Star­tups’ Line of Thought Shifts From Top to Bot­tom

Cos try to get their act to­gether by get­ting ‘unit eco­nom­ics’ right & re­duc­ing ‘cash burn rate’

The Economic Times - - Front Page - Mad­hav.Chan­chani @times­

Ben­galuru: For con­sumer in­ter­net com­pa­nies used to spend­ing their way to mar­ket lead­er­ship or oth­er­wise, con­serv­ing cash has be­come a pri­or­ity to ex­tend their runways. In the new regime, star­tups are shun­ning pre­vi­ously pop­u­lar buz­zphrases such as ‘ growth over profit’ and ‘win­ner take all’ and adopt­ing new ones in­stead — get­ting ‘unit eco­nom­ics’ right and re­duc­ing the ‘cash burn rate’. With fund­ing hard to come by, and in­vestors fret­ting about re­turns, it is dawn­ing on star­tups big and small that the bot­tom line mat­ters. Which is why the most as­tute among them are re­duc­ing the amount of money they use to grow their busi­ness — termed the burn rate — and sharp­en­ing fo­cus on the core busi­ness. It is time for pru­dence over profli­gacy.

“Across all com­pa­nies both within our port­fo­lio and out­side it, it is twice as nor­mal to see burn rate lev­els in Jan­uary and Fe­bru­ary that are half or one-third of their peak lev­els,” said Mo­hit Bhat­na­gar, manag­ing di­rec­tor at Se­quoia Cap­i­tal, which has backed hy­per-lo­cal de­liv­ery startup Gro­fers, restau­rant list­ings ser­vice Zo­mato and bud­get ho­tel ag­gre­ga­tor Oyo. Un­like last year when large fund raises were the norm, this year “com­pa­nies are not re­warded if they have ex­po­nen­tial growth with bro­ken unit eco­nom­ics”, he said.

‘Cash burn rate’ is a mea­sure of neg­a­tive cash flow that was be­ing used as a weapon by star­tups to out­gun their ri­vals to win mar­ket share and pump up growth. This was be­ing fu­elled by co­pi­ous cash from a plethora of in­vestors rang­ing from ven­ture funds to hedge funds and strate­gic in­vestors ag­gres­sively scout­ing for the next multi-bil­lion-dol­lar com­pany. Among those now tak­ing cash burn most se­ri­ously are on­line mar­ket­places Flip­kart and Snapdeal, In­dia’s two most valu­able star­tups. They have re­duced the cash burn rate by over one-third, ac­cord­ing to sev­eral peo­ple in the in­dus­try aware of the changes afoot in In­dian in­ter­net com­pa­nies.

Flip­kart, In­dia’s most val­ued startup with an es­ti­mated worth of over $15 bil­lion (Rs 1 lakh crore), has man­aged to trim burn rates from a peak around $80-100 mil­lion per month in the last quar­ter of 2015 to around $50 mil­lion now, the sources said. A per­son familiar with the think­ing in the com­pany told ET that Flip­kart may fur­ther re­duce its burn rate by $10 mil­lion. A large part of it is driven by the fact that first two quar­ters of the year are con­sid­ered a slow pe­riod for re­tail sales, but fo­cus is now on care­fully watch­ing costs, the per­son said.

Ri­val Snapdeal has been able to cut its burn rate by as much as 40% com­pared to last year, an in­vestor in the com­pany told ET. The Del­hibased com­pany, in which Ja­pan’s Soft­Bank is the big­gest in­vestor, was spend­ing around $20 mil­lion per month last year.

Flip­kart and Snapdeal did not re­ply to emails seek­ing com­ment.

To­tal ven­ture cap­i­tal in­vested fell by nearly 80% to $334 mil­lion in Q1 CY15 com­pared with $1.8 bil­lion seen in the cor­re­spond­ing quar­ter the pre­vi­ous year, ac­cord­ing to VCCEdge. Both large play­ers like Flip­kart and Snapdeal, who raised three rounds of fund­ing each in 2014, closed only one fi­nanc­ing round in 2015.

