Startup industry set to witness mass firing, thousands of Startup Jobs at stake

Startup Jobs recession mass firing

The writing is clearly on the wall, whether you decide to read it or not is entirely your call.

The Game of Thrones Season 6 recently premiered, and I am busy reading about the negativity surrounding B2C e-commerce in India right now. It is quite remarkable that the “Iron Throne” of Indian e-commerce is also up for grabs between the three big kingdomsFlipKart, Amazon and Snapdeal, while some houses are playing a wait and watch the game, focusing on their core business growth – namely, PayTM and ShopClues.

While About a 100+ years ago, with the advent of manufacturing economy, thousands of jobs were created around the world. Recessions happened, but once in over 20-30 years. Lifestyles changed slowly, needs were limited and so were the wants.

During a recession, in simple terms, demand fell as people did not have much money to spend, companies scaled down manufacturing and employees lost their jobs. Then over a period of time, government interventions and pumping in money through monetary and fiscal measures brought the economy back on track. Loss of jobs at a mass scale were a result of natural unpredictable disasters. Of course, there were people to be blamed, but it wasn’t looked-at as a man-made intentional recession. Even the loss of jobs during the financial crisis in 2008-09 was due to unreasonable risks been taken by banks which did not reap the right return and many lost their jobs. All was a part of business as usual and no one saw it coming – basically, things went wrong due to business factors but not due to wrong intentions towards the business.

The devaluation of FlipKart and the fear of biggest job-cuts in the recent times

However, Indian e-commerce space is different in this context. Let me explain it by asking some fundamental questions:

  1. Is connecting people (buyer and seller) through technology the biggest invention of all time?
  2. Do majority of people value convenience of purchase over monetary value for majority of their monthly transactions?
  3. Does the future of retailing lie in hand-held devices and will markets and shopping malls cease to exist?
  4. Can the fundamentals of potentially successful business be based on financing losses?
  5.  Has the human touch, feel, interaction while making purchase lost its charm?

Answers to most of the above questions by a practical person will be a big and bold “No”. But believe it or not, the answer to each of these questions has to be a “Yes” to justify FlipKart’s valuation!

The point is – the basic assumptions taken by these companies on selling-to and retention-of customers are proving to be the biggest issue for their businesses today. Customers don’t value FlipKart but they value the brand they buy on Flipkart. Hence, FlipKart’s assumption of never-ending exponential growth is flawed.

The company is only as strong as the weakest link in its chain

And FlipKart is full of weak links. Its sales, as per latest reports, are stagnant and the only way to push them upwards is more discounting. The business has more or less ignored the different value creation mechanisms the ecosystem offered, and the one’s it could have put in place – advertisements, payments, strategic partnerships etc. Today, it is a big brand wanting people to come to it’s website to buy a competitively priced product – but why will a customer come to you? There have been no strong loyalty mechanisms put in place for customer, no incentives beyond discounting, no relationship building and hence almost no loyal customer base. 

The key to any businesses success is customer loyalty, where the customer will buy from you even if there is a monetary loss in doing so,and will promote you in his/ her social circle as an influencer

But as the human touch is missing in e-commerce, there is no one face to interact with. Also, there is no product that is “FlipKart’s product” where I go and tell my friends how awesome it is. So how do people promote you? And why would they do so? Hence, building loyal customer base should have been at the core of these businesses from day one, but unfortunately, it has been ignored and discounting got the front seat. Hence, the sales have been dependent on value seeking customers who visit you for discounts.

The peril’s of discounting-driven GMV’s and GMV-driven valuations

All the top e-commerce companies have burned cash in discounting. The investors, who now pressurize these firms to break-even, were funding them on Gross Merchandise Value (GMV)-driven valuations. The firms ran after GMV’s and the easy-way out to get the right GMV was discounting.

Strategy was simple, buy a product for Re 1, sell it for Re 0.8, mass market with front page ads, millions of customers buy, your GMV goes up, your valuation goes up, you get more funding, then repeat

But how long would this strategy circle last? Investors had to come back asking for profits, the founders knew it and so did the investors. To put this strategy to action, it required thousands of people to be employed, who will get more sellers, more strategic partnerships and deliver these discounted products to tens of thousands of customers. Team sizes increased and FlipKart is ~35,000 people today. But they knew these people are not required for the fundamental business that will make money, these people were required to reach scale – in terms of GMV and valuations. 

The mass job cut and its consequences

Thousands of jobs will be lost in the coming months both in FlipKart and Snapdeal. Others will follow suit. Jabong is up for sale and so is FoodPanda, FabFurnish has been sold at a valuation of “money in the bank“. All the resume’s of bright, young and talented individuals who wanted to be a part of the growth story will be floating on job portals. Many will get jobs but given that none of the big e-com companies is growing as fast as they were, many will be left without any jobs. This will result in difficult times for some of the fundamentally strong e-com companies to attract good talent and the incumbents to retain good talent. Overall, this will result in the size of workforce in e-com  contracting, valuations falling, investors exiting and more firms shutting shop. The glamorous industry will see its own phase of natural correction while the job market will be disrupted with oversupply impacting related industries.

However, I call this a man-made recession as the fundamentals of this business were clear in the Indian context, the firms scaled their operations in search for higher valuations by burning investor money to achieve GMV. I wish those funds were spent on building loyal customer base, own products that crush competition and an ecosystem of revenue streams. With all that done, FlipKart’s valuation might have been 1/4th of where it stands today, the work force would have been 1/6th and they would be close to achieving profitability, and most importantly, no one would have lost their job.

(Disclaimer: views expressed in the article are those of the author, and they do not reflect in any way those of the institutions to which he is affiliated)

First published here.

Vicky Bahl

Vicky Bahl is a strategy consulting professional based out of New Delhi and Mumbai, India. He has over 10 years of experience in advising companies on growth, innovation and transformation. He is currently working as an Associate Vice President with Avalon Consulting, a boutique strategy consulting firm ranked amongst Vault's top 10 in Asia.

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One thought on “Startup industry set to witness mass firing, thousands of Startup Jobs at stake

  • May 26, 2016 at 11:55 pm

    Nicely discussed in detailed….waiting for more post.. keep posting sir

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