Ecommerce Entrepreneurs : Choose your investor wisely!

3:31 AM Suvir Sujan 4 Comments

Everyone I meet today wants to start an ecommerce company - groceries, furniture, jewellery, mobiles, handicrafts, carpets, toys, food, diebetes monitors, stationary, and the list goes on and on.....And there are investors flying down from New York , San Francisco, Delhi, Mumbai and Bangalore, meeting many of these budding entrepreneurs with a blank cheque book asking "how much?".

There is no doubt that the internet has reached critical mass in India today. And ecommerce is very important for the country as it has the potential to leapfrog the inefficiencies of rolling out traditional retail in an infrastructurally challenged country like India. But creating an large ecommerce company is non trivial. For every Amazon created, there are thousands of boutique ecommerce companies that couldnt scale. This ratio is going to be very even more stark in India give the complex supply chain, cost and complexity of delivery, cost of Cash on Delivery (many shoppers dont use thier credit cards to shop), high marketing costs, cost and complexity of enabling returns, low switching costs, state taxes, which all add to the challenges of running a profitable ecommerce company.

I have no doubt that many ecommerce entrepreneurs will be able to raise thier initial financing due to the hype today. But if they are not able to continue to attract future financing/capital, there will be no choice but for them to scale back significantly or shut shop given the challenges articulated above. Early signs of this has already begun. I personally know of a few ecommerce companies that got funded in 2009/10 who are unable to raise further financing today primarily because they have not been able to demonstrate that they can scale on various dimensions and/or show a clear path to profitability and are now contemplating a fire sale. I predict that this trend is going to magnify in the coming years.

Word of caution to the ecommerce entrepreneur - don't take external institutional capital (bootstrap as long as you can), till you are convinced that you have understood the challenges of building an large ecommerce company and convinced that you will be able to build a large profitable company in the long run. If you cannot bootstrap initially, take money from friends and family or institutions whom you think will be able to help you address the challenges menitoned above to be able to build a large ecommerce company or will be open to you scaling back and continue running your company and not pressurise to shut shop if you cannot grow fast enough, show path to profitability and/or raise further financing.


iceman said...

Interesting post Suvir. I think the challenges you have described are very real - maybe one has to think of alternative mechanism to create a successful ecom venture, copy pasting the offline mechanism online won't do it. Again, most ecom ventures will take a few years to breakeven meanwhile requiring fair amounts of capital - case in point flipkart did around Rs. 10cr of topline and Rs. 95 lakhs of loss last year which means that the need for capital would be fairly meaningful in the initial years itself - the backend costs. It may not necessarily be possible for an entrepreneur (who typically does not have a high corpus of funds at his disposal) to bootstrap beyond the very short term. Would love to heard your thoughts on this.

Suvir Sujan said...

I agree with you. IF there is not enough funds available to bootstrap, then try and find investors at the early stage who will not force a shut down if you cannot reach a certain scale or raise another round.

Sandesh said...

Where can one find such investors. Angel Networks ?

vijitha said...

Thank you for the info. It sounds pretty user friendly.

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