The Great Indian E-Commerce Market: Boom Or Bubble?

Mayur Pathak
Mayur Pathak
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Mayur Pathak is a management consultant and experienced industry professional from IT & internet industry. His skills are to help his clients, especially funded startups to grow their business through intelligent marketing strategies and partnerships. He is also a co-founder of Dealaram.com, a daily aggregation site that specializes in national and local deals across some cities.

It was about this time of the year in 2011 that the news of multimillion-dollar valuations of companies such as Flipkart, Snapdeal and others came out in business circles. VCs and Angels flush with funds went on a spending spree, extending financial support to any one they thought was the next big thing on the internet. E-commerce, the word much used and abused since India's first successful internet venture, baazee.com, was the hottest selling cake again. This gave hope to many aspiring entrepreneurs wanting to make it big in the internet world. What also went abuzz was the talk about another internet bubble waiting to burst. A Year has gone by. Has e-commerce really arrived or has it come closer to bursting?

"Online retail is a proven business in many countries, and while there are questions outstanding around internal competition within online e-commerce sites and their profitability, it is a reality that online models significantly improve upon the offline retail models, both on margins and on reach," says Alok Mittal, Managing Director at Canaan Partners, a VC firm. Alok has every reason to be upbeat about the internet centric ventures having co-founded jobsahead.com, now acquired by Monster. But aren't the e-commerce players battling for profitability? Many have meager earnings while some have already closed shops.The ones with cash from VCs are battling it out in a fiercely competitive market. With abysmal levels of internet penetration in India, the space they are left with is still very small. So what really drives the investors to such companies? Here is what Amit Sharma, founder of gountucked.com, a manufacturer and online retailer of T-shirts has to say.

"In early stage investment, valuations in any industry are based on expectations about future earnings. It is about demonstrating in a rational way that you can scale up your current earnings by a multiple of 100 or 1000. It is less about what your current earnings are, and more about whether you have demonstrated a path to scale. By the time a venture's current earnings grow, the time to take bets is over. It’s no longer a venture then." Gountucked manufactures and retails their own merchandise and hence for them, the high investment is duly justified. Also as Alok Mittal puts it, "Large market space is what is leading to attractive valuations."
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Reader's comments(3)
1: Thanks for the interview- I'll add that "expectations of future earnings" is the logic that often goes untested. The corrections we are seeing lately are due to investors realizing how they were wrong about the fundamental business logic- generally to do with their cost of acquiring customers and repeat behavior.

- Amit, founder-CEO, GoUntucked.com
Posted by:amit sharma - 19 Mar, 2012
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3: While product differentiation and internet penetration are concerns addressing issues such as payment realization and fulfillment/logistics will enable many smaller specialized businesses to go online and reach out to a wider audience than their own neighborhood or city. Payment gateway charges and courier costs are a real dampener to some one starting out.
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