Is it lockdown for startups?

With Covid-19 and automation, GoI’s one-time employment darlings could become prodigal liabilities.

Agencies
A triple-whammy — SoftBank’s debacles with WeWork and OYO, Covid-19 and GoI’s decision to monitor investmentse from contiguous nations — has finally shaken the façade of confidence that ignored the reality of mounting losses and topline stagnation.
By Ateesh Tankha

Beyond the volumes of cash that developers were able to attract time and again in their bid to become the next unicorn, India’s ecommerce and fintech startup ecosystem employed five lakh direct and 16 lakh indirect personnel by 2019, numbers that were slated to triple by 2025. Now, this figure looks doubtful for two reasons. The first is reckless disruption — and one isn’t even talking about the Godzilla-sized disruption that Covid-19 has unleashed.

Every startup claims to solve a market problem, through better, cheaper or faster solutions. But disruption comes at a cost, and customers will only pay and use if there is a visible upside. This is critical because market growth depends on it. Unless, of course, a startup was built for sale in the first place.


The US experience is instructive. Google, Facebook, WhatsApp, Amazon and many others built businesses that could be scaled to become big enterprises. Each one grew the market for their offerings: advertising, retail shopping, etc. They were built to last. Then came pure disrupters. These startups were determined to use any means to steal market share from larger companies, with the intention of selling themselves to the highest bidder thereafter. Buyer motive lay in FOMO — Fear Of Missing Out. Buyer’s remorse was common.

Like the Norsemen, they stole your cattle and only returned your cows when you paid an exorbitant price. The herd-size did not increase. In order to offer customers large discounts on local and national brands, JPMorgan Chase, through its subsidiary Chase Bank, bought San Francisco-based local offers company Bloomspot — a real lemon — for $35 million in 2012, only to discover that it was an empty shell.

Chase’s merchant offer programme was shuttered a few years later. Babycare and household products ecommerce platform Quidsi used to purchase diapers at retail price and sell the stock online at a discount. Finally, to contain the annoyance, Amazon bought it for $545 million, more than the cumulative turnover the company ever made. Amazon shuttered it in 2017.

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StartYup or Nope?
Quidsi founder Marc Lore then set up ecommerce site Jet.com, which he sold to Walmart for $3.3 billion. Walmart later bought the Bengaluru-based Flipkart for $16 billion. Only when Walmart turns a profit on these acquisitions will it justify the costs incurred to bring these cows back home.

Today, Indian startups account for a small portion of commerce and payments. But touted growth lacks a critical insight: market expansion.

Because if disruption does not increase the size of the pie, then disruption was unnecessary. And short of a successful exit — sale or initial public offering (IPO) — these corporations will eventually die. The second reason to doubt the Great Indian Startup Story is lack of profitability. While some venture capitalists (VCs) call startup business plans a sub-genre of science fiction, there is no excuse for business models that lack unit profitability. Many startups have grown exponentially — millions of sign-ups, billions of sales — through incentives that could make a national political party blush on the eve of an election.

To exchange long-term relationships for transactional arrangements, you have to gamble on the fact that the customer will continue to enjoy your wares long after the incentive is withdrawn. But not every provider who offers free service becomes the Empress Theodora — or is even guaranteed the Emperor Justinian’s eye for long.
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From the beginning, startups have shown a willingness to defray the costs of adoption and usage in a ruinous price war. This strategy works if competition suffers, or the market for digital offerings grows significantly.

Neither of these events has transpired. Yet, startups have shown no intention to waver from their path. In order to sustain and augment their valuations, VCs have continued to pump money into startups. OYO, Swiggy, Paytm, Ola and Zomato have cornered more than $13 billion of investments. The less said about their cumulative expenditure the better.
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A triple-whammy — SoftBank’s debacles with WeWork and OYO, Covid-19 and GoI’s decision to monitor investments from contiguous nations — has finally shaken the façade of confidence that ignored the reality of mounting losses and topline stagnation. Finally, the likely oligopoly of Facebook-Reliance, Google-Airtel, Amazon-Future Group and Walmart-Flipkart may challenge these startups in areas that range from sourcing and payments, to physical shopping and home deliveries. As it is, business models are being reevaluated, mergers and partnerships are being contemplated in these times of Covid-19 where there was only adversarial conflict before.

Work, Interrupted
Eventually, this is likely to lead to enhanced unemployment. As investments dry up, startups will be left with three options: sale, merge or shutter. In each instance, the wage earner — whose career growth was non-existent to begin with — will find his job terminated or discontinued.

At a time when automation is beginning to challenge our notions in the workplace, unsuitably skilled — or in the case of during lockdown, absent — workers are unlikely to be re-employed in a hurry. And startups, once the government’s employment darlings, will become their prodigal liabilities.

The writer is former head, partnerships and Citi merchant service, Citibank, US
(Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of www.economictimes.com.)
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