Smaller star­tups have seen even more dras­tic changes, rang­ing from shut­ting down op­er­a­tions in some cities to lay­ing off staff. Ex­perts be­lieve that star­tups will have to fo­cus on build­ing a sus­tain­able prod­uct to win and raise more cap­i­tal, rather than spend­ing more money and rapidly ex­pand­ing op­er­a­tions. “The cost of run­ning a busi­ness has to be re­duced as there are in­nate in­ef­fi­cien­cies that have crept in,” said Sreed­har Prasad, a part­ner spe­cial­is­ing in ecom­merce and star­tups at KPMG.

The cau­tion­ary mood was best ex­em­pli­fied when Flip­kart backer Tiger Global pulled back from In­dia and Soft­Bank, which poured over $1 bil­lion into In­dian star­tups in 2014, be­gan to cau­tion star­tups on their spendthrift ways.

“Costs will have to be cut in ar­eas like salaries, du­pli­ca­tion of work within de­part­ments and re­duc­ing cost of op­er­a­tions,” said Prasad.

Sev­eral star­tups, es­pe­cially in ar­eas like hy­per-lo­cal de­liv­ery, ag­gres­sively ex­panded to dozens of cities across the coun­try in the first half of 2015 but have since cut back on op­er­a­tions. Food de­liv­ery play­ers like Zo­mato and TinyOwl and gro­cery de­liv­ery play­ers like Gro­fers and Pep­per­Tap are among those which shut op­er­a­tions in smaller cities. While many com­pa­nies con­tinue to spend cap­i­tal, they are now able to di­rect the money to­wards build­ing long- term in­fra­struc­ture. “We are burn­ing cash on op­er­a­tions where we will lose un­til we build the in­fra­struc­ture. We have sig­nif­i­cantly re­duced the dis­counts, but burn rate doesn’t come down sig­nif­i­cantly if you shut smaller cities,” said Al­binder Dhindsa, co­founder of Gro­fers.

Some, like bud­get ho­tel ag­gre­ga­tor Oyo, have seen burn rates slide from $8 mil­lion a month in the last quar­ter of 2015 to $4 mil­lion re­cently, ac­cord­ing to sources. While this has been driven by ef­forts to con­sol­i­date the ag­gres­sive ex­pan­sion un­der­taken by the com­pany in 2015, part of it is also be­cause of the need to con­serve cash.

“Among our fo­cus ar­eas last year was build­ing scale and with over 65,000 branded ho­tel rooms in the coun­try, we have made sig­nif­i­cant progress. As the “net­work ef­fect” kicks in for us, we ex­pect to drive more ef­fi­ciency in the busi­ness and fur­ther en­hance our unit eco­nom­ics,” said Kavikrut, chief growth of­fi­cer, Oyo Rooms while de­clin­ing to com­ment on the burn rate.

Mon­i­tor­ing costs and im­prov­ing unit eco­nom­ics is also be­com­ing essen­tial for rais­ing more cap­i­tal. Take for in­stance home and beauty ser­vices startup Taskbob, which has cut burn rate by over 33% since Oc­to­ber 2015. “Fo­cus has com­pletely shifted from top line & rev­enues to sus­tain­abil­ity. Across all costs like op­er­a­tions, mar­ket­ing and re­cruit­ment we are care­fully eval­u­at­ing re­turn on in­vest­ment,” said CEO Aseem Khare.

This also meant that 16month-old startup has put on its plans to ex­pand to Ban­ga­lore, but go deeper into ex­ist­ing Mum­bai mar­ket to drive bet­ter unit eco­nom­ics even af­ter rais­ing a Rs 28-crore fund­ing round in Fe­bru­ary.

For now, on­line re­tail­ers have been able to bring down burn rates by cutting dis­counts, re­duc­ing de­pen­dence on low-mar­gin cat­e­gories like elec­tron­ics, build­ing ef­fi­cien­cies on lo­gis­tics and re­duc­ing cash re­turns through on­line wal­lets. And these com­pa­nies could look at more ar­eas to save money as they ag­gres­sively ramped up their teams and ex­panded into new cat­e­gories.

Among those now tak­ing cash burn most se­ri­ously are on­line mar­ket­places Flip­kart and Snapdeal

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