Increasing instances of e-commerce companies scaling back operations due to limited funding availability highlight that all is not well in the start-up world. We expect lower PE/VC funds availability to manifest in three ways: (1) shutdown of companies with high cash-burn amid lack of fresh funding, (2) acquisition of weak companies by stronger peers, and (3) fresh funding rounds at lower valuations.
There have been a number of instances in the past six months of companies laying off employees (Housing, Tinyowl, Localoye, Zomato, etc.), scaling back operations (Grofers, Peppertap), shutting down (Localbanya, Dazo, Eatlo) and getting acquired (Zo Rooms, Spoonjoy). Most of these were in the hyperlocal delivery as well as food ordering segments, which were unable to scale up further due to weak demand and poor unit economics. Other segments that could potentially see consolidation include: (1) e-tailers, horizontal and vertical (high cash burn and too many players), and (2) classifieds (slow pace of monetization and high customer acquisition costs).
We believe the initial exuberance in the e-commerce sector in India in CY2014-15 was on account of expectations of large market potential and China-type growth. While we don’t deny the potential, the time-frame within which it can be reached remains debatable, particularly as India’s purchasing power and quality of internet penetration (smartphones versus regular phones, broadband penetration) take time to ramp up.
We believe that the probability of next funding rounds happening at lower valuations looks increasingly likely for e-commerce companies. Info Edge invested Rs 150 mn in Canvera in December 2015 at Rs 750 mn premoney valuation, implying a steep hair-cut to prior valuation of Rs 1.8 bn. The e-commerce and tech space globally is under pressure and India will be no exception.