E-Commerce Startups- A Bubble in the Making

Published by MBA Skool Team, Published on December 18, 2015

It is not a hidden fact that E- Commerce companies have taken the world by storm. Having conquered the west, now, they are out to capture the Indian market and the way things are going the future looks hopeful, to say the least. Lots of investment is being made in the sub-continent and the investors are aware of the potential of India’s booming internet market place.

Image: pixabay

Before going into details let’s look at, Flipkart, one of India’s top 3 E-commerce giant which raised $1 billion investment a fresh round of funding. The next we heard was that amazon announced that it will invest an additional $2 billion "to support its rapid growth and continue to enhance the customer and seller experience in India." These investments are hardly a surprise when one delves into the demographics of the country. India, (along with being the country with the world’s third largest internet users) is also among the countries with highest percent of growth in the number of internet users. It saw an almost 20% growth in the number of users in 2013.While the internet population penetration in the country was a paltry 19.19%. These key stats justify the optimism of the venture capitalist when analyzing the emerging Indian online market.

With many rounds of funding and a huge customer base, the valuation trajectory of E-commerce industry has sky-rocketed. According to a PWC report, the sector in India has grown by 34% (CAGR) since 2009 to touch 16.4 billion USD in 2014. The sector is expected to be in the range of 22 billion USD in 2015.

As of Q1 2015, six Indian E-Commerce Companies have managed to achieve Billion-Dollar valuation namely Flipkart, Snap deal, InMobi, Quikr, OlaCabs, and Paytm. But the big question that comes to mind now is “Is this a bubble in the making?”

Well, the answer to that question is tricky and is often subjected to individual mind set. With many pundits believing that Digital resources can create significance just like physical property and therefore may draw valuations that may look high at present but due to the unclear profitability model that most of these giants work on raises some eye brow on their practicability in the long run. According to the USB report, Flipkart, Amazon India and Snapdeal reported a combined revenue of $85 million and a loss of $163 million in FY14. This essentially means a $3 loss to earn a revenue of $1.

If we observe closely, we find that not many of the top Indian corporate groups have really ventured into this space aggressively. Many are comfortable in setting up plants of 1000 crores worth of debts, which along with long gestation period comes with lot of other risks as well. It can be inferred that the fear of the unknown in the E-commerce space have made them wary from the start.

While on the other side Ratan Tata, Chairman emeritus of $100 billion Tata Sons, heavy investment in E-commerce reflects the industry’s confidence and emphasis towards E-commerce companies in India. The Tata sons have invested in five E-commerce industries namely Snapdeal, Paytm, Bluestone, GirnarSoft and UrbanLadder.

Analyzing from the past, the results have been mixed. Amazon made no money in the first 10 years of its operation and has been making little since. While Ali Baba, a Chinese E-commerce giant has made consistent profits. E-Bay has been active in India for over 10 years but its market share is small when compared to relatively newer active E-commerce firms like Snapdeal and Flipkart. Therefore, it is only fair to say that a lot depends on the business model of the company and its profit-making ability.

Between all this, one thing is for sure that the main priority on the minds of E-commerce companies right now is to broaden their customer base. Due to various factors such as Better technology and other Government initiatives such as The Digital India campaign, the reach of internet is only going to get deeper. Thus, the potential that these E-commerce industries have in future is going to be immense and that’s what the investors are banking upon. However, whether it turns to be a profitable investment or another dotcom bubble remains to be seen. Having observed the trend of the past, it is certain that the people of India will have a huge say in whether it turns out to be a bubble or whether it becomes ‘The next Big Thing’ in this country which itself is tipped to be ‘The next big thing’ of the world.

This article has been authored by Vaibhav Singh from SIBM Pune


• http://www.business2community.com/infographics/global-internet-population-penetration-stats-01270234

• http://e27.co/the-game-begins-flipkart-1-amazon-2-20140730/

• http://www.pwc.in/assets/pdfs/publications/2015/ecommerce-in-india-accelerating-growth.pdf

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