Author Archives: Aristotle Consultancy
The new foreign direct investment (FDI) regulations that prohibit online marketplaces from offering discounts may inadvertently help e-commerce firms Flipkart and Snapdeal, which are scrambling to conserve cash and cut costs, by slowing Amazon’s advance in India, albeit temporarily.
While the three companies continue to fund discounts purportedly given by third-party sellers on their sites, they have cancelled planned sale events and accompanying advertisements until the start of the festive season to avoid potential punishment from regulators.
The cancellation will hit Amazon more than its local rivals.
Amazon, with its deep pockets, gained significant market share last year at the expense of Flipkart and Snapdeal by outspending its rivals on discounts, advertising and logistics. This, despite the fact that Flipkart and Snapdeal were flush with funds.
Meanwhile, Amazon has seriously stepped up its pace of spending. Amazon Seller Services Pvt. Ltd (Amazon India) nearly doubled its authorized capital to Rs.16,000 crore in February, exceeding its capital commitment of $2 billion made in July 2014.
After the new regulations, however, the US-based company has been forced to hold back on discount-driven sale events and accompanying ads for a few months until it figures out new methods of funding discounts and devising ad messages.
“Amazon was beating Flipkart and Snapdeal at their own game of discounting deeply so in the short term. Yes, the new regulations will pull back Amazon slightly because it cannot discount and advertise as freely as it was doing earlier,” said Harminder Sahni, managing director at Wazir Advisors, a consulting firm. “But over the long term, the regulations may be good for Amazon. It excels at customer service and offering the widest range of products. If the e-commerce game comes back to basics, Amazon will surely emerge as the winner.”
“The recent clarifications to the FDI policy give clarity to this fast-growing sector and will definitely help Snapdeal accelerate growth, since we have no corrections to make arising out of the policy clarifications,” a Snapdeal spokesperson said by email. “We are a true marketplace with more than 300,000 sellers connecting to millions of buyers across India. With so many sellers and buyers being able to discover and transact with each other through our frictionless technology platform, it is natural that consumers will continue to benefit from extremely competitive options.”
In March, the government allowed 100% FDI in online retail of goods and services under the so-called marketplace model, seeking to legitimize existing businesses of e-commerce companies operating in India.
However, the government added two riders that have far-reaching consequences for e-commerce firms. One, marketplaces cannot influence pricing of products and services on their platforms, directly or indirectly. Two, no one seller can contribute more than 25% of the sales of any marketplace.
“E-commerce entities providing marketplace will not directly or indirectly influence the sale price of goods or services and shall maintain level playing field,” the department of industrial policy and promotion said on 29 March.
The government attempted to create a level playing field between cash-rich e-commerce firms and offline retailers, which have lost millions of customers to their online rivals.
For now, however, it looks like the regulations may have accidentally created a level playing field even among the three large online retailers by temporarily neutralizing the spending power of Amazon.
Source – Livemint
The company secured €300 million ($339 million or Rs 2,250 crore) from Germany’s Rocket Internet SE and Swedish investment firm Kinnevik. The transaction values the company €1 billion, Rocket Internet said in a statement. This is a drop of almost 68% from its previous funding round in July when it was valued at €3.1 billion.
Kinnevik will invest up to €200 million while Rocket Internet will underwrite the remaining. Rocket Internet said it expects to invest up to €85 million including the conversion of an existing investment at the terms of the financing.
Separately, Kinnevik said GFG will get pre-funding of €50 million as shareholder loan during the first quarter.
GFG CEO Romain Voog said the financing will provide the company the necessary capital to execute its strategy of building out its leading position in the online fashion sector in emerging markets. Voog said the company reduced its loss from operations during the first quarter of 2016 compared with a year earlier, resulting in an improvement of the adjusted EBITDA margin by over 10 percentage points.
Formed in 2011, the Luxembourg-based GFG was created by combining six e-commerce brands that continue to operate in emerging markets around the world. It includes India’s Jabong, Latin America’s Dafiti, Russia’s Lamoda, Namshi of the Middle East, Southeast Asia’s Zalora and The Iconic in Australia.
Jabong, which competes with Flipkart-owned Myntra among others, has been struggling for the past many months after expanding at a rapid pace that led to massive losses. The company has been focusing on mending its leaking boat now. Its operating loss (adjusted for share-based compensation), shrank in the three months ended December 31, 2015.
