Snapdeal: From Unicorn to ‘White’ Elephant

Snapdeal: From Unicorn to ‘White’ Elephant

The last decade has seen the most remarkable growth in the startup ecosystem in India. Most of these technology-based start ups have focused on innovation to disrupt existing business models. The founders of these startups have been high on energy and motivation to make an impact on a variety of industries, such as e-commerce, healthcare delivery, transportation, education, entertainment and many more. The USP of most of them was to ensure that a large number of people are able to access services that they did not have access to earlier, at affordable pricing.

Initially, they were able to scale rapidly and create jobs, the sort of growth model that works well for the labour intensive Indian economy. They were further fuelled by changes in government regulations and tax policies that recognized the importance of startups in a broader economic framework. If they had continued doing what they were doing, they would have formed the foundation of long-term economic growth and brought millions of people out of poverty as the positive externalities of entrepreneur led growth are known to do.

As things stand in 2017, they have not been able to stand true to their potential and the ecosystem seems to have been strained to breaking point due to a multitude of issues.

The worrying aspect of it all is that no one, neither the media nor the venture capitalists, is willing to address the elephant in the room, in this case, a ‘white’ elephant – the one that is too expensive to maintain and too difficult to get rid of.

The worrying aspect of it all is that no one, neither the media nor the venture capitalists, is willing to address the elephant in the room, in this case, a ‘white’ elephant – the one that is too expensive to maintain and too difficult to get rid of. According to Innoven Capital’s India Startup Outlook Report 2017, nearly 65% of startup executives and founders believe that the Indian startups are in a technology bubble, of which, 18% feel that the bubble is close to bursting soon.

2015 saw a large number of startups being funded thanks to the Indian government’s promise of favourable tax norms, setting up of a ‘fund of funds’, and favourable policy changes like easing rules of exit. The tide turned in 2016 with fewer deals being sealed, indicating that venture capitalists and limited partners had become cautious. They placed more emphasis on unit economics, rather than hedging their bets on the number of customers, projections and valuation of a business. India witnessed a deep decline in venture activity across the board, leading to many Indian startups shutting down their operations in 2016.

Too many acquisitions spoil the broth

As if trying to make a self fulfilling prophecy come true, Snapdeal, one of the earliest ‘Unicorns’ of the Indian startup ecosystem may become the first casualty. There are news reports of the company co-founders writing to their employees stating that “the fate of the company is out of their hands as their investors are driving the discussions around the way forward.” The media is abuzz with reports that, Flipkart, Snapdeal’s closest Indian rival is slated to buy the company in the coming days. It is here that one can’t help but wonder what took Snapdeal from ‘Unicorn’ to ‘White Elephant’ in a span of less than a decade!

Kunal-Bahl-Snapdeal
Kunal Bahl, Snapdeal Co-Founder

Firstly, Snapdeal  tried to imitate Facebook by hoping to become a platform for multiple e-commerce apps. Just like Facebook is now a clan of apps, that has under it’s umbrella a number of smaller apps that allow everything from instant messaging to photo sharing, shopping to gaming and more.

Towards attaining this objective Snapdeal acquired FreeCharge, a mobile recharge application, in a bid to be part of the booming digital transactions in the country. Earlier it had acquired Shopo, an online marketplace for handicrafts, Wishpicker, a gift recommendation technology platform, Doozton, a social product discovery technology platform; Wishpicker, a gift recommendation technology platform; group buying site Grabbon and online sports goods retailer eSportsBuy. As if not satisfied, it went on to make bigger acquisitions like, RupeePower, which provided marketplace loans, credit cards, and financial services; and Exclusively, seller of designer labels.

Chasing gold at the end of the rainbow?

Unfortunately, going the Facebook way, did not work for Snapdeal. Every domain in which it had a acquisition, had a bigger player with a larger market share. Ultimately, FreeCharge could not catch up with Paytm and Exclusively had to be shut down. Snapdeal could have absorbed those shocks if its core business of marketplace was resilient. But there it kept chasing Gross Merchandise Volume (GMV), which has now been debunked as an irrational parameter for deciding success and valuation. GMV, also called Total Order Value, is a metric used to value online retail businesses in their initial stages, when it is too soon to judge them on the basis of metrics such as revenues and profitability.

Simply put, GMV is the sales price charged to the customer, multiplied by the number of items sold. For a company earning commissions on transactions, its revenue is the commission and not the value of transaction. But if the company purchases the items, maintains inventory and also, sells or delivers the items to customers; then in such a business model, its GMV will be the gross revenue.

