Entrepreneurship in India

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 Any material borrowed from published and unpublished sources has been appropriately referenced.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.

Sai Prasanth C, MBA 2015-17, Vinod Gupta School of Management, IIT Kharagpur

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Till recently, all one heard of was euphoric investor pouring crores into half-baked businesses at stratospheric valuations.These days, one frequently hears of consolidation, rollback and even closure. It looks like e-commerce’s moment of reckoning is here. Thus, Quikr has bought CommonFloor. Oyo Rooms, it was reported last month, is keen to acquire its smaller rival Zo Rooms.

Ola has acquired TaxiForSure. Zomato has stopped food delivery in four cities. Grofers has curtailed operations in 9 cities in the last one month or so, after it entered these markets amid much fanfare. Dazo and Langhar have shut down.The Quikr- CommonFloor all-stock deal is interesting – for more than one reason.

According to news reports, Quikr paid $100-120 million for CommonFloor. In December 2014, CommonFloor had raised money from Google Capital at a valuation of $150 million.So, in the space of one year, it shed at least 20 per cent value. One reason for this erosion could be the tightness in the realty market, both offline and online.  Consolidation is bound to happen in any sector that has too many players and no profits. None of the e-commerce startups in India has yet made money. And with no entry barriers, e-commerce has seen several stampedes. Thus, as soon as the Delhi government started its road-rationing initiative, several ride share apps popped up. Most of them have a limited shelf life.

In this scenario, the smaller players find it hard to survive and have to look at new ways to do so. For instance, many people say TaxiForSure chose to sell because it couldn’t have taken on Ola, which had put together a sizable war chest. Also, in most of the cases, the investors are responsible for the consolidation. Thus, the acquisition of CommonFloor by Quikr is known to have been driven by Tiger Global, which had invested in both the companies.

This seems to be particularly true of real estate. Elsewhere, the market has got split amongst a large number of players: think of food delivery, online grocers and carpooling. Mergers and rollbacks are nothing but course-correction instigated by the investors. In some other cases, the business model turned out to be erroneous.  Thus, commentators have come round the view that, in a small town, online orders for food and grocery delivery is a small service – all it helps save is a short walk or drive. Compare this to fashion, which brings stuff that may not be available in the town at all, and saves the user a trip to the nearest metropolis. It is clear what will click and what won’t.

There is reason why investors have turned active: they are faced with the option of either letting the venture die and cut their losses, or pump in more money with little hope of being able to match the leader. They have now started to settle for a third option: become a part of the leader. This is their only hope of recovering their investment. Not all startups will manage to find buyers – some of the smaller ones will die a natural death. This would include players which have thus far not been able to get an investor on board; their demise will be painless. A whole lot of investors wrote large cheques freely because they did not wish to miss the bus. An opportunity had shown up and they had to take their chances. And everybody wanted to catch the cycle right at the beginning.

The sovereign funds come with a different mindset. They do not enter at an early stage, which would have given them the advantage of buying at low valuations, and look at investments in mature ventures. They don’t mind paying a higher value and have a longer time horizon in mind. They will get in once consolidation has happened and only stable players are left standing.

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