However, its number of orders declined by a third as it cut discounts and its gross merchandise value dropped by one-fifth to Rs 377.3 crore in October-December 2015. GMV is the value of products sold through an e-commerce platform before discounts. It is a key performance metrics used by e-commerce firms even as actual revenue that the firms clock is much less as consumers rarely pay the full price or the maximum retail price for a product.
Jabong, which has a hybrid e-commerce model with both inventory-based business and third-party merchants selling through its marketplace, has also been on the radar of other e-commerce companies. As first reported by VCCircle, e-commerce giant Amazon.com, Inc was in talks to acquire Jabong where the asking valuation was $1.1-1.2 billion. The deal was called off due to a mismatch in valuation by the prospective buyer and Jabong’s shareholders.
Sources – Tech Circle
The e-commerce space has rapidly evolved but several challenges have surfaced primarily in areas of taxation, logistics, payments, internet penetration and skilled man power, the CII-Deloitte report on ‘e-commerce in India A Game Changer for the Economy’ said.
“In taxation, for example, the lack of a uniform tax structure leads to several issues such as double-taxation or impediments in the free flow of goods across the country. However, the ensuing Goods and Services Tax (GST) is expected to help in overcoming these challenges through a uniform tax structure,” it said.
Clearly defined rules for e-commerce transactions in GST and a consultative approach while framing these rules will be favourable to both, the government as well as e-commerce companies, it added.
It also said timely and effective implementation of programmes like Digital India, Make in India, Startup India and Skill India will support the e-commerce ecosystem to overcome the challenges related to ineffective rural internet penetration and lack of skilled manpower.
The report has recommended several measures including in the areas of direct and indirect taxes to promote this sector.
It said documentation requirements should be simplified for applying tax treaty provisions such as declaration by the payee, as opposed to tax residency certificate; and simplified mechanism should be in place to obtain lower or nil withholding tax certificates for the companies, without requiring payer details.
“Unutilised business losses of e-commerce companies should not be lost even if the shareholding of the company changes by more than 49 per cent. Increasing the number of years within which the tax holiday can be availed by startups in the e-commerce industry,” it suggested.
The indirect tax environment in terms of policy as well as administration would also be the key towards unleashing the potential of the industry in India.
“The indirect tax laws need to be evolved and re-designed to consider the changing business dynamics of e-commerce since the activities involve high volume and low-value supplies,” it said adding a central committee needs to be constituted to oversee the implementation of a conducive environment.
States and local bodies should ensure that a comprehensive tax is uniformly interpreted, and implemented for facilitating the growth of the sector, besides GST laws should take into consideration the actual nature of the transaction to determine tax liability of the sellers.
Source – ET Retail
From a period of exuberance, India’s e-commerce sector has entered a reality check phase with players focussing on cost cutting and business viability as investors seek performance, tech investor T V Mohandas Pai said today.
Pai, ex-CFO of software major Infosys, said 2015 was a year of exuberance as a lot of money flowed into the sector but it is no longer the scene now.
“Now, the funds have become very costlier. Now, they (investors) are demanding performance. Capital is also becoming scarce driven by interest rates in the US and potential meltdown in demand in China. Europe is not growing and Japan is not doing well and there is fear.
“That’s why venture capital flows have come down. They (investors) have become very selective. People are now beginning to ask questions as to when e-commerce business will be viable and when they will create a sustainable business and value for the money they have put in. That’s good news”, he told .
Many e-commerce players believed that if they go on giving fat discounts and sell more, they would get more revenues and higher valuation. “That model is not sustainable,” added Pai, co-founder of Aarin Capital.
Now, investors are demanding performance. “Some sanity is coming (in the e-commerce space). E-commerce players should build business based upon efficiency and not upon steep discounting. Discounting can be there to the extent of savings they have compared to a conventional store. They are getting cautious and they are cutting costs, and that’s good news,” he said.
As for whether some top Indian e-commerce players are overvalued, he said, “Whether they are overvalued or not depends on who is willing to pay money for that valuation. If they are raising capital, if somebody is paying money, then it’s fairly valued. It’s very difficult to make comments. Some funds write it down based on their model.”
Pai does not think investment flows into the e-commerce play would slow down further. “Funding will come in for B2B and players with sustainable businesses and great technology. Direction of the funds may change. Funding will not come down in a substantial manner,” he said.
Pai, who is also Chief Adviser to the Manipal Education and Medical Group, dismissed reports that hiring is slowing down and salary packages are being slashed in the sector.
