On Wednesday, the startup world was taken by storm when Snapdeal Founders Kunal Bahl and Rohit Bansal wrote a letter to their employees. But it was a storm that everyone was waiting for given the funding crunch, mass firings, and valuation drops for the e-commerce firm.
It was the year 2015. The Twitter wars were in full force - #SachinBansal v/s #KunalBhal were busy taking on each other for going #MobileFirst or not.
And while they were busy waging Twitter wars, Amazon India quietly grew its presence in the country. There began the murmurs about 'profitability', 'funding winters,' and questions on whether GMV is the right metric.
These murmurs turned to roars in 2016, when valuations were slashed, mass firings took place and the startup tigers began to hibernate. But on Wednesday, the drama reached a crescendo when Kunal and Rohit Bansal, Founders of Snapdeal, sent an open letter to their employees taking responsibility for the tumultuous situation in the company, and especially for the decision to whittle down the employee base in their quest for profitability.
According to a report in Livemint, Snapdeal’s losses more than doubled to Rs 3,316 crore in fiscal 2015-2016, while its revenue growth plummeted. Snapdeal had posted a 150-percent increase in losses from Rs 1,328 crore in the year ended March 31, 2015. Revenue grew by 56 percent to Rs 1,457 crore from Rs 933 crore in the same period, according to documents filed with the RoC.
Snapdeal has an employee base of over 8,000, which makes it one-fifth the size of Flipkart, whose employee strength is 30,000. Amazon's global workforce has 3,41,000 employees.
With Snapdeal now laying off 600 people and looking to approach 'lean' mode, one cannot help but wonder - aren't technologically-driven businesses actually supposed to be lean? However, according to sources inside the company, the pink slip has been given to over 2,300 employees, which is close to 30 percent of the workforce.
"The company will let go of these 2,300 employees in phases that will be completed by end of March," says a senior vice president who left the company earlier this month.
Sources say that fearing a possible backlash from disgruntled employees who were laid off, Snapdeal has arranged for additional security.
"I can sense security concerns mounting for the management. Bouncers along with additional security guards can be spotted patrolling the office premises," says a senior marketing executive working in the Gurgaon-based company.
Additionally, employees were advised not to come to the office in their own vehicles. "Instead of driving in, we commuted by cabs and autos," add three employees to YourStory on condition of anonymity.
This unsettling atmosphere calls to mind the situation in the startup world not too long ago when foodtech Tinyowl was going through a similar crisis. But do mass layoffs always cause so much fuss?
Chinese e-commerce giant Alibaba had fired employees from its global branches, including the Silicon Valley one, in the early 2000s. Similarly, Indian conglomerate Larsen & Toubro fired over 14,000 people between April and September last year. But neither company faced the sort of flak that some Indian startups attempting mass layoffs get, mainly because they went about it in a structured manner.
In a press statement yesterday, Snapdeal's tone was not so conciliatory, as it claimed the layoffs were part of the firm's efforts to become India’s first profitable e-commerce company in two years. It had also noted that the company had made substantial upfront investments in building e-commerce infrastructure, such as marketplace, payments and logistics platforms.
In the light of such developments, experts believe that startups should not bite off more than they can chew. K. Vaitheeswaran, mentor and Founder of India Plaza, an erstwhile e-commerce company, points out that if you want to grow 200 percent annually, you will grow the team accordingly. But if you are anticipating only 20-percent growth, you have to cut down on the staff too.
The best recourse to layoffs is being honest about the whole thing. Legally, you can lay off people from white-collar roles with notice pay in lieu of notice period, but a company can maintain goodwill by going beyond this. The quantum of compensation should be determined by the company based on its financial situation and the reasons for the lay-off.
Players in the industry, however, are not surprised by the turn of events. TN Hari, HR head of online grocery platform BigBasket, says,
“Existing businesses shutting down and new businesses starting up is the way of life. It does not make news. What makes news is when high profile companies with hype and a history of excesses begin to shut or lay off people."
The Snapdeal saga, as expected, has social media abuzz with speculation on the ‘e-commerce bubble' finally bursting. “But we cannot only hold the entrepreneurs responsible. It is everyone who has been a part of the ecosystem who is responsible for the mess, including the media,” quips Anuj Roy, Partner and Head – Digital Practice, Transearch India.
When one reads the letter sent out by the founders of Snapdeal to its employees, one gets a clear idea of what has gone wrong with not just Snapdeal but with the startup ecosystem:
“Over the last 2-3 years, with all the capital coming into this market, our entire industry, including ourselves, started making mistakes.
"We started growing our business much before the right economic model and market-fit was figured out. We also started diversifying and starting new projects while we still hadn’t perfected the first or made it profitable. We started building our team and capabilities for a much larger size of business than what was required with the present scale.
However, a large amount of capital with ambition can be a potent mix that drives a company to defocus from its core.”
The mistake, Anuj explains, was in assuming that the traditional way of doing business no longer works. “Everyone assumed that they would fuel growth through funding but then funding died and companies started struggling,” he adds.
