Wake up call

Valuation write-downs, withheld offer letters and top management churn have dominated the news flow on Indian e-commerce players in the last one year. Therefore, recent events at Snapdeal occasion no surprise. In a letter to its employees, the firm’s founders have admitted to execution mistakes and announced ‘tough’ cost-cutting decisions. The firm will stop chasing growth and gross merchandise value (GMV) and focus on turning profitable. To downsize, it is reportedly planning to let go of nearly half its workforce, with 300-400 layoffs planned immediately.

The immediate provocation for Snapdeal’s decision seems to have come from the sharp dip in the platform’s transaction volumes in recent months as the top two players, Flipkart and Amazon, slugged it out in the marketplace. With ebbing traffic, Snapdeal’s GMV, pegged at about $4.5 billion last year, is believed to have dipped to less than $1 billion, making it difficult for the firm to raise further rounds of funding. Given the high cash burn rates in this business, if money cannot be raised, there is no option but to downsize. This whole episode therefore exposes the fragility of both the e-commerce business model and the fanciful GMV-based valuation assumptions that have kept this juggernaut going since 2011. Even assuming Snapdeal’s founders were following the path chalked out by rivals, it is certainly intriguing why its marquee investors (SoftBank, eBay, BlackRock, the Alibaba group, Intel Capital among others) failed to raise red flags when the firm made over a dozen acquisitions, paid exorbitant salaries and notched up losses (₹2,960 crore) amounting to two times its sales and nearly half its net worth, in FY16. Yes, it is possible that such write-offs are par for the course for risk-seeking venture capital and private equity investors who spread their bets thin over many ventures, expecting only a few to succeed. But e-commerce is a knowledge-intensive business and such expensive course corrections entailing hire-and-fire decisions can do a lot of harm not just to the brand, but also to the entire sector, in attracting talent. It is also difficult to countenance such wastage of funds in a capital-scarce economy like India, where thousands of established SMEs in less glamorous businesses struggle for finance.

The Snapdeal episode is a wake-up call to India’s tech start-ups and their investors to temper their ambitions with prudent financial decisions, as the music can stop anytime. The prospect of write-downs and job losses in e-commerce is a worry for policymakers, who were relying on this sector to create employment opportunities in the coming years, as traditional IT firms curb their hiring.

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