raising 50, 100 million dollar rounds is not going to come back anytime soon; as poor capital intensity kills returns," said Bajaj in a tweet. "So, companies
should focus on building businesses the right way and take an axe to burn rates."
Bajaj, way back in 2,000, cofounded Baazee.com, an online marketplace which four years later got acquired by eBay. Earlier, Nikesh Arora, vice chairman of Japanese investor Softbank had also expressed worry over the way some start-ups were burning money on marketing instead of perfecting their products in the early stage.
"There are very few companies in the West that have become very big companies who invested hundreds of millions of dollars on marketing in the early stages of their lives," Arora had said last October.
Similarly, T V Mohandas Pai, a former Infosys top executive turned investor also agreed that e-commerce sector is headed for a shakeup as e-commerce companies are burning cash by subsidizing products to grow their customer base.
Of late, venture funding in the start-up space is showing signs of drying up with companies, especially in the FoodTech space, bearing the maximum brunt. Finding it hard to raise their next round, several players such as Zomato, TinyOwl and Foodpanda have laid off staff and are scaling down operations in order to reduce cash burn.
"Burn rates are still too high - million dollar monthly burn rates still de riguer and not shocking enough," said Bajaj. Bajaj shared figures of what he considered optimal burn rates for start-ups in the early stage of building their businesses.
In India, Matrix Partners has invested in scores of tech-backed start-ups such as Ola, Practo, Chumbak, Housejoy, DailyHunt and TinyOwl.
According to Bajaj, money between each round should be rationed to last for 18 to 24 months. A start-up that raises seed funding of Rs 3-4 crores, should restrict peak cash burn to Rs 30 lakhs per month. With Series A funding of $2-3 million (around Rs 13 - 20 crore), a start-up can increase its monthly cash burn to Rs 70 lakh.
Bajaj says that to multiply traction and iterate on their business model, a start-up can double its monthly cash burn to Rs 1.5 crore - Rs 2 crore after a Series B round of $6-8 million, and in order to demonstrate a scalable and sustainable business model, a company should cap its peak monthly burn at $1 million after a Series C round of $15-20 million.
He said, start-ups with cash burn higher than their net revenues equates to an "impending disaster". Also, in order to avoid dilution, founders should only raise money when their firms are worth 10-25 times the money they've raised.
Experts say, many successful companies globally such as Facebook, WhatsApp, Twitter or Tinder, have grown to billion dollar scale with minimal marketing spend in their early days.
"Anybody who spends big money on advertising will die. All of these guys (who are spending huge money in marketing and advertising) are in a death spiral," Mahesh Murthy, founder of digital marketing company Pinstorm, told Business Standard in an earlier interview.
A study by brokerage firm Kotak Institutional Securities which looked at the financials of 22 top Indian e-commerce start-ups during the fiscal 2015, found that losses grew by 293 percent to Rs 7,884 crore on a combined revenue of Rs 16,199 crore. Among the companies surveyed, health tech start-up Practo was the only start-up whose losses were lower than its net revenue.
However, e-tailers such as Snapdeal, Amazon and Flipkart who are considered trendsetters in the Indian start-up ecosystem are slowly moving towards profitability. While they posted a massive combined loss of Rs 4,984 crore, revenue growth outpaced growth of losses.
Business Standard has always strived hard to provide up-to-date information and commentary on developments that are of interest to you and have wider political and economic implications for the country and the world. Your encouragement and constant feedback on how to improve our offering have only made our resolve and commitment to these ideals stronger. Even during these difficult times arising out of Covid-19, we continue to remain committed to keeping you informed and updated with credible news, authoritative views and incisive commentary on topical issues of relevance.
We, however, have a request.
As we battle the economic impact of the pandemic, we need your support even more, so that we can continue to offer you more quality content. Our subscription model has seen an encouraging response from many of you, who have subscribed to our online content. More subscription to our online content can only help us achieve the goals of offering you even better and more relevant content. We believe in free, fair and credible journalism. Your support through more subscriptions can help us practise the journalism to which we are committed.
Support quality journalism and subscribe to Business Standard.