The Hindu explains: From Kulbhushan Jadhav to Chennai’s R.K. Nagar

Why are there shake-ups in the start-up sector?

KERALA: KOCHI: 27/02/2014: God's own tech country: A techie on his laptop at Start-up Village in Kinfra High Tech Park in Kochi, Kerala. The State Government has stepped up its efforts to build a robust ecosystem for start-ups in the State by extending financial support to young entrepreneurs. The State budget for 2014-15 has set the road map for shaping Kerala as the start-up destination of the country. Finance Minister K. M. Mani has allocated 25 crore in the budget to the Kerala State Technology Innovation Zone at the Kinfra Hi-tech park in Kalamassery, Kochi. The Technology Innovation Zone, spread over 13.2 acres with an investment of ₹150 crore, is expected to be complete in 2016. The zone will provide space to about 3,000 start-ups, Feb. 27, 2014. Photo: K.K. Mustafah   | Photo Credit: K_K_Mustafah

What's wrong with it?

The Indian e-commerce and start-up sector, which until recently was talked about as one of the most exciting places to be in, has hit a rough patch. Serious questions have cropped up about the ecosystem after the arrest of Stayzilla co-founder Yogendra Vasupal on a vendor’s complaint and staff layoffs in e-commerce majors Snapdeal, Yepme and Craftsvilla.

In the last three-four years, a large number of e-commerce entrepreneurs entered the fray. Most of them offered to make our lives easier by catering to everyday needs: shopping, clothes, finding a doctor, hailing a taxi, mobile recharge and ordering food, among others.

With customers lining up behind the new trend, investors from across the world poured large amounts of money into them. In the last five years, an estimated $15 billion, or ₹97,000 crore, has been invested in this sector.

With venture capital flowing in, companies burnt a lot of cash to get more market share. The cash burn continued at a high rate, even as most of the companies were making huge losses.

Soon, the venture capital and private equity (PE) players realised that they were unable to reap the real fruits of their investments. Even the large e-commerce companies had not set up a strong profit-making business model or provided returns to investors. While big players face a funds crunch, smaller entities are being forced to shut shop.

Doesn't funding help?

Leading domestic players in the e-biz sector raised incredibly large sums of money from all around. These investments were used by the companies to try out new business models, dabble in non-core areas and venture into acquisitions, among others. But since they failed to figure out the right economic model, the plans backfired. Soon, many of the trials went awry, resulting in big losses.

Snapdeal co-founder Kunal Bahl admitted this in a letter to employees: “Over the last 2-3 years, with all the capital coming into this market, our entire industry, including ourselves, started making mistakes.”

Why is Flipkart funding a relief?

As the fund story turned a full circle, e-commerce majors such as Flipkart and Snapdeal were finding it difficult to get the next round of funding. Last week, Flipkart announced $1.4 billion in fresh funding and also the acquisition of the Indian arm of eBay.

The fresh infusion of funds is likely to give a breather to the struggling company.

The company, which now has marquee investors like Tencent, eBay, Microsoft and Tiger Global, is competing with the global e-commerce giant Amazon in India. The Indian arm of the U.S.-based Amazon is also investing huge sums to acquire market share.

At a time when Flipkart raised fresh funds, its Indian rival Snapdeal is struggling to find enough money to run its operations. According to reports, Snapdeal’s major investor Softbank is looking at merging operations of Snapdeal and Flipkart.

Another player, Paytm, is also gearing up to grow its business as investor Alibaba eyes the Indian e-commerce market. All this will result in major consolidation among the players.

Analyst firm Gartner said: “India’s e-commerce market is still at an early stage; the market is seeing signs of consolidation as scale is a key success factor in the business.”

Why is failure not so bad?

In countries like the U.S. and Europe, where the start-up activity is on a higher and stronger scale, it is common to see ideas or businesses fail. It is almost a given that about 70% of the new ideas fail, and a few start-ups succeed, and investors accept it as reality.

It is accepted that in a strong start-up environment an idea which sounded excellent and received huge funds can fail. In a territory such as India which is taking baby steps, investors and policymakers should be aware of the pitfalls. Industry experts point out that failures should not cause scepticism towards innovation and entrepreneurship.

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