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Bengaluru: If 2014 was the year when any doubts about the survival of e-commerce (though not e-commerce companies) were erased, 2015 will be remembered as one that showcased the Internet’s potential to transform all kinds of consumer businesses in India.

Yet, it was also a year that hinted at the troubles ahead for companies in India’s larger digital commerce ecosystem: large companies, some Unicorns included, found it difficult to raise subsequent (large) rounds of funding as investors turned conservative, although all of them eventually did raise funds; smaller start-ups, especially in flavour-of-the-season businesses such as food-tech, began to go bust; and larger issues such as regulatory compliance and governance continued to dog many start-ups.

First, the good news.

Venture capital firms have invested $5.7 billion in Indian start-up companies thus far this year, a 39% rise from 2014, according to data from Tracxn, a company which provides data on start-ups.

In 2015, the Internet touched the lives of the roughly 400 million users in India who mostly got online using cheap mobile devices and inexpensive data tariff plans. People used the Internet extensively to hail rides, hire plumbers, electricians and beauticians, order food and groceries, and book hotels and flights.

Many who did so ended up getting good deals, thanks to the piles of venture capital (VC) money behind pretty much any idea that connected consumers to online merchants and service providers.

Indeed, 2015 was the year when it became clear that India would leapfrog so-called modern or organized retail.

“India is a very domestic consumer driven economy and retail in India is a very large market worth roughly $700 billion. The organized retail is very small. What is happening in India in the broader retail segment, whether it is food or grocery, is that we are going to completely leapfrog the offline revolution that has happened in every other market," said Vishal Gupta, managing director for India at Bessemer Venture Partners.

Think India. Think Retail, a February report published by property consultant Knight Frank India Pvt. Ltd and lobby group Retailers Association of India, estimated that the share of modern trade in retail would slip from 17% in 2013 to 13% in 2019, while that of e-commerce would jump from 2% to 11% in the same period.

“We didn’t have a landline revolution, but went straight to mobile. Similarly, we didn’t have a (fixed) broadband revolution but went (straight) to wireless Internet. Similarly, in retail we are going to skip offline and predominantly be online," Gupta added.

That is an argument that applies to just about anything in the digital space—from ride-hailing services to food-tech (basically a fancy name for food delivery) companies.

Gupta argues that such shopping doesn’t always need to be driven by discounting, as much of it has been in the past two years.

Lower prices may be a result of cutting out the several layers of middlemen that offline retailers deal with, Gupta said.

Still, discounts ruled the roost in 2015, and that may be responsible for some of the existential angst e-commerce firms are now facing.

Companies used the bulk of capital at their disposal to acquire customers by way of offering discounts and free shipping, with barely any focus on profitability.

Investments in early-stage companies more than tripled to 284 this year, data from Tracxn shows.

More than half of the investments this year went into large online retailers such as Flipkart Internet Pvt. Ltd and (Jasper Infotech Pvt. Ltd), mobile wallet firm Paytm (One97 Communications Pvt. Ltd) and ride-hailing service Ola (ANI technologies Pvt. Ltd), the poster children of India’s start-up boom.

The euphoria leading up to the spectacular listing of the largest e-commerce company in the world—China’s Alibaba Group Holding—on the US exchanges last year added heft to investor interest in Indian e-commerce.

However, in the last few months, a lot of that optimism has faded, weighed by the slump in shares of Alibaba.

The Chinese company’s stock price fell to as low as $57.20, the lowest from its listing price of $68. The stock saw a near 50% drop since it hit an all-time high of $120 in November 2014. It was trading at $82.44 on 16 December.

That has had a ripple effect on the technology investments in China, and even India. As investors turn conservative, consumer-facing Internet companies that thrive on offering discounts to lure the value-conscious Indian consumers may be bracing for tough times ahead in 2016.

“The bar has already become high for the choice of company to be funded. Hence, there will be some companies that will fall by the wayside," said Sudhir Sethi, founder chairman and managing director at of IDG Ventures India..

