indian_rupees-498x295Times Of India became the Indian e-commerce advertising journal last week with 6 full pages of ads begging people to download apps, visit their websites and buy products that they want (or don’t want!) the cheapest!

Then was the time for these conversations – “Hey, I got the brand new iPhone 6S with INR6,000 Cash Back!!” Wow, that’s good amount of saving I must say. But did the guy who sold it to me make any money? Let it be! Who cares?

Someone has to care right?

That was someone’s cash, it’s the wealth generated by this world in some way which is being “invested in losses“. Of course, we are subsidizing the loss, but I often think that why would we do it for prolonged period of time. The usual answer is the Great Scale Theory – “Profits will come with scale, let’s wait for the next couple of years and we will be EBITDA positive” – okay, got it, let’s give it two years. But wait, it has been 6 years guys, 6 full years! And still millions of dollars of Gross Merchandise Value (GMV) generated with millions going away as losses.

In a recent conversation with a friend who works with a Private Equity company, he mentioned that the PE is investing money of a foreign pension fund into Indian e-commerce. I researched a bit bore and realized that pension funds have been continuously increasing their PE exposure post the global financial crisis of 2009.

To keep it simple, someone’s monthly savings in the US, that were done over a period of time for a monthly post-retirement income, are now being diverted to subsidize a 16 year old’s new iPhone in India – with an expectation that this investment into losses will reap higher net returns once the PE firm exits the company (company goes public or it sells stake to another investor at a higher valuation). But wait a minute, these ballooning valuations are themselves driven by increasing GMV which is driven by more losses being funded by the similar investors!

So theoretically, no one loses anything only and only when these companies become profitable before shutting shop. That’s a dangerous assumption to make, specially in India. Millions of people have billions of choices around them. Products with no differentiation will have to be subsidized to sell online (and attract visitors) and profits will be made on products that either one of the following:

  1. Don’t have a reach/ channel near the relevant consumer
  2. Are convenient to buy online and vice versa
  3. Are online-only products that deliver great value
  4. Are manufactured by the e-com player or its associates so they control the pricing
  5. Are super-expensive majorly due to the high-street rentals and can be far cheaper if sold online

But how large a share can these products have in the total GMV of an e-com player? How many online only brands have you bought lately? How many products (out of lets say 100 odd that you bought) lately, can be very inconvenient to buy offline so you chose to buy online? I believe not enough to turn the tide from loses to profits!

Nikesh Arora, one of the key faces of investments in the e-com / tech space in India also expressed his concern on surging valuations of start-up’s.

I believe its bigger than a bubble that we are dealing with here – hope some fundamentally strong business cases are built and scale theory/ GMV takes a back seat. That is a change which may work, till then, let’s wait and watch!