What is Going Wrong in the Indian Startup Ecosystem?

5 years ago

Since the data revolution happened with the help of Reliance Jio, all the startups that provide products or services based on the internet started getting funding. Today, we will understand brief analysis about why Indian startup ecosystem is flooded with funding.

Young Indian entrepreneurs from the cities like Bengaluru, Mumbai and Delhi NCR are the most active in taking funding from the investors.

In this article, we will talk about internet-based startups. Investors are highly bullish on India’s economy because this is a country with more than 60% of the population is below 35 years old.

If you know a little bit about a dot-com bubble, the situation is somehow like that. Investors are blindly investing in internet-based startups.

After reading this article you will believe that bootstrapping business model is better than taking funding from a venture capitalist.

There is no doubt. It is a good strategy for raising funds for your company to grow. While starting a company with a new concept easily gets funded because there are lots of investors who are willing to invest in order to make a QUICK return.

Indian Startup Ecosystem is Flooded with Funding:

Generally, the founders of a startup take funding with a view to expanding the business. After raising funds, most startups started spending millions on marketing. It can be traditional or digital or both.

In the initial years of a company, it is being observed as a general trend, the founders are not interested to make a profitable business. That’s a really very strange thing.

What they want to do is disrupt the market by providing goods and services at the cheapest possible rates. The founders don’t even want to think for profitability (that should be the ultimate goal of any business) even after 5 to 10 years of the company’s launch.

In spite of not having a profitable business model, the investors keep putting their money in the startups and that increases the valuation(according to Investopedia a business valuation is a general process of determining the economic value of a whole business or company unit.) of a business.

Let’s take some examples to understand what is going on.

Flipkart Story:

Singapore based Indian eCommerce giant Flipkart was bought by the world’s largest company in the retail market Walmart Inc for $16 billion in June 2018.

At that time business was not profitable even after 10 years of launching a company. And today in August 2019, it is still a loss-making business.

What Flipkart did in the 11 years of a journey?

The company took funding and started expanding the business. Flipkart started giving discounts(by taking losses) in order to get more consumers. Try to disrupt the retail offline market.

Also read: Why we will get fewer discounts from Flipkart and Amazon

Zomato, Swiggy and FoodPanda Story:

I have already written an article on why food delivery companies are giving so many discounts.

Zomato and Swiggy are still loss-making companies. But, the valuation is more than $10 billion combined.

These two companies are expanding their businesses to other countries also! They are already in debt!

FoodPanda, on the other hand, did not have that much cash flow in funding that’s why the company was not able to give more discounts.

Also read: How Zomato and Swiggy are Playing a Game of Monopoly

Eventually, the consumers started shifting with the companies that were offering a discount. And, FoodPanda is now struggling in 2019.

To make the company profitable, Zomato and Swiggy may decrease salary or delivery charges to their delivery partners.

Oyo Rooms Story:

Ritesh Agarwal lead Oyo Rooms have been always remaining in the news for the last 4 years.

The company backed by Softbank Vision Fund is currently India’s highest-valued unicorn startup.

Also read: 7 Big Reasons Why Oyo Rooms is Growing Rapidly

Billions of dollars are invested by investors believing that the business model will generate higher returns in the long run.

Now let’s look at the numbers. In the financial year 2017-2018, an estimated loss of Oyo Rooms was 360 Cr INR and in FY 2018-2019, the losses have risen to 511 Cr INR.

Over a period of time, the losses should be decreased in order to reach the break-even point.

Paytm Story:

Another big name in the Indian startup ecosystem is Paytm that is a subsidiary company of One97 Communication limited.

Also read: Paytm Success Story and Future Plans

Vijay Shekhar Sharma lead Paytm is also a billion-dollar company. In spite of having the largest shareholder in online payment services, the company reported a loss of 1787 Cr INR in FY 2018. Paytm is still struggling to make a profit.

Ola Story:

Big names, same situation.

Bhavish Agarwal lead Ola Cabs is also a giant name in the Indian startup ecosystem. India’s largest cab-hailing made a loss of 774 Cr INR in the financial year 2017.

With a view to making a company profitable, Ola is continuously decreasing rates of drivers.

PharmEasy Story:

The online pharmacy industry is one of the most emerging industries in India. The companies are offering a 20% discount from the first purchase and planning to disrupt the retail offline market.

A Softbank backed startup Pharmeasy made a loss of 48 Cr INR in 2017 and 97 Cr INR in 2018.

If we compare with the percentage, newly funded startups are losing millions of dollars.

THE RISK:

It is completely fine to run a business based on funding and not thinking about profitability and only focus on generating more and more revenuer.

Have you ever thought? What if revenue stops!

These companies are already in losses of millions of dollars and if there is no revenue coming , there would be tremendous risk to the business.

Because of the coronavirus outbreak, India is in lock-down for 21 days. The government may extend further.

Big companies are profitable and they always keep emergency fund or cash reserve from their profit. These startups have no profit! So, there is no point to have a cash reserve to survive 1-2 months without generating revenue.

That is why there is massive risk of shutting down.

Conclusion:

The written examples are the best and easy to understand how an investor’s money is being used. Zomato, Swiggy, Flipkart, Byju’s, Ola and Pharmeasy are still finding a way to make the company profitable.

The Indian market is a cost-sensitive market. People care less about the quality of a product and service and more about the price. There are lots of startups get founded every day with millions of dollars.

The consumer gets the highest benefits. Businesses are like fighting with each other to give a higher discount to consumers and deliver high-quality service to maintain lifetime loyal consumer.

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