The crisis in Indian ecommerce

Vanishing VC capital, irrational exuberance, and dying companies have caused hundreds of Indian startups to go belly-up. What's urgently needed is domestic mid-stage capital.

One of the most memorable events in investing that I remember from the mid to late 1990s was a competition organized by the Wall Street Journal newspaper in New York, which pitched the country's best analysts and investors against picks generated by random throws on a dartboard. Astonishingly, the dartboard trumped the analysts on numerous occasions and I can't help but liken it to what is happening on the Indian venture capital front.

Venture investing of course is not stock market investing, but it does involve some of the same rigours and expertise -- how to read numbers and evaluate industry and competitive landscapes and then use this along with judgement, analysis, and gut feel to gauge the future business potential of companies to make current bets.

In doing so, venture investors have performed abysmally in India. If there were a new equivalent to that dartboard -- say an artificial intelligence bot that actually used all of the market intelligence and disruptive potential of a business idea plugged into it, as some investors have begun to do recently -- I am quite sure that it would be a no-contest. The bot would win.

Fifteen years after the great dotcom inferno in the early 2000s that witnessed the demise of ideas such as Pet.com, an avalanche of companies in India have expired in the last year or so due to a vast amount of money chasing either hair-brained schemes or unsuitable copy-cat ideas amongst a few good ones, as well as vapourising over $2 billion in wealth.

THE INDIAN DEADPOOL

The stampede to get in on the action "no matter what" essentially over-capitalised many business ideas that deserved a minute fraction of their investment at the outset, and funded many idiotic ones. Of course, this is not just an India-specific phenomenon -- other parts of the world including China have experienced a slowdown in VC funds in the last year or so. However, because of India's image as the next ecommerce El Dorado -- now being viewed as something that was coined a little too early and with more than just a dollop of optimism -- the bottom has fallen out of Indian ecommerce.

Consequently, an Indian company based out of Bangaluru has generated India's first "Deadpool" -- a list of dead or dying Indian startups much in the tradition of the iconic and ironic F**ked Company website (a parody of Fast Company magazine). Amongst the graveyard headstones is one belonging to Peppertap, a $51.2 million on-demand grocery business whose spigot was shut off by its investor Sequoia Capital. This is a company that had expanded to nine Indian cities and whose ads you could not avoid on any form of social media.

These are not insubstantial sums of money, as you can see. AskMe -- another outfit that started off as a consumer internet search platform linked to some 12,000 merchants in 70 cities, which then meandered into a hyperlocal business, much in vogue around a year ago, and then the fintech space if you can believe it -- sucked up some $300 million in cash before going belly-up.

These are just two amongst hundreds of outfits -- 800 according to the Deadpool list, but possibly going up to 1,600 according to some industry experts. These kinds of developments weren't helped any by asinine investments made by the copycat German investment firm Rocket Internet, which has been forced to flog some of its marquis investments at rock bottom prices while watching its other properties wither away.

The rot has spread far and wide. Blue chip Silicon Valley firm Draper Fisher Jurvetson (DFJ) has hawked most of its India investments portfolio -- around eight or nine companies -- to Hong Kong-based private equity firm NewQuest Capital Partners in the equivalent of a fire sale. Shockingly, these include firms that have been leaders in their domains such as travel site Cleartrip and e-waste outfit Attero.

Even startups that have outgrown their categorization as such and have grown into "unicorns" have had their horns filed down to size. Flipkart, for instance, was given a widely discussed markdown by various investors that ranged from as much as 30 to 40 percent.

Meanwhile, bricks-and-mortar businesses that actually generate cash and have very unambiguous business model upsides have thrived. New Delhi-based medical diagnostics services chain Dr Lal PathLabs for example, had a hugely successful IPO that was subscribed 33 times.

THE MISSING PIECE

While boneheaded investment decisions are undoubtedly a large factor in the Indian ecommerce implosion, another crucial problem, as this piece by venture investor Haresh Chawla outlines, is the absence of mid-to-late-stage domestic investors who are there to stay, unlike global hedge funds who wade in and out based on the fickle whims of global liquidity.

Plus, domestic investors prefer to write small checks where the upside is the greatest. No one wants to plonk down $50 million to grow a company at a later stage, and this means that every time there is a global financial crisis of some sort and funds shift location, Indian mid-stage companies suddenly find themselves starved of cash, as we are seeing now.

This will need to change rapidly if Indian companies hope to be freed from the tyranny of global capital and evolve on their own terms in an organic, healthy way.

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