Startups like Flipkart, Snapdeal try to conserve money by reducing 'cash burn rate'
'Cash burn rate’ is a measure of negative cash flow that was being used as a weapon by startups to outgun their rivals to win market share and pump up growth.
In the new regime, startups are shunning previously popular buzz-phrases such as ‘growth over profit’ and ‘winner take all’ and adopting new ones instead — getting ‘unit economics’ right and reducing the ‘cash burn rate’.
With funding hard to come by, and investors fretting about returns, it is dawning on startups big and small that the bottom line matters. Which is why the most astute among them are reducing the amount of money they use to grow their business — termed the burn rate — and sharpening focus on the core business. It is time for prudence over profligacy.
“Across all companies both within our portfolio and outside it, it is twice as normal to see burn rate levels in January and February that are half or one-third of their peak levels,” said Mohit Bhatnagar, managing director at Sequoia Capital, which has backed hyper-local delivery startup Grofers, restaurant listings service Zomato and budget hotel aggregator Oyo. Unlike last year when large fund raises were the norm, this year “companies are not rewarded if they have exponential growth with broken unit economics”, he said.
‘Cash burn rate’ is a measure of negative cash flow that was being used as a weapon by startups to outgun their rivals to win market share and pump up growth. This was being fuelled by copious cash from a plethora of investors ranging from venture funds to hedge funds and strategic investors aggressively scouting for the next multi-billion-dollar company.
Among those now taking cash burn most seriously are online marketplaces Flipkart and Snapdeal, India’s two most valuable startups. They have reduced the cash burn rate by over one-third, according to several people in the industry aware of the changes afoot in Indian internet companies. Flipkart, India’s most valued startup with an estimated worth of over $15 billion (Rs 1 lakh crore), has managed to trim burn rates from a peak around $80-100 million per month in the last quarter of 2015 to around $50 million now, the sources said. A person familiar with the thinking in the company told ET that Flipkart may further reduce its burn rate by $10 million. A large part of it is driven by the fact that first two quarters of the year are considered a slow period for retail sales, but focus is now on carefully watching costs, the person said. Rival Snapdeal has been able to cut its burn rate by as much as 40% compared to last year, an investor in the company told ET.
The Delhi-based company, in which Japan’s SoftBank is the biggest investor, was spending around $20 million per month last year. Flipkart and Snapdeal did not reply to emails seeking comment.
The total value of venture capital invested took a drastic fall of over 80% during the first quarter of 2016 to $337 million from $1.79 billion in the same period of the previous year, according to VCCEdge. Both large players like Flipkart and Snapdeal, who raised three rounds of funding each in 2014, closed only one financing round in 2015. Smaller startups have seen even more drastic changes, ranging from shutting down operations in some cities to laying off staff. Experts believe that startups will have to focus on building a sustainable product to win and raise more capital, rather than spending more money and rapidly expanding operations.
“The cost of running a business has to be reduced as there are innate inefficiencies that have crept in,” said Sreedhar Prasad, a partner specialising in ecommerce and startups at KPMG.
The cautionary mood was best exemplified when Flipkart backer Tiger Global pulled back from India and SoftBank, which poured over $1 billion into Indian startups in 2014, began to caution startups on their spendthrift ways. “Costs will have to be cut in areas like salaries, duplication of work within departments and reducing cost of operations,” said Prasad.
Several startups, especially in areas like hyper-local delivery, aggressively expanded to dozens of cities across the country in the first half of 2015 but have since cut back on operations. Food delivery players like Zomato and TinyOwl and grocery delivery players like Grofers and PepperTap are among those which shut operations in smaller cities. While many companies continue to spend capital, they are now able to direct the money towards building long-term infrastructure.
“We are burning cash on operations where we will lose until we build the infrastructure. We have significantly reduced the discounts, but burn rate doesn’t come down significantly if you shut smaller cities,” said Albinder Dhindsa, cofounder of Grofers.
Some, like budget hotel aggregator Oyo, have seen burn rates slide from $8 million a month in the last quarter of 2015 to $4 million recently, according to sources. While this has been driven by efforts to consolidate the aggressive expansion undertaken by the company in 2015, part of it is also because of the need to conserve cash. “Among our focus areas last year was building scale and with over 65,000 branded hotel rooms in the country, we have made significant progress. As the “network effect” kicks in for us, we expect to drive more efficiency in the business and further enhance our unit economics,” said Kavikrut, chief growth officer, Oyo Rooms while declining to comment on the burn rate.
Monitoring costs and improving unit economics is also becoming essential for raising more capital. Take for instance home and beauty services startup Taskbob, which has cut burn rate by over 33% since October 2015. “Focus has completely shifted from top line & revenues to sustainability. Across all costs like operations, marketing and recruitment we are carefully evaluating return on investment,” said CEO Aseem Khare.
This also meant that 16-month-old startup has put on its plans to ex pand to Bangalore, but go deeper into existing Mumbai market to drive better unit economics even after raising a Rs 28-crore funding round in February.
For now, online retailers have been able to bring down burn rates by cutting discounts, reducing dependence on low-margin categories like electronics, building efficiencies on logistics and reducing cash returns through online wallets. And these companies could look at more areas to save money as they aggressively ramped up their teams and expanded into new categories. “In order to drive profitability, big players will start asking ecosystem partners who are making money — payment firms, lastmile delivery companies and cataloguers — to start sha ring the costs and risks,” said KPMG’s Prasad. But depending on competitive intensity — especially from US-based Amazon — and their ability to raise exmore money before the festive season starting in August, both Flipkart and Snapdeal may begin to spend more.
(With inputs from Aditi Shrivastava)