GMV does not factor in discounts, returns, cancellations, and cash-backs on products so, it might account to just a fraction of the net sales. Snapdeal was almost obsessed on beating Flipkart on the GMV front, ignoring in it’s wake, the need to ensure a better customer experience.

Ultimately, GMV does not factor in discounts, returns, cancellations, and cash-backs on products so, it might account to just a fraction of the net sales. Snapdeal was almost obsessed on beating Flipkart on the GMV front, ignoring in it’s wake, the need to ensure a better customer experience.

While Flipkart may end up buying Snapdeal soon, it also shares most of the issues that has taken Snapdeal to where it is today. Infact, there is a meme going around that lists all acquisitions done by Flipkart with the caption “Flipkart buys more than its customers do”.  Ironically, this meme is what sums up the malice in the Indian e-commerce sector in particular and the startup ecosystem in general! The focus on capital and technology is not the key to success but customer experience, and innovation is, a fact that VC funded start ups seem to overlook as they burn cash to expand their market share.

Is burning cash the prerequisite to success?

The Snapdeal takeover by Flipkart is often portrayed as a three way fight between Flipkart-Amazon-Alibaba (or as some like to call it, India-America-China) and there are reasons for it as well. Primary among them are the fact that Softbank, largest investor in SnapDeal has promised a $500 million infusion in Flipkart after the takeover. Analysts believe this would give a boost to Flipkart as it faces Amazon India, which is backed by the deep pockets of its American mothership. Chinese investors, like Ant Financials (backed by Jack Ma’s Alibaba) have invested heavily in the Indian startup ecosystem and Alibaba itself is looking to make inroads in the Indian e-commerce market.

Amazon’s business success in India is its attention to the three core principles of online shopping – providing a massive selection for the shoppers, maintaining low prices, and creating a great shopping experience – NOT deep pockets.

While the numbers are all correct, they overlook the fact that the key to Amazon’s business success in India is its attention to the three core principles of online shopping – providing a massive selection for the shoppers, maintaining low prices, and creating a great shopping experience; not deep pockets. So what is been shown as a three way war till the ‘end’ is in fact a battle half won by Amazon’s zealous focus on customer experience.

Jeff Bezos - Amazon CEO

When confronted with this fundamental difference in the way of conducting business between Amazon and other e-commerce players, ‘experts’ of the Indian startup ecosystem are quick to point out to a plethora of other problems they believe are at the core of non-performance of Indian startups. Primary among them are the allegations of ‘capital dumping’ and the lack of government regulation in this domain.

Capital dumping and its impact

It is a phrase coined by extending the term ‘dumping’ used in international trade. In this context, it means that Indian subsidiaries of foreign firms like Amazon and Uber are heavily funded by their parent firms. This allows them to invest in marketing activities and offer heavy discounts to customers to draw them to their platforms. Experts advocating this concept claim that it is happening for real. They are concerned that if the government or the competition regulator does not do anything about it soon, then investors will stop investing in local companies, jobs will be lost, and economy of the country will be hurt.

Those against it are quick to point out that both Flipkart and Ola have had large investments from foreign investors during their initial funding rounds and continue to draw investments from investors like SoftBank and Ant Financial even now.

Should India adopt policies to level the playing field for internet companies?

The question was triggered by concerns raised about capital dumping by large foreign companies to the detriment of Indian startups. It has set off intense debate in the Indian startup ecosystem. While having strong government regulation is historically known to have negative externalities in an ecosystem, the lack of any regulation may make things worse in the Indian startup ecosystem.

If India’s largest internet firms fail, job creation will take a hit. In India, the ratio of employees in Indian startups against their foreign counterparts offering a similar service/product is heavily skewed. For example, Uber has 1,500 employees to Ola’s 7,000 while Amazon has 24,000 employees to Flipkart and Snapdeal’s 45,000. The Indian government’s flagship program Startup India-Standup India will be a non starter if a dumping-like strategy continues to define investment trends in Indian startups. Not to forget that the government may lose $400 million in taxes annually. Government intervention, if any, should be limited to being an enabler and not an active regulator of the ecosystem. Light touch regulations that seek to protect the interests of customers are the need of the hour, however if the government looks to intervene by means of price-caps and licenses for certain operations then it may become even more difficult for startups to sustain themselves.

But it ain’t doomsday yet!

But all is not lost in the Indian startup scenario, precisely because not all success stories are capital intensive. There are those like Directi, Wingify, Zoho, or FreshDesk who started boot strapped and are now growing on what they call as ‘customer-funding’, which is another name for making profits! After almost a decade after making heads turn, the Indian startup ecosystem has definitely arrived at the proverbial cross-roads, whether it goes the way pointed out by VCs or the one pointed out by customer expectations will determine how far it will go.