Startups

Employers routinely hand out pre-drafted agreements that contain clauses like: You will not be employed in a firm that competes with [Company] for a period of two years after the termination of this agreement.” These clauses are supposed to deter employees from joining competition and taking away years of effort in training and what not.

Some startups are trying to get over this by creating non-compete agreements their employees have to sign.

Not Enforceable?

While this may be legal in some parts of the US, such contracts are almost definitely not enforceable in India. There is an “Indian Contract Act” in which there is a Section 27, which states that you can’t deny a person the right to livelihood. Restricting a person from working, even with a competing firm, for a few years, is a restriction on that right, as many judges have ruled.

You can read these two links to see case history on what other people have tried:

• LawyersclubIndia on Non Compete Clauses
• MajumdarIndia paper

Case history shows how the courts have frowned about restrictions after the termination of a contract. Courts understand that employees have little bargaining power at the time of signing a contract and will sign what they are given, or stand to lose a job. In one case in 2009 where the company said they wanted to protect their trade secrets, the court said:

the High Court ruled that in the clash between the attempt of employers to protect themselves from competition and the right of employees to seek employment wherever they choose, the right of livelihood of employees must prevail.

Employees should resist signing non-competes, but in the choice of that or no-job, might as well sign knowing that the contract is illegal and unenforceable. (And you can say it as much over an email to have it on record)

Yet, I’m not a lawyer. So my opinion should be taken as such.

The Fear Factor

One reason for an employer to offer a non-compete is that employees are afraid they’ll get sued, so they won’t go join competition.

After going through a long civil case recently (eviction of a non-rent-paying tenant) I have realized that much about the fear of the law and courts is overrated. The fear that someone will take you to court is a misguided one.

People, and educated folk, are afraid they will have to spend years going to court, even if they are likely to win. And that it will cost so much money. An understanding of the legal process is probably way off-topic for this blog (and I’m not the right person to explain) but it’s not as bad as it sounds. Even if a company does sue, the cost isn’t much. Lawyer costs at lower courts aren’t too high. Your new employer might even bear it for you! (If you’re worth suing, you’re worth defending)

What about the future?

One fear is that the law can be changed, and such contracts suddenly become enforceable. However, laws don’t generally change to disadvantage people that much – after all, the right to livelihood is a solid argument. At the very least I expect that an employer will have to pay your market salary or more, even in the off-chance that they allow non-competes against employees enforced (highly unlikely in my opinion).

What do startups do?

Don’t bother with non-competes, unless some investor kicks up a fuss. Then do non-competes but tell your employees how it is.

Then how do you protect your company? Answer: keep secrets when you must. People will leave. People you trust. You have to let them go if they will, or make them want to stay.

They will demand obscene salaries. Raise the money. This is why you exist, as an entrepreneur. If you think they deserve the pay – if their obscene demands would have been met if only you had the money – then it’s your job to raise it. I know I will face this problem, because people are motivated by money or by the belief that they are contributing to something that will change the world. If you truly are changing the world, you will easily raise money. Either ways, you need that money.

Secondly, put reasonable redundancy and security. Make sure employees take holidays – that way you know what happens if they’re not around. Put up proxy servers and track traffic, even if you aren’t likely to use it (I once found a massive issue with a couple guys through chat transcripts – they were planning to steal our code and such.) You gotta trust people until someone betrays you, and then you need to have that audit trail to figure out everything that person did!

Finally, work on making people want to stay. At a service company, my ex-boss would do this – everyone gets a one-year salary as a bonus if they stuck around for three years. That way, after two years, when the employee was at his productive best, he wouldn’t leave for another year at least – the prospect of getting a large amount for just another 12 months was too attractive. This may not work for you, but you can do other things – remember though that how you motivate people ensures they will stay or leave. (People usually leave their managers, not their companies)

This is off-topic, but it came to mind today. Back to regular programming after this.

