India’s young internet companies have had a great ride over the past decade with global investors queuing up to pump billions of dollars in them.
Yet, it’s not all good news as these firms have been burning huge amounts of cash despite being in business for years.
The combined losses of just five of India’s most funded and celebrated internet firms – Paytm, Flipkart, MakeMyTrip India, Swiggy, and Zomato – during the financial year ended March 2018 was at Rs 7,800 crore ($1.08 billion), data from business research platform Tofler showed.
One97 communication, the parent company of digital wallet Paytm and e-commerce site Paytm Mall (which was hived off into a separate entity a couple of years ago) together led the pack with a huge Rs 3,393 crore loss in financial year 2018.
“[The] trend will continue as long as there is significant potential for growth, significant competition in the market to grab that growth and deep-pocketed investors who are willing to fund the growth of these companies,” said Harish HV, an independent analyst who tracks India’s startup sector.
Profit’s not on mind
Startups in India are still focused more on grabbing market share than controlling their costs.
“There’s pride and ego associated with Flipkart being larger than Amazon and Ola being larger than Uber and all of that. Everybody wants to maintain pole position,” said Ankur Nigam, partner at KPMG. “The core fundamentals of business are not being adequately looked at.”
This race has also been fanned by investors.
A couple of years ago, amidst a global funding crunch, investors had begun pushing Indian startups towards profitability. However, over the past year or so, the focus has shifted back to growth and winning at any cost. This has particularly been fueled by the entry of new-age Asian investors like Baidu, Tencent, and Softbank, who had made a lot of money in the consumer tech sector back home.
“Far East investors – Chinese, Japanese, South Korean etc – started pumping in fresh funds to set the ball rolling for land grab again. Everybody’s coffers have been sort of full since,” said Nigam. “Now, it’s all about who is larger, who is doing more trips, who is selling more merchandise, who is got more orders a day, etc.”
And this tendency to overlook profitability won’t taper anytime soon.
“Companies such as Oyo, Ola, etc continue to expand globally and that should worsen this trend,” said Yugal Joshi, vice-president, at consulting and research firm Everest Group. “Flipkart, which is in a never-ending discount model in fending off Amazon, is struggling as well.”
Besides, splurging alone isn’t the issue – there is no plan to plug the bleeding either.
“The challenge is if the startup doesn’t have a roadmap or meaningful plan to turn around much like the way Snapdeal did and a few others did earlier,” Joshi said. Profit-making has to feature on their agenda somewhere down the line even if growth is the priority now, he added.
Meanwhile, behemoth startups with deep-pocketed backers are creating a crisis of sorts for new, upcoming ventures.
“Now that you’ve taken an $800 million bet or $2 billion bet, you’re not going to suddenly shut the tap off,” explained KPMG’s Nigam. Because of significant follow-on rounds required for large companies, there is a direct and negative impact on money being poured into the small and new ventures. “They’re not getting funded,” said Nigam.
There’s already proof of this phenomenon. While the big boys like Oyo and Flipkart have hogged most venture capital funding in the 12 months ending September 2018, seed funding (the first stage of venture capital financing) slid down 21% to $151 million.
“So far, startups were funded and, hence, there was innovation towards multi-billion companies,” said Nigam. “At the starting of the funnel, if you start to filter out early to do only late-stage funding, startups raising inaugural rounds feel the void.”
This article first appeared on Quartz.