#Startups: The Window of Opportunity is till May 2016

Indian Startup industry is now 7 years old.  Why 7 years?  The world saw the last economic reset in 2008.  Before that, in 2000.  And now in 2016- and let us braze ourselves.  And the startup - at the back of a recovering economy and an improving telecom network, resulted in the evolution of websites to web applications, which are more so portals.  These portals help people to interact, transact, interchange and trade.   

The bubble will burst around May 2016 - Startups need to watch out

This has led to a proliferation of 'ideas' that can now be resolved through a web portal, or more so, now mobile applications.  Mobile applications have been gaining ground since the last five years, with smart phones penetration shooting up dramatically.  there is huge potential for people who will continuously adopt to online sales, service, transaction and trading.    The opportunity here for the technology startups is to leverage this boom.  With 4G coming in, and Internet penetration doubling up, the market is poised to welcome applications.   

There are three issues here - a) are startups solving real issues here?  b) with valuations sky rocketing,  when is the correction bound to happen? c)a recession is round the corner?  d) Goods and Services Tax ( GST) in India might kick in. If we put these three together, we are looking at a opportunity of window closing around middle of next year.  

• Are startups solving real issues?  -  We have seen broad categories  a) Product Marketplace b) Service aggregators - Uber, Ola c) Home Services ( Called Hyperlocal).  Our experience is that, like how Telecom revolution happened, there is a series of pioneers of the idea, who have got early funds and are able to move forward.  However, the cash is being burnt on acquisition of market and that too at a fast rate.  95% of startups fail to raise funds, as they are me-too players.  But if we look at startups that are actually getting funded, are still in the process of enhancing traction, and using cash to fund discounts.  So, there is no price discovery happening at all.  Not yet.   The me-too players who are funded are looking to increase valuation, so that they get more funds, or well, preparing a case for consolidation.   The value players will reduce to one or two at best.  The writing is on the wall.  The time for building value based, profit focused businesses are the only way to survive 2016. 
• Consumer purchase power:  The premise of any fast growing consumer market is that there is liquidity among the consumers to buy things.  The expectation is that the market will 'explode' - which means there will be more consumers or each consumer buying more ( average revenue per consumer) to go up all the time.  Now the Greek debacle, followed by Chinese devaluation of the Yuan is going to create a strong dollar.  A strong dollar means a weak rupee, and that means that the market size will eventually shrink. Already the devaluation of the Yuan has resulted in almost 8% devaluation of the rupee.  This is one dimension.  
• Higher entry barriers for investments: Another dimension is the recessional  effect created by the bursting of the Chinese bubble.  While the share markets tank, the market capital of the listed companies fall.  This sentiment will easily seep into the minds of the investor - both institutional and individual.  This will result in startups being put to pressure - for showing better results for the existing investments, and showcase better and tougher KPI's for further funding.  Early stage funding has already moved from idea and prototype to traction and revenue plans. 
• Good and Services taxes - what is key here is that Goods and Services tax will be launched in April 2016.  GST will be now treated as a liability when inventory is stored - either by the ecommerce player, the vendor or the third party inventory holder - and can be billable to the customer only when sold. This period of inventory hold is about 1 to 4 months, experts say.  And there is another issue of interstate stock transfers.   Now in addition to 12.5% excise duty, it is predicted that 8-10% of additional tax cost will be incurred on stock transfers.  Companies who are already funding sales through discounts will have to burn more working capital, which in turn will result in more rounds of fund raising.   GST will be the single biggest impact on smaller players, as the funding would cut down their survival period between two rounds of funding by atleast 2-6 months.  
• Government Intervention: There are grievances from state governments as to the actual status of e-commerce companies.  The Central Government is planning to bring multi-brand retail and e-commerce companies under competitive and regulatory laws.  The main objective is to protect the consumer and competition.  The need is to avoid predatory prices and practices, which otherwise will have a detrimental effect.   While the so called marketplace approach enables the e-commerce ventures to avoid any product liabilities - when any organization interacts with a consumer, they need to be protected.  
• State Government intervention:  There is no clear definition of 'electronic commerce' in the annals of ministry of industry and commerce.  The incumbent minister has initiated consultations with her state counterparts, but if you look at the state government response - some states, taking advantage of the lack of a clear and tight definition, have sent notices asking for more taxes. Karnataka, the hotbed of online transactions, wants Amazon to pay value-added tax on goods sold through the site because it sees loopholes in its fulfilment centre model. The matter is in court. Delhi, Uttar Pradesh, Kerala and others have also tried to find opportunities for raising tax demands.   In some cases, the listing of transactions for government scrutiny is being demanded, to say the least.   Tax audits will be disruptive - as the informal setup of startups will be challenged. 
• Source of Funds:  While many E-commerce funds are above board, there is a genuine concern about how ecommerce funding really happens.  There are smaller to mid-size ventures who gets 'funds' and then go on a massive cash-burn spree.  This is still a simmering issue, but one instance of  exposure will trigger an avalanche.  Is there proof?  There are certainly murmurs in the corridors. 

Like any industry, E-commerce is evolving in India.   The founders of the present day startups are not privy to the earlier dot com burst ( of 2000's) or the recession of 2008.  It is good and bad.   As they say,  every generation carries its own candle, and we are yet again - facing the next hump in the ride. 

-Ashok Subramanian

(C) Cherunathury Tech Ventures