Smaller start-ups may especially be at risk. “In the early part of this year and last year, a number of companies were funded with extensively high amounts of capital even though they had not reached a critical mass. That is because the number of investment-funds was also very large. They cultivated that frenzy in the marketplace."

That frenzy, especially in e-commerce, is evident in the numbers.

The online retail sector remained the hottest in India with 406 start-ups founded this year, data from Tracxn shows. But Flipkart, Snapdeal and US e-commerce giant Inc. together accounted for 80% of the marketshare in online retailing in India. Inc. has been fast catching up on Flipkart and Snapdeal. Amazon Seller Services Pvt. Ltd, its India arm, has been strengthening its war chest ahead of the festive season, infusing 2,437.38 crore into the India arm since June.

Alibaba entered the Indian e-commerce sector through its financial unit Ant Financial at the beginning of this year. Alibaba invested roughly $680 million in Paytm, owned by One97 Communications, which operates an online wallet as well as a mobile commerce site.

Rivals Flipkart and Snapdeal, too, raised millions of dollars of capital this year from venture capital and hedge funds, though raising money is increasingly becoming an uphill task, even for large firms.

Flipkart raised $700 million this year from its existing investors led by New York-based Tiger Global Management after protracted negotiations with new investors failed to make much headway, people familiar with the matter said.

Snapdeal conducted negotiations with Alibaba and Taiwan-based Foxconn Technology Co. Ltd for more than six months over valuation and shareholders’ rights, before finally clinching a $500 million deal at a lower valuation than it wanted.

There are other clouds on the horizon, too.

India is working on definitions of what will be considered retail, wholesale and marketplace selling on e-commerce platforms. The new laws may affect the legal structure of e-commerce companies in India and could also address issues related to the taxation of e-commerce transactions. There is, however, no clarity on when the government will finalize and implement the new definitions. Online marketplaces aren’t currently defined under law.

Because India doesn’t allow foreign direct investment (FDI) in direct online retail, Indian e-commerce firms have adopted complex corporate structures that no one knows are legal or not. The Delhi high court in November ordered the government to investigate  21 e-commerce websites, including Flipkart, Snapdeal and Jabong, for possible violations of FDI laws.

Then, e-commerce firm aren’t the only ones with a regulatory overhang.

Ride-hailing services have piqued consumer interest using convenience and low fares as their unique selling proposition.

The sector turned a duopolistic market with two large competitors, home-grown Ola, owned by ANI Technologies, and US-based Uber Technologies, after Ola bought smaller rival TaxiForSure for $200 million earlier this year.

Ola expanded to more than 100 Indian cities, raised $900 million, started offering new services such as online food and grocery delivery and spun out its mobile wallet into a separate payments app over the last one year.

Meanwhile, rival Uber pledged $1 billion investment in India to expand to more Indian cities and offer one million rides a day by early next year.

Both companies, though, are also facing real world problems. They need taxi licences (issued by the states) to operate. And they have run into trouble in Delhi which, pursuant to a Supreme Court decision from the 1990s, allows only taxis powered by CNG to operate on city roads.

The shake-out that some parts of India’s digital ecosystem are beginning to see has nothing to do with regulations, though. And nowhere is there more evident than in the case of food-tech and logistics start-ups.

The boom in online retail fuelled investor enthusiasm in a number of other sectors, especially online food ordering that saw a 64% jump in the number of companies that mushroomed in just one year.

According to data compiled by Tracxn, there were 335 companies in the online food ordering sector in India in 2015, up from the 204 last year.

A number of investors that failed to cash in on the initial boom in retail swooped down on fledgling technology companies in the sector earlier this year sending their valuations soaring. Many burned piles of cash to acquire customers without creating any meaningful product differentiation, forcing investors to tighten their purse strings.

As capital dried up, many firms failed to raise subsequent rounds of funding, forcing them to shrink or shutter business.

