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Don’t let the ecommerce bust fool you

It seems that past 6-9 months have played out a full boom and bust cycle as far as ecommerce in India is concerned. Where as in july-august timeframe, 10 million dollar fundraises were being inflated to 40, and investors seemed to be willing to pay 5-8 times the gross merchandize value as premoney valuations, suddenly the world seemed to turn cold over past three months. What does this mean for entrepreneurs?

  • Customers continue to buy: Not unlike 1999/2000 experience, customers seem unaffected by all the kolaveri around. Keep the focus on customers and deliver great consumer experience – that is the essence of building a great business
  • Build a business, not transactions: The only currency of a good ecommerce business till now has been transaction volume. Now is the opportunity to answer more fundamental questions – why would customers buy from you (apart from getting products below your cost price), what really differentiates your business from the guy next door (no, really!), what will drive profitability in your business, which customers do you want to target and who do you want not to, etc. “Internet is cheaper than retail stores” is not enough anymore.
  • Time for innovation: Premium will shift back on great teams with propensity to innovate, rather than the best search engine marketer. If you do have a customer proposition that goes beyond discounting, can you run the business at 25%+ gross margins (including logistics costs)? How can you build a business without investing $100M in inventory, and still ensure great consumer experience? Whats uniquely Indian about ecommerce?
  • Investment is still available: Ecommerce in India is not a space that investors can ignore (even Mahesh is investing in ecommerce now :) ) – they just seem to be correcting themselves to look at the right things.

Lets get back on the roller coster. The party has just begun!

  • Hrishikesh Desai

    While there is a great potential for e-commerce in the country it still needs to overcome several hurdles before making big money for investors. Infrastructure problems – abundance and penetration of payment platforms and poor logistics networks/fulfillment centers are major hurdles.

    Furthermore, most of the Indian e-commerce companies are focused on increasing transactions and not on building customer loyalty or increasing customer lifetime value. While discounts are a good way to attract traffic I am not sure they are a sustainable way to build business. A successful e-commerce business hinges on the customer returning and transacting on your site again and again. Whether many companies are worrying about this right now is questionable. Its just a mad race to offer free shipping, discounts, promos, offers and COD (this really obliterates margins) in the name of customer acquisition.

    For e-commerce to grow these things need to go or overcomed through some innovation.

  • Vinod Ram

    E-commerce ventures in India are under immense pressure as the payment modes adversely affect the business’s working capital management. As an example, do go through this: http://smallbusinessindia.intuit.in/?s=e+commerce&submit

  • Ravi Trivedi

    6 to 9 month is a short time span to have a business cycle. (the operative word is “seems”). It is more that the deal heat that existed 6 to 9 months back, seems to have reduced. Reasons -

    1) People with negative bias on e-commerce have made their case more emphatically and vocally after 1 or 2 companies have gone under. (Alok K and Mahesh M). This has influenced some investors point of view, and also entrepreneurs expectation on pricing.

    2) Investors who have own a e-commerce portfolio company, typically do not invest in competitors. Most of the companies they invested in want to sell all categories.

    If you look at the venture funds, most have at-least 1 investment in plain vanilla e-commerce hence the # of funds that will invest plain vanilla e-commerce is rather limited. Thus a pressure on valuation as well. This also implies that if you want to get funded, chances are higher if they are in the e-commerce ecosystem (logistics, etc.).

    I believe here is still lot of work to be done in terms of customer satisfaction and communication with customers. This is from my personal experience, and I have a comparison point having shopped several years online in US, and now doing it in India.

    Agree with rest of your points, except one. Exceptional search engine marketers can generate/create huge value. Look at Red Ventures and also to some extent Like.com as a case study on additional value search engine marketing can show.

  • http://www.quora.com/Sanjay-Banerjee Sanjay Banerjee

    I feel that every Organisation talks great about Customer Service.
    They would talk in all Forums about the same.
    Then these companies would go to all HR Forums and talk about all the great things they do for their employees.(THe problem being ,they hardly understand ” Industrial Realtions”….since none have spoiled their hands on the Shop Floor

  • http://www.FootprintVentures.com Neill

    Which e-commerce company(ies) will become TRUSTED? These will be the winners if they can also sell their produects at a profit.

  • http://www.globalchoupal.com ashu garg

    Alok – well written. I am reminded of what Bill Gates supposedly said, “we always overestimate the change that will occur in the next two years, and underestimate the change that will occur in the next ten”

  • http://www.artjini.com Suresh

    Alok:

    Insightful post!

    It warms the cockles of my heart to hear a VC (a big name one, no less!) talk about capital efficient models and 25+% profitability, low inventory costs…..

    Basically what any sane rational business person would do if money did not flow freely….

    We have built our business around these principles for the last 4 years.

  • http://tiemumbai.org Kanchan Kumar

    Alok, my pet peeve is that no one has done anything about building customer loyalty, despite knowing that cheap prices only give you one-off sale.

    That makes me feel that most of them are here thinking that high volume will get them a buyer, rather than looking at it as a long term business.

  • Ravi

    Good post, but perhaps better suited for an internal board meeting; would have served as a great ‘pep talk’. Some insightful analysis from a marquee VC would have served everyone a world of good! As an example, http://bit.ly/zcitic

  • http://www.canaan.com Alok Mittal

    Vamsi – partly due to the constrained availability of capital, we are seeing some entrepreneurs now come up with more capital efficient models. Still too early to say if they will work, but definitely a direction to think about.

  • Vamsi

    Alok, completely agree with this. The fundamentals for e-commerce remain very strong. However, this is still a very capital intensive business. Building a viable business is crucial – but you need deep pockets to reach that stage. I hope entrepreneurs and investors continue to bet and experiment.