Is there something really bad happening with e-commerce companies? Recent developments indicate that the space is now going through a massive correction, and a crisis of confidence.

In Trouble

Arindam Bose, founder of TimTara.com has been arrested along with the company’s CEO, Harish Ahluwalia, for supposedly defrauding customers who paid for orders through their credit cards, but didn’t receive goods. The scale of the fraud isn’t very big – just Rs. 82 lakh from one source. (It has appalling English, but you’ll get the point)

The curtains have begun to close on SeventyMM, the online retailer that started off as a movie rental service and ended up selling pretty much everything they could. It’s raised over $21 million till date, but with the lack of further funds, might shut down soon, reports NextBigWhat.

One of the oldest players in India, Indiaplaza, seems to be in trouble and needs $5 million to stay alive. I used to buy from it over 10 years back when it was called FabMall; and this is not the first time they’ve seen serious signs of trouble. Yet, the funding environment for such startups is weak, so their future depends on their ability to make someone other than customers pay.

Consolidation

In lesser known cases, Hoopos.com merged with Babyoye.com so they could secure funding – a case, it seems, of either die separate deaths or live to fight another year.

LetsBuy merged with Flipkart, and because they shared common investors (Tiger Global and Accel) the theory was that the investors made them do it.

Naspers-owned Tradus bought Naspers-funded BuyThePrice.com earlier this year, Myntra bought Exclusively.in,  FashionAndYou bought UrbanTouch.com and then shut it down. The list is getting larger.

TechCircle even has a list of potential mergers in 2013 based on common investors.

A larger single player is better in a capital intensive model like online retail, so no matter what you might say of investors calling the shots, the idea of a merger is sound. In a time of crisis, it’s better to concentrate your bets and focus on being the last man standing. In good times, you can spray and pray.

Another big challenge is regulation. With foreign investment in multi-brand retail e-commerce being illegal, companies have created complex mechanisms to skirt the law. Some act purely as marketplaces, not actually selling goods but just handling customer acquisition and payment intermediation. Others put the foreign investment into a wholesale company which then sells to a “retailer” that is only a shell company in the Indian promoters’ name – which then sells the goods to the end-users. All these are quasi-legal, and attempt to stymie regulation.

My Thoughts

The fear of fraud – that is, a company taking your money and then not delivering the goods – is now more real than ever. Trust is essential to e-commerce. E-Bay’s India portal even offers to keep money in escrow until you receive your goods. Retailers fear that customers will order and not-pay – that’s one of the biggest problems with the “cash-on-delivery” model – you incur the cost, but goods get returned. However this two-way-fear is what will hinder even the biggest of companies in the space.

The fear of fraud is greater in India: recovery can take years. And, if court cases drag out that long, it will also mean that founders and other directors will have cases on them for that much time as well – something e-commerce VC funds (who put directors on e-com company boards) will want to consider (Imagine checking a box saying you’re facing a criminal case in India in your visa application).

E-Com players have started to cut discounts, and most think they have brand loyalty because of “convenience” or some such thing. While availability helps because you can’t get goods from local retailers that you can online, that assumptions is largely theoretical because I’ve recently looked for a number of different things from toys to mobile phone to bake-dishes to swimming caps, and in all cases, offline retailers seem to have the variety.

Price beats the crap out of convenience for the masses, in my opinion. There are only two exceptions – where service is exceptionally fast (like your kirana store for buying one or two small items) or where the difference in cost is marginal. E-Commerce shops by definition have a huge service disadvantage compared to offline shops, and in my opinion they haven’t really tried to arm twist manufacturers into letting them discount products much more. Unfortunately, their bloated cost structures and continued mad-growth focus doesn’t allow them to get that much more efficient, which is key to making any profit in this business.

Regulation arbitrage is stupid. All of these players want to be either India’s next Amazon.com or get acquired by it. Yet, once regulation eases up, these companies will set up their own portals since they have way better supply chain capability.