“Startups are also businesses. Some of them may succeed, many of them will fail. That’s the nature of the business. Nothing has changed in the last six months. Startups are coming, some of them are raising money, some of them are failing, it’s continuous,” he said.
Source – ET Retail
For any startup, the first year is very crucial. It is the stepping stone of a successful entrepreneurial journey, which can make or break a startup. Having a baby and having a startup have much in common. Just like a baby needs nurturing and care, a startup also needs the same level of dedication and time from day one.
For a first-time entrepreneur, a host of things can go wrong while rolling out a startup. So, how do you ensure that your startup is able to survive the tough first year?
1. For validation, get out of your comfort zone
Entrepreneurs need validation for their startups. Validation or market research is one of the crucial parts when it is about laying the foundation of a startup. Interestingly, this is where a lot of entrepreneurs make their first and the most fatal error. They create circumstances where their validation exercise will inevitably succeed. For example, in a hyperlocal business they will test it in a place where they have lived for the last few years and thus know most of the people around. With that unfair advantage, their hyperlocal proposition such as restaurant or food ordering will work.
It is similar to a child asking his mother whether she is good looking. A mother will always answer in the affirmative. Using this positive reply, they go to the investor, pitch their idea and share their promising market research. The moment they get the money and apply it in a real situation, out of their comfort zone, they fail. It is one of the prime reasons for the downfall of food delivering startups. So, instead they should set up their experiments in a way where they get some initial paying customers or do some research in an area where they have no contacts.
2. People management is the key
A good team is the most important piece of the startup puzzle and one wrong hire can pave the way for downfall. When a startup is trying to ramp up quickly, it is easy to fall into the trap of hiring too many people.
In the first few months of a startup, only the founders and founding team work round the clock as they passionately build their company from scratch. When they start hiring, they wrongly assume that these people will also share the same vision. However, the employees that come to them only see it as a stepping stone in their career path and thus are not likely to produce results same as that of the owners. The founders assume that since work has increased, they need to hire more and more people, without realising that people management is an enormous task.
The budding entrepreneurs learn this the hard way. That’s when we hear about people getting fired. This is a huge challenge and most founders take people management for granted.
3. Do not run after the money
Another mistake that has become synonymous with startups has to do with money.
Entrepreneurship now has become more about raising money. Entrepreneurs start chasing money as if that is the sole objective of their business. Since they are more inclined to chase investors, the business suffers as they do not focus on making the startup more sustainable.
It is true that people who raise a lot of money in the early stages of a startup get a huge lead over rivals but it creates dependency on the investors. When the investor loses confidence or interest and if the entrepreneur has no solid economic model to sustain, the company comes crashing down.
4. Fundraising is no piece of cake
When it is about raising money from an angel or seed investor, the first-time founders fail to realise how cumbersome and time-consuming the process is. The entire team puts all its effort in raising money and thus the business suffers heavily.
This problem is so acute that it never goes away and is just pushed into the background but can turn lethal in the first year. Flipkart’s re-jig at the top with Sachin Bansal moving from the CEO’s position to the chairman’s is a perfect example. With the responsibility of IPO and other corporate actions, it was best that he did not have an operational role in Flipkart anymore. Thus, the solution is to give one of the founders the primary responsibility of reaching out to investors and that person can move away from the operational side. The rest of the founding team can focus on operations.
5. Do not get swayed by what others are saying
Getting influenced too much by their first contacts is a problem faced by first-time entrepreneurs. Many startups constantly change their direction of work based on the feedback they get from an investor, a startup event, etc.
When founders set up businesses primarily driven by the opportunity in the market they get lost in the never-ending web of change. However, if the founders set up the business based on where their passion lies, this problem would not occur.
6. Keep your house in order
People become entrepreneurs because they are good at something or have experience or belief in something. However, there is one thing which no entrepreneur is good at. It is related to compliance, regulation, paperwork, accounting, book-keeping, record keeping, et al.
Most entrepreneurs find this part of a business to be a big pain area and thus steer clear of it to focus on the bigger picture. They would love to write cheques, without having to fill up some forms. They might be under the impression that their company is moving very fast, but on the other hand these things might come back to haunt them in the future.
When investors are vetting your company, they ask for various pieces of information or evidence. However, if you haven’t kept any records and are not good with compliance, you might end up missing out on a lot of opportunities that may come knocking at your door. In the last one year I have come across two companies where everything was finalised from term sheet to shareholders agreement, but the founding team was not able to do all the compliances and the deal fell through.
Source – Kotak Business Booster