In October, restaurant aggregator Dazo shut down barely a year after it started operations, while Internet-first kitchen Spoonjoy (Emvito Technologies Pvt. Ltd) sold its business to hyperlocal delivery platform Grofers (Locodel Solutions Pvt. Ltd). Last month, another food tech start-up TinyOwl Technology Pvt. Ltd laid off 100 people and said it is shutting offices across four cities in India.

Zomato, one of the most popular and well-funded food technology start-ups in India, laid off 300 people from its global workforce, mostly in the US in October.

“There are multiple business models in the food technology sector. There are companies that do only aggregation, some that do only last-mile logistics, some involved in the preparation of the food and then there are the ones that control some or all these elements," said Revant Bhate, head of marketing at Faasos, a food technology start-up backed by Lightbox Ventures and Sequoia Capital.

This was the year when companies discovered the models that have the potential to scale up sustainably and the pitfalls of some other models, Bhate added.

“In our opinion, this was not a bubble bursting, but a quick re-alignment of how businesses should operate. There are a lot of sectors where investors are still trying to identify the most sustainable business model. Organizational shake-ups and pivots are always healthy for all stakeholders, if done early in the company’s lifetime."

The slowdown in the food-ordering sector spilled to other sectors such as hyper-local logistics and home services which were overcrowded.

As many as 183 logistics companies sprung up this year, according to Tracxn, while the number of online platforms that connect customers to local home service providers more than doubled to 223.

Last month, logistics service provider Pickingo Logixpress Pvt. Ltd, which handled hyperlocal delivery for restaurants, groceries and pharmacies as well as reverse logistics (handling of returns) for e-commerce companies, started winding down its operations after it was unable to raise funds, people familiar with the matter said.

“The entry barrier in hyperlocal logistics services was very low. Hence, a lot of companies entered the space in the last few quarters, and a lot of them have shut down due to the lack of focus on unit economics," said Sameer Brij Verma, an early stage investor at Nexus Venture Partners.

“There will definitely be a leader emerging in the space from a last-mile, hyperlocal, intra-city perspective. Technology-driven firms with strong operational chops and focus on unit economics will eventually succeed," Verma added.

Verma expects the bigger e-commerce companies such as Flipkart, Amazon and Snapdeal that are building an army of merchants to sell wares on their platforms to fuel a boom in shipments to customers providing opportunities for logistics companies to cash in.

“I don’t think investors have lost interest, it is just that too many players have emerged in this space and some of them have been discounting to get merchants signed up for their services and built unviable businesses. The key is to work with merchants who view fulfilment as a long-term competitive advantage rather than a commodity service," Verma said.

Experts say the online home services sector is also facing a similar downside. Many are poised for consolidation, mirroring the experience of food tech and delivery services firms, as they struggle to raise funds.

Home services start-up Timesaverz Dotcom Pvt. Ltd is in talks with three companies for potential takeovers and has already acquired one. Zimmber (Rejuvenate Solutions Pvt. Ltd) acquired Dhulai, a laundry services firm, and is eyeing potential acquisitions in the laundry and home cleaning segments. Taskbob (Crenovative Ideas Pvt. Ltd) acquired Zepper Services Pvt. Ltd last month.

Top investors such as Tiger Global, Accel Partners, Matrix Partners and IDG Ventures have all invested small amounts in the sector, but most seem to be wary of pumping in more cash for want of a proven business model and lack of a clear leader emerging in the sector.

With 2015 tapering down to slowing investments, investors say greater focus will be on the operational metrics of companies such as growth, cost of consumer acquisition, and efficiency of capital utilization.

Next year, most big investors who were putting in $10 million to $15 million in early-stage investments are likely to scale down as they consolidate their investments.

“The year 2016 will be the year of sanity where operating metrics will justify whether a company will get funded adequately or not. Next year will also be the time when the difference between the best and the also-rans will be substantial. Those companies that have established leadership will attract much more capital than the second and the third ranked," IDG's Sethi said.

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