With the Indian government banning FDI in e-Commerce specifically, companies like Flipkart are getting investigated. (which resulted in their selling off the promoter owned front-end retail company to an outsider so they can comply with the rules) Investors are worried because the negative impact of the investigation means they are toast, and the positive is only that they can continue being what they are – the downside is huge, the upside is very small. Given this, the expected action is to tighten the purse strings and say “later”, exactly when the capital intensive business needs continued money to last out a long-drawn battle.

If there is an e-com crash – no, “when” there is one – the impact to jobs will be felt, but remain small. While many have large numbers of technical staff, the biggest numbers of hires is in things like delivery, or elsewhere in the supply chain. However, while this might sound very big to the media, it pales in comparison with losses in, say, the textile export sector a few years back.

While there is a large market in India, I think there have been simply too many e-commerce companies, and this is just the start of the end-game. Eventually the landscape will change, new companies will arrive and the old ones will die. I believe the situation was “bubbly” – I had called the Indian internet a bubble in 2011, when Flipkart was supposedly valued at $1 bn. More thoughts on that meme after being on a TV panel last year. We’re now getting to see the real picture; what are your horror stories in the e-com landscape?

I was a mentor at a “Lean Startup Machine” conference recently, where people got together, formed teams and do a first layer of customer validation (“Get Out Of The Building”) for their idea. One of the key concepts of “Lean” seems to be that you don’t spend too much time imagining what can be; instead, you get to the market and if you have to, fail early. Or “Pivot” into new strategies after you hear from your market.

The teams were excellent; one was formed to get doctors for quick advice, another to sell excess stock of IT products that vendors grapple with, and yet another was a local search engine. The businesses weren’t, sometimes, apparently scalable, but they had potential and many of them pivoted even before their own presentation a couple days later.

I presented about being lean – financially. Like a complete dumbass, I didn’t consider time properly and couldn’t finish what I started out to say. So I’m writing about it – the five myths of being Lean, money wise.

What Do I Know?

Everyone should ask this question. Because everyone with a frikking keyboard has an opinion on how startups should be run. Not everyone’s advice is valid, or useful, and more importantly, you have to learn from what people did, not what they think.

I am not a hugely successful startup guy. So if that disqualifies me, stop right here and go your way. I’ve never gotten “funded” by venture capitalists. Another disqualification. I’ve very little idea what happens when your company grows to more than 50 people, because I haven’t built one of that size myself.

I’ve started up thrice – a software services firm, a market information company that became an algo trading firm, and now market education and big-data analysis. I’ve been in startups since 1997 – either one I founded or one I was an early employee in, with the latter just three years in the whole span. I know about the small stuff because I was neck deep in the small stuff, like negotiating with customs officers, getting customers to pay on time, talking to banks about bridge loans and working through hiring and firing. I’ve been lean because you have to when you have no money – all my startups started out poor.

Myth #1: You can start with nothing

I did, in 1998 and 2007. I didn’t have much, so I decided “what the heck” and started up anyhow. This is stupidity. In a lot of ways things have changed dramatically.

Earlier – probably a decade back – the biggest cost of a tech startup was building the darn thing. We built an accounting package. The cost of the hardware needed just to test various scenarious (Windows 98, 2000, “ME” and what not) added up to a  couple lakhs then (which is way more than what a couple of lakhs today would buy you). The rage was Hotmail and early Google and all that. You built a good thing – and it cost you a lot to build it in the first place – and then people would come. You did “viral” marketing. People in India came cheap – at Rs. 15,000 per month you could hire a developer, and it was a small cost compared to hardware and all that.

Things are different today. It doesn’t cost that much to build, or deploy. You get hardware for a very low cost (from Amazon Web Services and the like) and tons of open source software that lets you get started for a very low cost. Laptops are cheap – you can get a developer machine for less than Rs. 40,000 today – I remember paying more than Rs. 100,000 for mine in 2003, and even that was specially imported under a zero-customs-duty license.

