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A Couple of Funerals

The last rites of two promising startups made news a few days ago, and not just because they happened together. Flipkart shuttered Letsbuy on the same day that Snapdeal gave up on Esportsbuy, both had been acquired barely months ago, so it does seem that the acquisitions were just sugar coating on the euthanasia pills.

This by itself is not particularly troubling. Natural processes of evolution dictate that many will launch and many of those will die. 2010 saw a spate of launches, one should not be surprised that many are running out of steam. Indeed, in any new business model it is quite likely that no more than a couple of firms will survive the initial spawning rush and become adults. Not all slaughter, however, presages the survival of the fittest - sometimes it is just an indicator of illness.

Many people ask me why Flipkart is doing so well while others struggle. I think the trouble with e-commerce in India - and every pundit seems to know this - comes from two fundamental issues.

One, the model is financially unviable - operational profits are nowhere in sight. Indian e-commerce has dug itself into a hole of deep discounts, cash on delivery and free shipping, and no site has a viable model other than last man standing. COD in particular erases most of the financial benefits of the virtual model. And I find automatic free shipping on everything mystifying - TV shopping, a much much larger business in India, happily charges very fat shipping fees (occasionally more even than the cost of the product) yet continues to prosper. The final nail in the coffin? The high cost of customer acquisition has not come down - loyalty is non-existent so the only way to drive sales is through high volume advertising.

And all this boils down to a key factor – a weak value proposition. The businesses seem more enamoured with the 'e' part of the model than on what differentiated value being provided to the customers. Why do I say that? TV shopping manages to charge generous shipping and handling because people feel that even after that it is worth the cost. Look at other business online – Bookmyshow and Indian Railways, both confident in their value proposition, happily charge "convenience" fees. Amazon too has a decent-sized business in India, maintaining loyalty without ad-spends, all the while charging fat amounts for international shipping. If a business is unable to persuade customers to pay for its services enough to turn a profit, I suspect the business does not have a convincing customer proposition in the first place.

Second, customer service – by and large – sucks. Even tiny startups have service people who talk like big business ("my shipping department will get back to you" or "sorry company policy"). Imagine my local grocer using language like that (and this is Bandra, his turnover probably exceeds some of these upstarts). Companies that feel themselves above customers even at startup stage are not my cup of tea.

What would I look for in an e-commerce business? Here are my three bullets, after three start-ups and plenty of bite marks to show for them.

  1. Conviction about the 'E' part. The online bit must matter to customer, not just to valuation-seeking investors and glory-seeking managers. We started that way in Futurebazaar, but soon it was more about turnover than value proposition.
  2. A tight, committed team. The team must be committed to the business rather than to the potential to buy a Porsche. I do believe it is better to have a committed idiot that a competent cynic, but it turns out to be surprisingly hard to hold the ground on this particular belief.
  3. Willingness to serve the customer. If the CEO is doing strategy while some junior employee 'handles' customer service, something is wrong in the essence of a startup. Again, something we did well in the early days of FB but got badly distracted from in later years.

That's it. No bullet point about revenue model or profitability. Nothing about business plans. No market share talk or first mover advantage. And especially, no valuation conversations. Those things are important, but they are the details, not the core. Get the core right, and you will usually be rewarded handsomely anyway. I want to participate not in a startup that wants to make money but in one that wants to change the world - or at the very least, the world around them.

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