Even start-ups that are relatively well-funded are shutting new business initiatives that aren’t yielding immediate returns or entailing high costs.
Over this week and the last, Mint reported that both Flipkart and Ola will shut their hyperlocal businesses.
While Flipkart needs all its energies and cash in its market share battle with Amazon and Snapdeal, Ola is locked in a similarly bruising competition with Uber, which is the world’s most well-funded and valuable venture capital-backed company.
Last year, investors poured more than $5 billion into Indian Internet companies, which expanded into new cities and businesses without caring much about the financial viability of many of their experiments.
Over the past four to five months, however, the market sentiment has flipped because of a mix of macroeconomic and international factors and local ones such as deep losses incurred by start-ups.
Given that funds aren’t going to be easy to come by, investors in Flipkart, Ola and other start-ups are pushing these companies to focus on protecting their core businesses and avoid distractions in the form of new initiatives that are unlikely to add anything meaningful to their results, at least over the short term.
The tech expertise, deep pockets and management talent of Amazon and Uber make them formidable opponents.
Flipkart and Ola, while being market leaders currently, will need to be at the top of their game to avoid being overrun by their American rivals.
For many other start-ups, conserving cash is a matter of survival.
As the win-market-share-at-all-costs approach becomes unviable in a weak funding market, the same investors that were pushing start-ups to grow fast are now forcing these young companies to shut operations in areas that eat up too much money.
That explains why the likes of hyperlocal start-ups Grofers, Peppertap and Zomato have shut operations in several cities since the start of the year despite being among the better-funded start-ups.
In January, Grofers India Pvt. Ltd shut operations in nine cities, citing poor demand, just two months after raising as much as $120 million from Japan’s SoftBank Group and Tiger Global Management. Rival PepperTap (Nuvo Logistics Pvt. Ltd) also closed operations in at least six cities last month.
Grofers and Peppertap, which deliver groceries to customers from nearby supermarkets, now have the unenviable task of facing Amazon, an opponent that wants to win in India at all costs.
“Consumer Internet businesses have been chasing growth and now with the markets moving towards consolidation they have chosen the path of cash conservation,” said Harish HV, partner, Grant Thornton India LLP. “New businesses have to go through investment, consolidation and profitability cycles. While most of the cash burn and spends on advertising and marketing have been a part of the investment cycle, cash conservation is a part of the consolidation and profit cycle. This would mean lesser spends on advertising, reduction in hiring, low or no discounting on products and services.”
While Grofers and Peppertap shut operations in unprofitable cities, Amazon launched its groceries delivery service Amazon Now last month in Bengaluru. Mint reported on 19 January that Amazon may expand to other cities by the end of the year.
Saurabh Kumar, co-founder at Grofers said the company’s focus has shifted toward attaining “unit economics and profitability,” but denied it was conserving cash.
“We are not burning cash in a crazy manner but we do not even want to conserve cash. This business wants you to spend cash to make money. Our focus will be more on building our revenue, getting the basics right — right from the way we manage inventory, marketplace to technology,” he said.
Navneet Kumar, chief executive officer at Peppertap, said growth expectations from start-ups have “rationalised.”
“Growth was directly proportional to marketing dollars, that will be reduced to a great extent now. Also when you are growing very fast you need to have a buffer in terms of team strength. But now that the growth rate has normalised we will look at efficiency of employees more than mere number count,” he said.
Still, Amazon’s expansion in groceries delivery will go a long way toward determining the prospects of Grofers and Peppertap.
At the same time, the cash these start-ups will need to compete with Amazon won’t be easy to come by. To make matters worse, Amazon has stepped up its investment in India this year just as others are talking of running their businesses conservatively.
As a result, the consumer Internet business is starting to resemble an uneven playing field in favour of American tech giants.
Learn more about finance and accounting outsourcing at Aristotle Consultancy.
Source – Livemint