Traditionally, companies are built around the fundamentals that if you make ‘X’ amount of money you should be spending lesser than X. This core Business 101 lesson has been swiftly swept under the carpet by most Internet companies in the face of excessive funding and unrealistic growth targets.
Everybody assumed that they will show growth as a metric and keep attracting investment. “Till you are able to attract the next round of investment, the investors also do not mind. But the challenges come when the bigger funds like Tiger and Softbank stopped funding,” Anuj explains.
“When you have any big global player entering the market, the local players need to give a compelling reason and differentiator for the consumer to choose them. And if you ask any of the Indian Internet companies, there is no such reason.”
E-commerce grows on three pillars - marketplace, logistics, and payments. Snapdeal has more than three lakh sellers on its marketplace; it had acquired Exclusively for premium fashion and Fashiate to improve the shopping experience.
However, after 18 months, buying Exclusively turned to be a bad decision for the company as the platform failed to make any mark. Exclusively shut shop recently. On the logistics side, Snapdeal had invested more than $20 million in GoJavas before it was acquired by Pigeon Express. Rumours have surfaced that Snapdeal's logistics arm, Vulcan Express, will be sold off to Delhivery soon.
For payments, Snapdeal had acquired FreeCharge, which was at its peak in 2015. But all these resources were still not enough for Snapdeal, what with Flipkart's logistics arm Ekart becoming the country's largest e-commerce logistics provider, and its payment wallet, Phone Pe, establishing itself as a strong competitor, already planning to raise funds from Paypal.
In 2016, Snapdeal lost fashion portal Jabong, which it was in final talks with for acquisition, to Flipkart-owned Myntra. Earlier this month, Snapdeal’s C2C platform Shopo shut down.
Finally, Snapdeal’s omni-channel strategy and multi-lingual platforms seen as a differentiator was announced in December 2015 but did not take off.
So, when its rivals Amazon and Flipkart started growing, Snapdeal had no differentiator in its business model. A former employee says that their omni-channel strategy which was announced towards the end of 2015 never took off - something which would have otherwise helped them stand out, considering none of their competitors are doing it yet.
While creating innovations in-house would take a long time, acquisitions often come with the advantage of a well-established customer base.
Despite spending Rs 200 crore on rebranding in September 2016, Snapdeal was not able to beat its arch rivals Flipkart and Amazon in the festive season sale in October. Besides, its losses more than doubled from the previous year, to Rs 2,960 crore for the financial year ended March 2016.
Snapdeal has a strong logistics game on, due to its home-grown arm, Vulcan Express. According to studies by PwC and Red Seer Consulting, Snapdeal is the fastest in delivery among e-commerce players in India. However, with the recent developments, this seems like another lost opportunity.
Some sources blame the company's autocratic structure for all its misfortune, with former employees saying the founders were incapable of running the firm. “Kunal and Rohit never allowed others to participate in decisions or shares. Many of the senior officials have left Snapdeal - even those with five years’ experience there, due to the autocratic structure within the organisation,” a former employee says.
Some blame the lack of a healthy workplace culture.
"The money was not shared with anyone - not even the exit money, which was promised to the leaving ones. The founders took it all. In contrast, Flipkart is more democratic and inclusive. Snapdeal was never bothered about building a culture; it never focussed on its people," a former senior employee adds.
Fund crunch was not just due to massive discounts but because of the top circle drawing huge salaries. Rohit and Kunal before taking the 100 percent salary cut were drawing Rs 46 crores each.
Hari of BigBasket points out that the bad rep some startups have been getting is not due to the decisions it made as a company but because of its lack of transparency in going about implementing them. If the company had to let go of people, but had avoided excesses and was truthful and open in its communication to its employees and the outside world, such a situation may have not risen, he adds.
Snapdeal's core strategy was to sell online through sellers' inventory by reducing costs. It had also tied up with UrbanClap, Zomato, Cleartrip, Uber and redBus to offer extra services. But a lack of traffic resulted in no revenue being generated from it. Snapdeal will now have to stop these services, or de-prioritise them.
Snapdeal's massive spends included PR initiatives and expensive branding campaigns. Hiring Anand Chandrasekharan too was seen as image building measure against Flipkart's decision to hire Punit Soni, a high profile Silicon Valley executive.
“Snapdeal should have taken an external, professional CEO long ago - now it is too late. Investors should take charge—like Tiger Global did for Flipkart—to ensure profitability. In Snapdeal's case, SoftBank wrote them off,” says the former employee.
Innovations can't work without a decent business model. Sources claim that Alibaba would enter the scene by merging Snapdeal and Paytm's e-commerce arm by Diwali. It will, however, wait to see how profitable the core model can be.
The next wave of startups has already begun. In the backdrop of high valuations and lack of profitability shown by many players in the sector, e-commerce will take a backseat now and many investors will start to focus on data-driven startups. Investment decisions will also be made on business model, tech, and vision.