In January 2016, Prime Minister Narendra Modi unveiled his Start Up India-Stand-Up India plan in front of a large gathering of the startup community. Sitting beside him were two entrepreneurs admired across the globe—Adam Neumann and Travis Kalanick. In a little over three years, these two have gone from being lionized to living in disgrace. Life has a way of reminding us that fame can be really short-lived.

Strangely, or not so strangely, the investors in both WeWork and Uber were the same, Benchmark Capital and SoftBank. Uber and WeWork are now struggling with an inflated valuation, that was set to rights by the public market, and issues of work culture.

WeWork has imploded despite SoftBank throwing good money after bad, and the Japanese multinational now has an 80% stake in the company. After Kalanick’s ignominious exit, and Dara Khosrowshahi’s infamous “MIT equals Mathematically Incompetent Theories" tweet in 2018, Uber is now trying to enter the fintech space.

In the rise and fall of these two companies is a lesson for India’s startups and investors.

If venture capital (VC) firms see an IPO (initial public offering) as the real exit when they invest, things cannot go horribly wrong because public markets tend to be rational, most of the time, at least. Therefore, the assumptions the VC firm makes about the future of the business it invests in also tends to be more realistic. However, when it sees a buyout by a mega fund like SoftBank as the default exit option, complacency sets in and things can go wrong.

In my opinion, it is the time of reckoning for e-commerce startups in India. Many of them have seen valuations skyrocket to levels that just cannot be justified by fundamentals or common sense. Some of them are likely to face the woes that WeWork has. There is no doubt that many e-commerce startups are solving some genuine problems. Growing a company to solve a real problem in a sustainable way (profitably), however, takes time.

The trouble is that some of the ideas on which e-commerce startups in India are founded create the hallucination of a “network effect" with a winner-takes-all outcome. The underlying belief is if you get ahead of the competition in terms of customer acquisition, irrespective of how you acquire customers, the customers would stick with you even after you remove the discounts because they have nowhere else to go. This is a questionable assumption.

In 2017, in my book, Cut The Crap And Jargon: Lessons From The Startup Trenches, I’d written that large funds such as SoftBank’s Vision Fund are unlikely to return even the original corpus to their limited partners (LPs) for the simple reason that such large funds are simply unviable when managed by one firm. It is simply too big to succeed. You cannot will a market into existence. A dog-walking startup with $300 million funding cannot create a 10x larger market for dog-walking.

Mint recently reported that Dunzo’s net loss in FY19 had ballooned to nearly 167 crore against an operational revenue of under 77 lakh. This is the story with many other e-commerce startups in India that are burning cash far in excess of their revenue. Markets created on the back of sheer discounts can never be sustained. Only those with a cash burn that is a fraction of the revenue with a clear path to profitability have a chance of emerging successful.

Some of us would know about a startup that was built around creating a marketplace for used furniture. It was a great idea, but in the greed to scale rapidly and create an illusion of growth, they began offering free logistics. Customers were smart and everyone moving home executed sham transactions and availed of free movement of household goods.

The counter to all this is that it is a free market and public money is not involved, so why bother? A free market is all about making bets. Someone who believes the market is overvalued is allowed to short-sell and make money if their belief is true. As long as there are large funds that are overvaluing some private companies, there will be entrepreneurs who will short-sell their own stock and make money.

It takes time, effort and deep commitment to deliver the kind of consistent customer experience that results in creating a lasting enterprise—remember James C. Collins and Jerry I. Porras’ Built to Last? I would stick my neck out and say that many e-commerce unicorns will see their valuations shrink to a fraction of their peak before 2022. Almost as if on cue, as I finished this piece, ShopClues, one of the early unicorns, was sold for between $70 million and $100 million, a far cry from its peak valuation of $1.1 billion. So, it seems like the prediction is beginning to play out.

T.N. Hari is head of human resources at Bigbasket.com and adviser to several venture capital firms and startups. He is the co-author of Saying No To Jugaad: The Making Of BigBasket.

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