And because it’s so easy to build stuff, you have massive competition. People can copy and turn things around relatively fast. A new feature takes a few hours to implement and deploy, no matter how many customers you have. The cost has now moved to the other stuff – marketing, positioning, alliances, branding etc. People are no longer inexpensive in India – the minimum you will pay a good developer to work at a startup could be Rs. 50,000 a month.

Marketing costs have skyrocketed. Your lovely little must-have app has about 400,000 others competing for limited real estate on a mobile screen. Your domain name is nothing. Google ads are expensive. Facebook ads are a black hole. If you build it, they will stand far away on the highway and admire your startup as part of the general landscape but they will not frikking come, because they have a hundred other places to go to. You have to make them, and it’s going to cost you.

Startups today could need serious operational or capital expenditure. Instead of expensive computers, rents have gone up. Embellishments not required earlier – like Air conditioning in Bangalore – are now essential. Travel costs are more nowadays, not because the ticket costs are greater, but because they’re low enough for customers and investors to meet in person constantly.

Regulation adds more compliance costs. You have to pay someone to take care of the formalities of filing Service Tax, VAT, Professional Tax, Income Tax, PF/ESI and other such returns – it’s not that this didn’t happen earlier, it’s that this stuff has gotten more complex now.

When you startup, much of this is not visible. I can build that app if I hack together a couple of PHP pages on top of a WordPress content engine and put in some free databases; the cost of doing this is fairly clear. The cost of getting 1,000 people to your web site to actually transact is just a wild guess in a cell in an excel sheet – it will change by more than 50% once you actually do it.

And what about your costs? I was stunned when at least 30% of the people in the room said they have families; more dependants means that you need money in the bank for yourself while this startup thing works out. A thumb rule is: 18 months of personal expenses are what you need in the bank, apart from what you’ll put in the startup. If you don’t have that – wait to collect it, or be stupid like I was in 1998 and hope for some awesome luck.

How much do you need for your startup? Well, you know the excel drill – put all of your imaginary costs in a spreadsheet. Store this for posterity because it will be a source of much laughter five years later. And then, take the final figure you think you need, and multiply by 2. This is not me being sarcastic; In reality you might find the multiple to be many times greater than 2. You need the buffer.

Myth #2: Revenue or “Traction” is supreme

Focus on revenue, you hear, and everything else will fall in place. You’ll find investors. You’ll be able to reinvest the money in your startup. You can get eyeballs – a metric that was beaten to death in 2000 and which has reemerged now – and thus get a funnel to sustain future growth. You can target marketshare, like “I’m the #1 web site for people looking for left toenail clippers”.

While this is relevant, my belief is that the one thing you should focus on is Cash Flow.

Let’s say you find a customer willing to buy your product, but he’ll only pay you after 90 days. Your costs of delivery for those 90 days are Rs. 500,000, and the customer will pay you, say, Rs. 800,000. If you don’t have the 500K, you’re finished; you can’t even last the 90 days needed to collect your revenue. You might look to get a bridge loan from a friend, saying, give me 500K, I’ll return you 550K in three months – a fabulous return to the friend, but you still make a good profit at the end. You could utilize a bank overdraft – more on this later. You might request an advance from the customer. Whatever you do, the deal here is to focus on cash flow, not just revenue or expenses.

On an accounting perspective, taking an advance for a service given over 12 months means you split the money 12 times and post an entry every month. The unused amount is a “liability” until you finish the 12 month. But from a cash flow perspective the advance is the difference between the full amount (since you can deliver) and zero (if you can’t).

You might need to buffer this in with an equity investor, of course, and this is nowadays the preferred option – but even with them, at a higher level, cash flow is important. You will always want to negotiate good credit periods with suppliers, and ensuring you pay them on time. I hate it when customers don’t pay on time, so I strive to make my suppliers really happy – they will let me delay my payments when I’m in a crunch.  You will want to work with banks to give you a loan “on demand”, so that money is available in a time of need.

