Over the last few weeks, there has been lot of debate about a bubble
in Indian ecommerce. The last 18 months have seen an unprecedented
amount of funding for Indian startups. Not only has the number of
investments gone up, but the average ticket size also has increased
There are about a dozen companies that have raised more than $100
million (Rs 650 crore) this year. The unprecedented amount of funding
pouring into the country’s startup ecosystem has done some great
things for us (for one, being an entrepreneur is no longer taboo in
the marriage market!). At the same time, it also sparked off the trend
of running a business on negative gross margins (a practice that is
primarily driven by way of perennial discounting).
Without getting into the debate to prove or disprove the existence of
a bubble, I was curious to understand what it would take to sustain
these discounting fireworks till Diwali 2016.
According to various industry sources, the total burn rate across the
top 10 ecommerce players appears to be ~$9 million per day. (Note that
this number is not officially reported and is completely based on
If we were to assume year-on-year growth of 150%, by next Diwali, the
top 10 companies would need about $22 million per day to sustain
business with the current unit economics. That means companies will
burn about $6 billion to sustain the current trend until next Diwali.
There are hardly any investors out there who can support that pace of
cash burn. But let’s assume for now that there are investors who are
willing to put in an additional $6 billion. Let’s look at what needs
to happen for these ecommerce companies to get the $6 billion in cash
they need. Historically, in India, every dollar of investment in this
sector has created $4 of enterprise value. Hence to raise $6 billion,
we would need to see $24 billion of enterprise value being created in
the top 10 ecommerce companies. The current enterprise value of these
companies stands at about $35 billion, so their market cap needs to
increase by about 70% to about $60 billion.
As of now, everyone is expecting something dramatic that will enable
reducing the burn rate. Here are a few possible scenarios.
One of these players suddenly cranks up the innovation engine
full-throttle and out-innovates everyone else in their sector. This
may potentially define the winners.
A global company may buy its Indian comparable and create a
Multiple domestic companies may merge together and give the global
player a solid fight.
A few domestic players disappear as they run out of money.
It is hard to predict which scenario will, in fact, play out, but it
does look like gathering enough dry powder to buy “fireworks” next
year will be a tough job.