went public in November 2015. Other tech stocks too have tanked – Chinese e-commerce gorilla Alibaba, Box, dating company Match, and wearables firm Fitbit are all trading below their IPO price.
P.P.S. – The above is based on research published in several media vehicles – a lot of it (including some images) from a BusinessToday article published in April 2016…
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