In trading, there’s a rule that encapsulates risk and cash flow:

If you don’t bet, you can’t win.

If you lose all your chips, you can’t bet.

Myth #3: Equity Funding is Better

We’re enamoured by equity funding nowadays, with angels, super-angels, Series A VCs, Series B PEs, stock markets and PIPE investors. This is a formidable industry. However, the situation in an early stage startup might be different.

When you sell your equity for a price, you get some money today, but that stake stays sold. It might make a huge difference to your cash flow, but the loss of control and the need for constant reporting might dwarf the gains you make in the longer term.

You could also consider taking a loan instead. From the same investors at phenomenal yield, of say 36%. Or from a bank, or a family friend. The idea here is that once you have generated your profits, you give the money back, and you get to keep all the profits going forward. While this sounds stupid for a mass business like Facebook, remember that when you grow to be a billion dollar company, every 1% that you don’t have is $10 million. And you should divest when you should, but attempt to retain stake where you don’t need to.

When you take debt you don’t easily transfer risk – that is, if you are unable to make the return you want, you still need to pay the loan back. This might lead to “recourse” – that is, if the company shuts down, the bank might take possession of your personal assets (car/house etc.).

And in the end there’s valuation. Should I raise equity today when I will get a low valuation – and therefore give away a huge amount of stake – or take some debt to build up to a certain level, and then raise at a higher valuation?

One way to bridge this might be to use convertible debt. Assume you don’t know current valuations, but you do understand that if you reach milestone X (revenue/traction metrics) then your valuation should be some number that both you and your investor agree. So you take money today as debt – at an interest rate of say 36% payable as a “balloon” payment at the end of the milestone period. Then, at the end of the period, if you have reached that milestone, the investor converts his investment (plus the interest) at the pre-agreed valuation. If you haven’t, then you work out a step down function for a higher stake appropriately (or find a way to return the money).

In India, regulations such as the Startup Tax (Read my free e-book) make convertible debt even more attractive; direct equity investments at pre-revenue valuations might not be palatable to the tax department, but when converted post-traction, the case is stronger.

Myth #4: Banks don’t fund startups

In one way this is true, that they don’t usually buy equity in them. However banks do provide loans in various capacities to startups. You can request an “overdraft” which is a loan that you don’t draw immediately; you can withdraw the money when you need it, and put it back in, and you pay interest only for the time that money is outstanding. A bank might say you need collateral against such a loan – and for that, you can place, say, your car as collateral (they’ll give you only a portion of it’s value but it’s money you can get!)

Banks actually get incentivized for lending to startups – SME (small and medium enterprises) are “priority sector” lending, which needs to be at least 40% of bank lending.

The Indian government also has special interest loans for startups. This could be routed through a bank when the government asks you to pay only 5% and they will pay the rest (an interest “subvention” scheme) or they directly lend to you through a public organization like SIDBI. Don’t think this is silly and unused – SIDBI actually has lent out 48,000 cr. to SMEs.

Public sector banks such as SBI, PNB or Canara Bank are better at SME lending than the private biggies of HDFC Bank, ICICI or Axis. While the private players will give you fully collateralized loans faster, the public sector banks will value a longer term relationship and increase credit limits over time (as you repay) without the need for more collateral. You might start small, but start – over time, the benefits will appear.

If you are an exporter you might be able to get access to export funding – which is even covered partially by the RBI (indirectly). For this there is a cost at both ends, but you will be able to “discount” a large order and get some cash if you’re dealing with a reputed organization. Bill discounting works even for local orders, but this is not quite as easy to get.

Banks do help with cash flow for startups, but it’s not equity. (Though a bank may require that you back your loan with equity – that is, if you don’t pay back, they will own a significant chunk of equity in your company. And they’ll ask you to increase your “authorized capital” appropriately.)

Myth #5: The worst thing that can happen is that you run out of money.

