Bengaluru: Last week, Japanese telecom and internet behemoth SoftBank bought stake worth about $2.5 billion in Flipkart, making the Indian online marketplace the third most funded private company globally. Flipkart has raised about $7 billion so far, and it’s among the top 10 consumer internet companies that have raised more than $14 billion cumulatively in the last five years. The cumulative annual revenue of these companies for fiscal year 2016, however, is less than $3 billion.

With the help of data analytics firm Tofler, examined revenue filings for the financial year 2016 with the registrar of companies, and found that consumer internet companies or B2C startups seem to have attracted funding, but it’s the workhorse B2B – business-to business or sale of products and services between businesses – startups that are racking up revenues without much investment.

For instance, online car dealership aggregator CarTrade, founded in 2009, has raised more than $225 million (over Rs 1,440 crore) from investors. The company reported revenue of Rs 39 crore ($6 million) in FY2016. Nine-year-old online classifieds ad platform Quikr, which has raised $350 million (Rs 2,200 crore) and is valued at $1.5 billion (over Rs 9,600 crore), declared revenue of Rs 95 crore ($14 million) in the same period. Messaging app Hike has raised $250 million (Rs 1,600 crore) since it was started in 2012 and has revenue of Rs 35 crore ($5 million). This holds for most of the top 30 highest funded consumer internet startups in India.

Higher revenues with lower investment

In contrast, B2B companies seem to be doing better in terms of revenue though they do not always raise as much funding as B2C (business-to-consumer or companies that do business directly with customers) startups. An example is Power2SME, which was founded in 2012 and links small enterprises in the manufacturing industry with raw material suppliers. It raised $35 million (Rs 220 crore) — a measly amount compared to the dollars flowing to consumer internet companies — but has revenues of Rs 310 crore ($48 million). The company says it is close to being profitable.

Cloud telephony company Exotel, founded in 2011, raised less than half a million dollars and reported a revenue of Rs 28 crore ($4 million) in FY2016.

Logistics startup Delhivery, which has raised almost as much as CarTrade or Hike since it was found in 2011, declared revenues of Rs 524 crore ($81 million) during the same period. Delivery’s revenues are within touching distance of those of cab hailing company Ola, which has raised almost $2 billion (Rs 12,800 crore) since it was founded in 2010.

Another logistics company Blackbuck has reported revenue of Rs 78 crore ($12 million) for the same period, having raised $100 million (Rs 640 crore) since it was founded in 2015. This is double the revenue of Hike, having raised just a third of the capital the messaging app has.

Similarly, logistics solutions provider Ecom Express raised $150 million (Rs 960 crore) in five years and has revenue of Rs 359 crore ($55 million).

Shift to b2b

Not surprisingly, entrepreneurs as well as investors seem to be turning their gaze to B2B companies. In 2014, the peak funding period for Indian startups, IT industry lobby Nasscom found that 65% of startups founded then were in the consumer internet space, a percentage that has now dropped to 50%. “Entrepreneurs are slowly moving to B2B ideas,” says K S Vishwanathan, Nasscom’s head of startup programme. “Unless you bring in operational efficiencies in India as a country, it is tough to grow fast and make profits for consumer companies,” he says, adding that B2B startups have been more capital-efficient in India.

Negligible digital payments

Mohan Kumar, Executive Director at Norwest Venture Partners, says the goal post for consumer internet startups to achieve their earlier revenue projections has been gradually and conveniently shifted to 2025 or 2030. “Everyone made a wrong call,” he says. In sectors like online hotel, flight, film and event bookings, consumers willingly paid booking charges for the convenience. For online services that were not irreplaceable, consumers were not as willing to buy online once the discounts went away, he explains. Norwest has investments in consumer internet companies Quikr and Pepperfry.

The Indian economy is seen not to have the depth to absorb so much capital in the internet space over such a short time. Only 5% of Indians make digital payments. In the US and Europe, two thirds or more of the population use digital payment methods.

“The main reason for the losses for B2C startups is the cost of customer acquisition in India. The cost of acquisition is similar to developed markets but since the purchasing power in India is lower, companies generate lower revenues here. That is the biggest challenge they are facing,” says Rutvik Doshi, director at Inventus Capital Partners.

Betting on market size

K Vaitheeswaran, founder of India’s first e-commerce company Fabmart, which was later renamed IndiaPlaza, says India is a large market but the potential is not as large as most people think. “Most of these investments were based on the expectation that someone will buy the company out,” he says, adding that some early investors will make money not because the company is successful but because there are people willing to buy them out based on the fallacy that the Indian market is huge.

Kumar of Norwest says entrepreneurs and investors were ambitious in believing that consumer behaviour could be changed by throwing money at problems. He says there will be many survivors in the Indian consumer internet space, but they will remain over-funded and under-performing companies.

For B2B startups, everything depends on the product, since the other business knows exactly what they want. Some B2B startups are targeting US and European markets, and tasting success. “In B2B, discounting will not get you consumers as enterprises look for stability,” says Kumar.

Blume Ventures, the early stage investor that has made the highest number of investments in the last five years in the country, has seen B2B performing much better in its portfolio. “In our first phase of investments, among our top 15 successful startups, 12 were B2B. We had invested money equally in consumer and B2B companies,” says Karthik Reddy, managing partner at Blume.

Kumar cautions that B2B firms should aim to be profitable from Day 1. “When their revenue touches Rs 100 crore, the loss should not be more than 10% of the revenue. At Rs 300 crore, the company should be EBITDA-positive (earnings before interest, tax, depreciation and amortization) and at Rs 700 crore revenue, it should be making net profits. Otherwise there is something inherently wrong in the business model,” he says.

Source: Times of India