Are Indian Start-ups and eCommerce Firms Living in Fantasy Land without Profits?

Are Indian Start-ups and eCommerce Firms Living in Fantasy Land?

It is a well known fact that India is a favourite destination for yield hungry investors and angel investors keen to fund start-ups and eCommerce firms in the hope that they would be able to garner significant profits at a later stage.

Indeed, India is globally recognised for its Unicorns (start-ups that have Billion Dollar valuations) as well as the money that is pouring in for aspiring ventures.

However, what is little known is that most of the start-ups and eCommerce firms are making losses despite generating revenues in the Billions.

Moreover, Indian start-ups and eCommerce firms are also scaling up in the hope that the efficiencies from the economies of scale would justify their optimism about the Indian market.

So, is this optimism justified or are Indian start-ups and eCommerce firms living in Fantasy Land?

The former is borne out by the high valuations and the equally high revenues whereas the latter is true due to the heavy losses that these firms are racking up on a year to year basis.

Therefore, one needs to analyse and examine how both conditions that are contradictory can be true at the same time.

Explaining the Apparent Contradiction of Large Revenues and Heavy Losses

To start with, world over, new ventures are usually characterised by heavy cash funding and investments that are aimed at capturing market share and then going all out for profitability.

In other words, the thinking is that by capturing a large market share and building a loyal base of consumers and customers, such firms can then hope to break even in a few years time and justify the funding.

At the same time, if such firms make losses year in and year out, there has to be a reassessment and re-evaluation of their strategies as to whether they can continue to make losses.

However, it is also the case that major start-ups and eCommerce firms in India are reporting large revenues which means that they are succeeding in the task of building a significant market share.

This brings us to the next point about how their business models work.

To delve deeper, essentially why Indian start-ups and eCommerce firms are reporting huge revenues and equally large losses is that they are banking on Deep Discounting strategies.

In other words, they are capturing market share due to heavy discounts and making losses since they are essentially selling below the cost price.

Will Short Term Pain Lead to Longer Term Gain? Some Thoughts on This Strategy

So, the question to ask is for how long can such a situation persist? While Amazon and Jeff Bezos might have deep pockets and can stay in the hunt for a few more years without making profits, the point as to whether the smaller start-ups and eCommerce firms can survive the longer term.

Indeed, the Indian start-up world is characterised by a few success stories and the high number of failed entities.

Moreover, it is only when Western investors start pumping in money into such firms do they manage to survive.

We have seen this with Flipkart with many global investors funding it until Walmart took over. We have also seen this with Oyo and Ola, the hospitality and transportation firms respectively.

On the other hand, there are countless others who have failed or are close to failing. Of course, Zomato is still in the hunt and it remains to be seen as to how long it can sustain itself without making profits.

What all these firms share is the ability to scale up and put in place sound business strategies that are hoped to be profitable in the longer term.

In other words, the expectation is that short term pain would lead to longer gains.

What Does Theory Say About Business Models and Strategies

Having said that, it is also the case that for longer term viability, there has to be a sound business strategy in place.

Indeed, as management theory states, the ability of a business to reach the Break Even Point and then either stay there or reach higher and make profits needs a business model that relies on sound financials.

As of now, it is not clear as to whether the business models of many Indian start-ups and eCommerce firms justify such optimism.

The only reason why Western investors are pouring in money into the start-ups and eCommerce firms is that they are looking for returns in India as the West is saturated.

This happened with China initially wherein Westerners flocked to the country once it opened up its economy and the same thing is happening in India now.

However, the crucial difference is that while China rolled out the Red Carpet for Western investors, India still has to decide whether to liberalise fully or retain some sort of governmental control over the economy.

This is another reason why one must circumspect about the chances for Indian start-ups and eCommerce firms.

Concluding Thoughts

Last, while it is okay to Make Hay While the Sun Shines, it is also the case that When the Music Stops, only those who are Agile and Nimble would succeed whereas those who are slow and lethargic would lose out.

Therefore, it is our argument that Indian start-up Entrepreneurs do not get carried away by the adulation shown on them and instead, focus on building business models that would last a long time and would lead to profitability in the longer term.

To conclude, one never knows when the Party Would is over and hence, one has to be alert and on guard all the time.

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