In my experience running out of money is a good thing. What you should be really scared of is:

Running out of growth.

A business is built to make profit, and many startups do reach that goal. However, they might still be a failure and profitable at the same time. For example, you hire at low costs, and keep your personal salary low so that the company can show a profit. Is that real? Any investor who looks at the books will tell you this is unsustainable – eventually, everyone will demand their real share and the company goes back into the red. Only the hope for much bigger things – through rapid growth – allows people the hope that even if they’re underpaid today, they’ll be rewarded with much more in the future.

Hiring and retaining is tough when you’re running out of growth; you might cut expenses to a point of sustenance, and it’s quite likely you can sustain for a long time. Like a company that has sold a lot of licenses in the past could sustain a few years with lacklustre sales only based on, say, maintenance revenue. But eventually if it doesn’t pick itself up, the company is finished.

Zombie companies abound in the marketplace. And too many times, companies are zombies BEFORE they actually die. The worst thing that can happen to the startup is that it stays in the zombie state for way too long. Running out of money is sometimes a good thing, it gives you closure.

These are my thoughts. I don’t intend to paint all startups with the same brush. I don’t expect to get massive applause. This is more of a discussion and I’d love to see it evolve. And remember, that in all of this, you have to chart your own path. Take all that you read with a pinch of salt; if you’re out there to beat the odds, you can’t really care about how other random people like me think.

You can also see my slides here.

Ravi Kiran talks about the Importance of Staying On. (Forbes)

The three most exciting events in the big-city start-up promoter’s life appears to be starting-up, raising funds and exiting. This is what a lot of start-up and VC media write about and a lot of people in the start-up ecosystem talk about. Many start-ups look at the Silicon Valley as a role model and fondly refer to it simply as ‘the valley’. They have been tutored to make ‘elevator pitches’, think of various types of the ‘addressable market’, create a ‘plan B’, learn to time a ‘pivot’ and provide ‘exit options’ for the investors. I am sure these are all important dimensions in business and every entrepreneur must learn about them, but sometimes I feel they are not tutored some other business basics.

One of those basics is developing an ability to ‘stay’ in business, something I find in much better supply in the entrepreneur in Middle India. The fact is starting, raising [funds] and exiting may appear glamorous and worthy of story material, but staying requires a different kind of attitude and skill. It’s a mindset and a ‘heartset’ thing, if you will.

While it is true in general that startups seem more enamoured by a build-and-flip model than by creating a business for the longer term, it’s almost sacrilege to uniformly apply a principle like “staying on for the long term”. My note in the comments section:

I've seen love marriages and I've seen arranged marriages. It seems statistics shows that 20% of love marriages end in divorce, whereas only 10% of arranged marriages do. People in love marriages seem to want to "exit" their marriages much earlier, because they don't try hard enough. People in arranged marriages, though, stay longer because even when it is simply not working out, they have the feeling that failure is not an option, and they will stay together, unhappy, passing on their misery to their children, fighting, not talking, but god forbid they ever use the word "divorce".

You could make that case. It's the same with startups.

There are startups that deserve a longer chance, and there are startups that don't. The service startups that you see today better make sense in a few years, otherwise you end up with something where you're running just to stay in the same place, and that's even worse than dying because it doesn't end. You could give a business 10 years and watch it just about make ends meet, or you could walk out and start another, faster growing company.

It's easy to justify staying on, and there are a lot of hero stories of those that did. What isn't apparent is those that are no longer visible - that guy who tried and tried and got his wife to eat one meal a day until she died. No one remembers him, or her. You have to stay true, but you have to stay practical. If at first you don't succeed, try, try, and try again, and then give it up and try something else. There's a fine line between brave and foolhardy.

