Online food delivery service Swiggy now also drops groceries at doorsteps, so does cab aggregator Uber, which along with rival Ola, is offering emergency rides to hospitals as well. Scooter-hailing firms are cutting down their fleets by selling vehicles or giving them on a long lease.
The Indian startup space is going through a churn, or a reawakening if you will.
The rules of business dictate that a company’s objective is to make money in exchange for a good or a service but in the last few years, startups were doing anything but that. Amid deep discounting, free orders and large fundraises, profitability was a long-term goal at best and invisible at worst for these companies busy spending money to attract customers.
But the coronavirus outbreak that has wrecked the economy has sent them scurrying to the drawing board to do what businesses have done for centuries: make money.
Even for India’s unicorns--firms valued at a billion dollars or more—recent decisions are aimed at making their businesses viable or at least slash losses.
Swiggy’s move to deliver groceries and liquor is an attempt to better utilise its fleet of riders as the food-delivery business takes a hit. Though allowed back, Ola and Uber have struggled to see the business pick up as people prefer to stay home, worried over rising coronavirus infections. They are exploring alternative revenue streams. Uber has found it in delivering groceries and parcels.
The move into newer business verticals is driven by firm goals and is not yet another experiment, which many startups indulged in when investor money was more easily available.
Last week, Swiggy’s rival Zomato shut down its grocery delivery arm barely two months into business to refocus on areas where gross margins are sustainable. Zomato, however, is delivering liquor in some parts of the country.
“The revenue models in food delivery are not sustainable. No wonder most of them are trying alternate businesses. The commission charged by these companies from restaurants is already very high. If they cannot make money from food delivery, can they ever make money? Maybe these alternate business channels will help,” said an industry executive, requesting anonymity.
Cloud kitchens, or delivering food from low-rent kitchen spaces, with no dine-in option, was another such trend. However, Swiggy, logistics firm Shadowfax and hotel chain Oyo have either closed cloud kitchen verticals, fired employees, or reduced operations to a fraction of original.
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Most startups are focusing on their core revenue-making activity. Those who are exploring new lines are doing so because their current business is not making money.
“While the stress continues due to the pandemic, startups are rejigging their business strategies, verticals and are trying to revive innovation to earn money and maintain revenue streams. They will also need to do this to maintain investor appeal for funding at some point in time,” said Dipti Lavya Swain, partner at law firm HSA Legal.
Down to brass tacks
Their new-found priorities are also evident in the metrics the startups are now chasing. From vanity metrics such as gross merchandise value, the number of downloads and transaction volume, which can often be misleading, most are now looking at cash burn, revenue growth and customer retention.
“Companies are now focused on economics and have realised that the days of discount-fuelled selling is over. During the lockdown, we have seen companies reduce discounts and even start charging for delivery in some cases,” said Ankur Pahwa, partner and consumer internet leader at EY. “Building sustainable businesses and focusing on unit economics will be the new reality.”
Customers’ willingness to pay for value-added services will aid their attempt to increase revenue. “Consumer behaviour is adapting to digital-first services and the fact that some of these services, like early delivery and orders of lower value, may come with delivery costs. This behaviour will likely benefit these companies,” Pahwa added.
Over the years, several startups have begun to resemble big businesses but without their financial muscle. These companies hire the best talent, match their salaries with those paid by MNCs and have large offices in prime commercial areas. This way of life, also generally funded by investor money, is being revisited.
A fresh graduate from a top Indian Institute of Technology got a Rs 30 lakh offer from a Bengaluru-based startup in February but the company yanked it after the pandemic broke.
“Startups have almost become as big as large corporates, without the strong revenue models of the traditional companies. Startups have hired very aggressively in the past. Founders should take this opportunity to rethink their strategies around hiring and team building,” an industry executive said, requesting anonymity.
Many consumer-internet firms have built asset-heavy businesses, the antithesis of an internet-driven firm, which seeks high valuations and growth based on lean models and little physical assets.
More startups are now going asset-light since servicing debt is becoming a challenge for companies with low cash flows. Scooter rental firms Bounce and Vogo and bike-hailing firm Rapido are selling off their vehicles and renting them out on long-term lease.
For most consumer-internet firms, anything less than doubling their user base every few months, or every year, was frowned upon by them and their investors.
Swiggy, for example, tripled its revenue to Rs 1,128 crore but also saw losses rise six times in a year to Rs 2,367 crore in FY19. Similar stories played out with most companies valued between $100 million and $5 billion.
On the other hand, the startups that grew at 30 percent a year while making money may survive in the long run but they will never hog headlines or got the large funding rounds. The coronavirus has pushed many such firms into a survival mode with modest expectations. Their primary goal is to outlast the pandemic.
Funding, the final frontier
Most, if not all, of the recent decisions taken by startups to be lean stem from the reality that unlimited fundraising may no longer be possible. Early-stage companies are seeing large investors go slow on new firms. They are reserving cash mostly for their own portfolio companies.
Venture funds have classified their portfolios broadly into three categories —startups that cannot get fresh funding and the future is unclear; companies that will be able to pull through with some booster funds and those that have either benefited due to the viral outbreak or are in a strong financial position, say sources.
Investors also say that while some of these calls-- on not funding firms or giving a lower valuation—were driven by the pandemic, many of these decisions had been coming for a while now.
It is the extent of cutbacks that took some investors by surprise. “VCs (venture capitalists) have become like private equity funds. They are asking companies to focus on making money, surviving the pandemic, and are propagating general conservatism, generally rare among VCs,” a banker advising on technology deals said, requesting anonymity.
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