E-commerce companies also perpetuate frauds
The so called Indian E-Commerce is at an inflection point. The arrest of Stayzilla founder Mr. Yogendra Vasupal have sent tremors and shock waves amongst Start-Up founders, Private Equity Firms and other stakeholders including employees. The company, Jigsaw Advertising, that filed the FIR in Chennai claims Stayzilla committed fraud and embezzled funds.
Inspired by Stayzilla episode Dream Merchants, an Events Company which organizes Bengaluru Fashion Week, filed a case against founders of Snapdeal for failing to pay Rs 25 Lakh [$ 38,783.44] and violating contractual obligations. According to Dream Merchants, Snapdeal reneged on its contractual obligations quite late and failure to pay in effect tantamount to cheating. Additional Chief Metropolitan Magistrate has issued summons to founders and nine other executives of Snapdeal to appear before the Court.
Easy money flowed into Start-ups over the last decade. Many promoters were able to fund their way into acquiring customers, selling products and services with complete disregard for a viable business model and financial statements. Having dug themselves in a deep hole, they are feeling deleterious effects of non-availability of funds. Many are falling behind on vendor payments and salaries. And Vendors are quite aware of the machinations of promoters many of whom cannot differentiate company bank accounts from personal bank accounts. And so the inevitable question needs to be asked – Are Indian E-Commerce Start-Ups F-Commerce or Fraud Commerce companies? Are entrepreneurs starting e-commerce companies with a “get rich quick” intention or are they are really in it for the long haul with a long term strategy to build a successful business?
Snapdeal and Flipkart, modeled after Amazon, are in merger talks to better compete with global giant. Big Basket, another e-commerce firm that received a large funding from PE firms.
Truth be told, most Indian e-commerce firms are C-Commerce companies or Copy Cats. None of the ten Unicorns except for data analytics firm Mu Sigma is a pioneering idea or has anything to showcase as a spectacular innovation or exceptional operations. And many of the entrepreneurs are in it for the short term with sole intention of making big bucks quickly. From being a middleman offline, they are now intermediaries online. Hence most are interested in acquiring a large customer base quickly in order to sell out to their bigger competitors or new entrants with a brand name and deep pocket.
MKhoj, reborn as InMobi, , is by far the most successful E-Commerce company competing with behemoths Google and Facebook in mobile advertising. PayTM, an e-wallet company modeled on US Firm PayPal, is another successful e-commerce firm but whether it can survive an onslaught of app based banking by traditional bankers will be known in the next two to three years. Taxi for Sure was bought out by Ola a couple of years ago. Both business models are similar to that of global competitor UBER which pioneered the app based cab services. Snapdeal and Flipkart, modeled after Amazon, are in merger talks to better compete with global giant. Big Basket, another e-commerce firm that received a large funding from PE firms, is similar to WebVan the online grocer that went bankrupt way back in 2001 within five years of starting operations. With Amazon deciding to enter online grocery business in India, a similar fate might await Big Basket. Most other service providers are operating on cost plus model. Once the customer places an online order, buy it from a brick and motor retail store with a cost mark up and deliver it at home to the comfort of the customer. Quality suffers most times that have left many fuming.
The entire e-commerce machinery fails to deter fraud and has become a conduit for fraud commerce
Despite recent optimism surrounding the Start-Up India initiative, it is clear that E-Commerce in India is nothing more than a glorified, jazzy website burdened with brick and mortar issues ranging from lack of governance to fake/counterfeit products being sold to deceit and fraud. At Indian E-Commerce companies, customers pay the price for fake/counterfeit goods, damaged products being delivered, products with sub-par quality sold on the website touted as being manufactured by a leading producer with proven quality credentials whereas in reality the products are bought at second hand/used markets like J.C. Road in Bengaluru, Chandni Chowk in Delhi, Chor Bazaar in Mumbai, Burma Bazaar in Chennai etc.
At times, Companies themselves are also victims of fraud since cartels of ‘fake’ customers buy electronic goods, claim defective delivery, reorder the goods and disappear without returning the original purchase. Employees and third parties who work at or with e-commerce companies also perpetuate frauds in connivance with their friends, families etc. In short, the entire e-commerce machinery fails to deter fraud and has become a conduit for fraud commerce.
Both founders of startup entities and private equity firms that fund such start-ups are to blame for the poor or non-existent governance mechanism. Founders see their entities as a get rich quick scheme whereas PE funds are waiting their time for an exit and dump the company on to a set of gullible retail investors. Sadly, professional advisers (accountants, deal makers and lawyers) instead of alerting and educating investors about the perils of such start ups are active participants in hyping so called ‘innovation’, over valuations and ‘unicorn’ status.
For Start-Up India to thrive, there needs to be a sea change in funding, governance and regulation. For now, it is best if stake holders in Start-Up eco-system sort out the mess, introduce strict controls and enhance corporate governance while keeping government regulators at bay.
Note:
1. Text in Blue points to additional data on the topic.
2. The conversion rate used in this article is 1 US Dollar = 64.46 Rupees.
3. The views expressed here are those of the author and do not necessarily represent or reflect the views of PGurus.
He tweets at @envyk_blr.
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So in short it is “Gloom,Boom& Doom” for e-commerce cos aping MNC giants as well as for all startups who don’t start with a robust financial model of not relyin heavily on PE/equity even for opex etc.
Good article but as typical with this website one has to suggest alternatives,+ve aspects as well and not limit to a generic solution like overall cleanup/overhaul etc which for most part infeasible in today’s setup.