An Open Letter to India's Graduating Classes from a KPMG partner is both eye-opening and outrage-inducing. He talks about how our graduating students are hardly prepared for the real world in terms of skills, problem solving ability, learning new things and being really professional. With very notable exceptions I cannot but agree; in general, there is an overall sense of entitlement, a lot of job-hopping and resume-shopping, a questionable work-ethic or a lack of "professionalism". It is difficult to find the right attitude and aptitude in the same person, and the cost-benefit equation can be exceptionally skewed. Some people price themselves out of the market.

But please note that these large type of companies are also to blame. Those that demand longer hours "when required" tend to be those that demand longer hours all the time, unless you have an emergency that your house is on fire and you can actually smell the smoke on the phone. Those that pretend to a potential customer that they are skilled in a certain technology, and then beg an independent consultant who actually does have that skill to sit in a conference call pretending to be a long-term employee. Then those that double-bill their clients on the number of hours worked because, well because they can. Those financial service companies and banks that tell their managers to lie outright to their customers, even if they are old and widowed and all that. The lala companies where you are expected to be a boss's man-friday. Those that refuse to give you your gratuity or PF benefits when you leave, or create unnecessary delays of months or years. And those that expect loyalty from you while, at the same time, giving a newcomer a salary twice yours as a "market" figure while he contributes far lesser than you. I'm sure you can think of more.

Everyone can rant and rave. Butevery dog has his day. Today, certain people are in demand. Tomorrow, unless they upgrade their skills, they won't be. Today just a large company's name is enough to get people to join it. Tomorrow, even they will have to grin and be proper employers to get the quality people they want. For years, new chartered accountants had no option but to work at salaries like Rs. 5,000 per month as an "apprentice" at large CA firms, working 18 hours a day, 7 days a week. Today they can get 5 times that much at newer firms and IT companies, and the old CA firms crib and crib and crib. Times change. People change, or get left behind.

I have, early in my career, taken Rs. 30 as auto fare as a reimbursement when I actually travelled by bus. I haven't job hopped (how do you do that as an entrepreneur?) but I've hired those who did (which in a way is my fault). I'm definitely inconsistent, being arbitrary when I wanted and demanding fairness otherwise. I hope I've changed, but it sometimes took an exiting employee to help me. I'll probably be both an employee and employer in the future. And I hope people (including me!) will change for the better, that companies will be better places to work.

I was in a panel discussion on NDTV on Friday: Is E-Commerce a Bubble?

I got a little face time and wasn't able to articulate all the thoughts I had.

Geographical reach: Everyone's talking about Tier 2 and Tier 3 cities. Yes, people there have aspirations, and they have money. But they are also more sparsely populated (at least, the target population that has money). And they might need far more hand holding, and support costs. These smaller cities don't scale as well as cities, and the costs (of transportation, delivery etc.) remain roughly the same. So while you might get coverage, a policy of "free delivery" is totally unsustainable unless you have high margins. And if you have high margins, chances that you'll sell much in the Tier 2s or the Tier 3s is er, very low. Given that most of the e-commerce sites provide free shipping to any town, and still work on wafer thin margins, something has got to change to make this model work.

Losing Money: Yes, it's okay to build infrastructure and lose money, but my question really was - are you making money on an operating basis? Many might say we make money on a per-transaction basis. Per-unit costs can be fudged - for instance, one of things Mahesh Murthy mentioned was an accounting drama in some such startups. A customer would be given a "coupon" which allowed him a discount of, say, 30%. If he used it to buy, the accounting would reflect the per-unit transaction as (FULL Sale Price minus Cost Of Product). The discount, they would say, is a way to try and retain the customer long term, so that cost should be spread across, say, three years.

This is a load of bull, because customers that buy on a discount, for the most part, do not buy in the absence of a discount. That means you can sell to them today with a discount coupon, but they'll just leave if you try to charge full price tomorrow. Data will show this is the case, and from personal experience this is definitely the case. I'm not even loyal to my local vegetable vendor when I can get a bigger discount in a wholesale market, and that applies to most of India. The discount amortization theory is simply garbage.

