High Cash burn rate . What is the Investment Strategy?

The following article is based on my own interpretation of the said events. Any material borrowed from published and unpublished sources has been appropriately referenced. I will bear the sole responsibility for anything that is found to have been copied or misappropriated or misrepresented in the following post.

Roohullah Salam, MBA 2014-16, Vinod Gupta School of Management, IIT Kharagpur

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The cash burn rate is the measure of the negative cash flow that explains how much a company is spending each month. The cash burn rate by Indian consumer internet companies and startups are increasing and have reached to 35-120 crore per month. The increasing spending done by these companies are mainly on marketing, advertisement and discounts to gain market share and consumers ,which is a tough task in Indian market.

These consumer internet companies are regularly funded by venture capitalist , providing them with enough capital to have high cash burn rate. For example Snapdeal, Quikr and Ola raise funds every 4-5 months. Overall Indian consumer internet companies have raised nearly Rs. 25000 crore last year from venture capitalist and angle investors.

Ola , a cab booking company , spends nearly Rs.125 crore every month. It was funded last year by SoftBank Corp. with an amount of Rs.1300 crore. Similarly, an internet housing company spends nearly 12 crore every months and still claim to have enough money in bank to last for more than three years.

The question that arises is, why investors are investing so much money in these companies and startups, which has such high cash burn rate but does not have revenue on similar lines. One of the reason is that success of similar business model in China and USA have poured investor’s confidence in startups and consumer internet companies. Thus the investment will continue to pour in owing to the fact that India is a potential market for every investors. But if these companies did not recover the money, the question is for how long will these investors continue to pour in the money.

References-

https://www.google.co.in/url?sa=t&rct=j&q=&esrc=s&source=web&cd=1&cad=rja&uact=8&ved=0CB0QFjAA&url=http%3A%2F%2Feconomictimes.indiatimes.com%2Ftech%2Finternet%2Fconsumer-internet-companies-spending-rs-30-120-crore-each-every-month-say-industry-executives%2Farticleshow%2F46509829.cms&ei=kGkFVemfLYOcuQSAjILoDg&usg=AFQjCNFB2sz-PS0DJCS-caVs6enUZH6kYA&sig2=Sljq_ddhRODEicr5kvjpBg&bvm=bv.88198703,d.c2E

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