How small e-commerce players are failing to survive with giants like Snapdeal, Amazon and Flipkart

Hyderabad | New Delhi: Even as market leaders march on, several smaller online retail ventures are forced to down shutters or tweak their business models as fierce competition breaks out in India’s booming online retail industry. Investors are advising young entrepreneurs to avoid cash burning in e-retail businesses which can’t even remotely compete with giant e-commerce firms in saturated areas like fashion or electronics.
This year, fashion e-commerce Yebhi changed its business model, online merchandise portal BlueGape closed its store, while e-shopping platform KoolKart shut down.
Co-founder of distressed fashion portal DoneByNone quit recently. Online toy store Wopshop, jewellery e-tailer 21Diamonds and electronics e-tailer Timtara also shut shop.

“Unless there’s a differentiator, there’s no point starting another etailing business,” said Blue-Cape cofounder Sahil Baghla. BlueGape downed shutters this month. “We did not focus on the key metric which was to gain our own user base and relied on other sites to make quick money,” said Baghla, whose company raised Rs 1.5 crore in angel funding through LetsVenture last year. He plans to re-launch the business month.

Ecommerce companies shutting shop within 2-3 years of operations have realised that they can’t match expectations of Indian users on prices or service like billion-dollar players can. “The horizontal ecommerce space is a tough one to invest now. Most VC investors are not forthcoming to ideas and businesses seeking funding in this space or in areas such as fashion or electronics e-commerce,” said Rajesh Raju, MD at VC firm Kalaari Capital, an investor in horizontal players such as Seventymm and Indiaplaza which closed shop last year.

“We believe that the next wave of growth in e-commerce will be through vertical-focused players such as Zivame, Urban Ladder and BlueStone, which are trying to solve tough supply chain problems,” added Raju. While the big guns such as Flipkart, Snapdeal and Amazon are expanding their offices, there are hundreds of cubicles which are getting vacated. The prime reason for the expanding graveyard is the cash burn which small players find it difficult to sustain.

“When we raised Series-A funding in 2011, the market was upstream. But later the mood of VCs receded. Existing investors were wary of burning more cash,” said Danish Ahmed, CEO and co-founder of Yebhi, which started in 2010. This September, the e-commerce venture pivoted from being a fashion e-marketplace to a product discovery site as it could not find investors to raise another round of $40 million.

Till downing shutters on the earlier model, Yebhi had raised about $40 million (Rs 250 crores) in four rounds from investors such as Nexus Venture Partners, Qualcomm Ventures and Narayan Murthy-led Catamaran. “There is scope in the vertical e-commerce space to serve niche requirements. But these would never become billion- dollar players,” said Ahmed.

Fashion retailer DonebyNone, a curated fashion e-tailer, is also in trouble with the recent exit of its co-founder Amarinder Dhariwal. Existing investor Seedfund is testing the possibility of a pivot for the venture. “As investors and co-owners of the company, we are trying to make things better. The company is operational, and the site is live, but being supported by a skeleton crew,” said Mahesh Murthy, managing partner at Seedfund, an investor in DonebyNone.

Fire-sale or a marriage between two e-tailers seldom lasts. Lifestyle e-tailer UrbanTouch was shut down by Fashion and You after its acquisition last year. Costly customer acquisition is also burning pockets. “Online customers are not sticky and we realised that we would have to burn money to gain scale. Investor interest had dried up in us by 2013,” said Anupam Agarwal, co-founder of e-shopping platform KoolKart, which closed last year. “Now, there is game for only niche players who can take a call to remain small yet profitable,” said Agarwal who dissociated from the company in 2013.

Due to the precedent set by global players such as Amazon, the business has become extremely cash-intensive. Companies are encouraged to lose cash fast to attain scale. “A business is a business if it makes money after a few years, else it becomes a hobby. The biggest challenge in the e-commerce business remains the same since 1999 --how to make money,” said K Vaitheeswa-ran, founder of the first e-commerce player IndiaPlaza, which downed shutters in 2013.

“In India, local e-commerce companies have built topline scale through deep discounting but will struggle to reach profitability,” said Vaitheeswa ran, adding the problem began when he started competing with others through deep discounts. However, there is a way out for existing horizontal players. Most are surviving by selling through Flipkart, Amazon and Snapdeal. “These companies can be called the living dead. The entrepreneur may be making ends meet to keep the venture afloat but without real growth and scale, there are no buyers for such companies and thus investors shy off from investing in such deals,” said Harshad Lahoti, co-founder at ah! Ventures, which also has a few e-commerce companies in its portfolio. “Now it's best advised to build only niche e-commerce businesses which can possibly be acquired. That’s the only way for investor to exit in them,” added Lahoti.