In that vein, per-unit accounting might show a profit for some startups, but the reality may be different.

Plus, if your infra costs are just going up forever, and you never turn a profit, does it make sense as a business? See airlines. Or some hospitals (Fortis/Wockhardt). Or infrastructure players like GMR. Or most large media channels. There's enough interest, but there's no profit. That wheel turns as long as the lubricant of liquidity is being poured on.

Amazon: Amazon listed in 1997. In early 1998, it had about $147 million of sales, was making losses, and about 600 people handling about 2 million customers. The valuation was around $1.25 billion. Flipkart is valued at close to the same (though they have over 4,000 people and hearsay is about $100 million worth of turnover). This took three more years to go bust; Amazon went on to a market cap of over $40 billion before 2000. Bubbles can last incredibly longer and go much higher than you think.

The downside - Amazon's nominal price (that is adjusted for splits etc.) did not cross it's 1999 high till....2009. Since then the stock is up about 130% or so, but for 10 years it didn't do anything. Even now, Amazon has a P/E of 187 and a forward P/E (assuming estimates work) of over 88, with a mere 3% profit margin ($1.2 bn on a LInkedIn has a 700 trailing P/E and a forward P/E of 90. Much of the forward numbers are guesswork. And if you look at Amazon, it has grown, just that valuations have been way ahead of themselves.

Henry Blodget, who came to fame by calling a $400 price on Amazon in 1998 when it was $200 (and it got there in a month) mentioned a figure of $230 billion for online retail, of which expected 30-40% with Amazon, and with 4% margins and a 40 P/E, you get a valuation of $400 which at that time was a market cap of $150 billion, by 2013. Today, the stock has just 10% of the online market or less, and just $1 billion in profits, and still it commands a market cap of $100 billion (due to the 187 Price to Earnings ratio). Blodget was wrong, but the market hyped up Amazon anyhow.

The deal is - if you want to be Amazon, you have to get those ridiculous P/E ratios. Like LinkedIn. Or Facebook which will come.

Listing: At the 500 cr. turnover level, players should be listing themselves in the Indian stock market. It's entirely silly because we thirst for quality players and detailed numbers. If these players are doing the right things, they should go public now (or should have already gone public). But they aren't doing so - and I hope the reason isn't that their numbers are not in any shape for disclosure. Should they list, I have no doubt they will also get the 90 P/Es etc. I will even buy some of these players if they shoot through the roof - no point missing a great return based on an opinion of profitability. Will exit just as quickly.

Competition: I'd mentioned toys are an unsatisfied niche but it turns out Infibeam and FirstCry have a section. Of course, I would say they need much more - the long tail of toys, if you may - but perhaps I should stop saying that toys are not being addressed.

Bubble or not? Who cares. You and I get great deals at low prices. Some random investor will lose money on a per-unit or company basis. Do you give a damn? I don't. I bought my TV at a mall which offered me a Rs. 200 price lower than Flipkart. You know why? Because it doesn't make any sense to buy from Flipkart when I have a better price for the same darn TV. This has applied to mobiles, to airplane tickets, to books even. Eventually, yes, some players will die and prices may go up - but I can count on the ingenuity of startups to find more investors and lose their money by giving me further discounts. The telecom and airline space are great examples of this.

But bubbles are all about valuation. It doesn't matter if people in Tier 2 or Tier 3 cities are a great market, or if the Indian consumption story is the next big thing. No one's arguing against that. It's just that the valuations given to startups who are trying to attack this place are ridiculous. Consider that Pantaloon Retail and Shoppers Stop are valued at far lesser than $1 billion today, though they have way more customers and Pantaloon is making profits today; online site valuations might just be getting way ahead of themselves. Still, without even a single Indian e-commerce player listing (and therefore, us knowing about the finances) we can't really call it a bubble. It might have some time to go.

There were too many illustrious people on the other side, and my credentials in the e-commerce business are approximately zero, in comparison. So pinch of salt and all that.