The Mahabharata of Indian internet unicorns

The likes of Flipkart and Snapdeal now resemble the brave Abhimanyu. They’ve gotten into the Chakravyuha. Will they emerge unscathed?

Haresh Chawla

[Wayang glass painting depiction of Bharatayudha battle by Gunawan Kartapranata under Creative Commons]

“I believe that whatever doesn’t kill you, simply makes you…stranger,so says the Joker in Christopher Nolan’s The Dark Knight. What he really means is not all change makes you stronger or better. Some changes leave a scar. It can break us from the inside and change us forever.

When looked at from the perspective of internet companies, the Joker sounds ominous almost. The unicorns—startups with a valuation of $1 billion plus—are forever flirting at the edge of a precipice, between becoming near-monopolies, or dying, clinically almost. There is no place in-between. You are either a great business or you are doomed.

Who, for instance, would have imagined five years ago that an automated telephone exchange which can fetch you the closest cab around can be worth Rs 450,000 crore? At the end of the day, that is what Uber really is. A fancy telephone exchange masquerading as an app. Strange, eh? But that’s how it is. Exceptions are the rule in the high-stakes game that is the internet.

I’m willing to go out on a limb to argue the kind of things happening on the Indian internet landscape are beginning to look strange. At first glance, if you try and analyze them, it defies any pattern. But dig deeper and something strange is indeed going on.

Consider these for instance.

  •, China’s largest travel site, acquires a 26% stake in  for $180 million. Makemytrip was already listed but had run out of ideas on how to break away from the pack of online travel companies (Yatra, Cleartrip and others).
  • Snapdeal, a Delhi-based online marketplace, pays a mind-boggling $400 million to acquire Freecharge, a Mumbai-based online facility that allows you to charge any mobile phone or data card in India.
  • Alibaba, the Chinese e-commerce giant, invests $630 million in Paytm, an online payment wallet service. Paytm then proceeds to start selling goods and services to compete with Snapdeal, another Alibaba investment. Not just that, it has acquired a payment bank licence and now announced plans to invest in logistics.
  • Oyo Rooms, the budget hotel booking app backed by Soft Bank, picked up its smaller rival Zo Rooms backed by Tiger Global before either had a chance to really compete. And consider the pace at which it vacated the market without as much as a thought for its customers. What drove this case of nerves?
  • Horizontal classifieds unicorns have jumped into real-estate classifieds. This business demands specialist attention and capital because by its very nature the opportunity in real estate is worth multi-billion dollars. How will they fund all these fronts?
  • Sudden consolidation takes place in the vehicles classifieds markets. Players are willing to pay cash instead of swapping stock—at this early stage, when the companies need to hold on to all the cash they can get. All of this is happening even as newer startups are getting funded.
  • E-commerce players have either divested or spun off their logistics arms. Think about it again. How many choices do you really need to send a packet from a warehouse in Bhiwandi to Jhumri Telaiya. Pincode 825409, in the Koderma district of Jharkhand. Just a few really. Why have the numbers suddenly burgeoned? And why does the logistics business sound like a great opportunity for India’s largest e-commerce players?
  • Then there is that darling Flipkart. It is in the news for all the rejigs in its management team. Sachin Bansal stepped aside as CEO to make way for his co-founder Binny Bansal. Sachin has been moved to a new role as the executive chairman. Mukesh Bansal on the other hand is moving out to start his own venture. He came in as part of the top tier at Flipkart when it acquired Myntra—a firm Mukesh had founded—for $300 million.

Given all of these, it is incumbent we ask a few questions. What do you achieve by merging two companies, both of which have not yet figured how to be sustainable? Is the outcome a stronger entity or a weaker one? Have the pressures started to show on the internet economy? Is there a pattern here?

Moats made of paper er…money

Imagine you are an Indian unicorn—a technology startup valued at $1 billion or more—whether it be in e-commerce, classifieds, cabs or any such business that involves transactions.

Exclude the likes of Zomato, once a much desired entity, but which is now grappling with a different set of demons even as the food-tech sector is now being described as a bubble. Not to forget Inmobi. A mobile ad network, it matches publishers who want to monetize their mobile users with advertisers who want to reach them. Founded in India, it boasts of being the largest ad tech company—but its performance remains inscrutable, especially given the glut in mobile advertising inventory globally.

These unicorns have roughly between 20 million and 50 million consumers squeezing through their pipes every month. Some of them buy frequently, others infrequently. To woo them though, they’ve burnt anywhere between $100 million and $3 billion.

They’ve used every trick in the book to buy customer loyalty—discounts, deals, cashbacks. Single-handedly they’ve been responsible for delaying the inevitable for the print media business in India. The Times of India Group reported record revenues and profits for the last financial year

This money was pumped by investors indifferent to cash burn, outsized teams, and eye-popping inefficiencies. No one was bothered to dig into the state of a unicorn’s financials. They’ve stayed squarely focused on the next round of funding and growth rates—everything else be damned. The only thing that mattered—who’s going to be the last man standing?

Over the last few weeks, the world has turned into a capital-starved one. Even if it were capital-flush, the unit economics reported by these entities make no sense. But the money poured because A-teams were in place and they did a fantastic job scaling up. Some competitors fell by the wayside because they couldn’t execute, and others because they couldn’t woo the right venture capitalists (VC).

And it was considered okay if these firms wobbled a bit. VCs overlooked management infirmities in these companies, their inability to retain senior leadership from the outside. Even early founding team members have left either due to fatigue or friction over the direction that the business ought to take. On the face of it, Ola seems to be the only exception to the problem. But that’s par for course. Growth pangs, if you will, as an outfit morphs into an enterprise.

Now there are just about two-four players in each segment of the e-commerce market. Nobody else is likely to get funded. A few startups may try sniping. But unicorns have cheque books on hand to acquire them. In theory, these unicorns ought to now be ready to reap the benefits of consolidation.

Their future looks bright. Morgan Stanley, for instance, estimates the Indian Internet market valued at $11 billion in 2013 will be worth $137 billion by 2020. Split that three or four ways and you are staring at some serious “decacorns” (unicorns with over $10 billion in valuation).

But a few problems exist that everybody seems to have overlooked.

  • The unit economics are unlikely to improve soon. The battle will get even more bitter to woo the next 200 million Indians on the internet bandwagon. With 4G around the corner, data prices will drop dramatically and populations the size of Canada and Australia will join our internet economy. You can’t step off the gas. If you do, it’s a one-way ticket into oblivion.
  • The moats—those wide ditches that surround castles and filled with water to defend against attacks—for internet companies, are filled only with money. They’ve been created with the risk appetites of their investors and not with differentiators or unique business models. Moats ought to be wide and deep. Else an attacker can wade through easily. But our unicorns' castles are protected by paper moats—made of money. Those castles cannot be defended unless the moats are refuelled constantly. That explains how Amazon just took away market share so easily from Flipkart and Snapdeal.

Enter the holding companies

The question facing Indian internet companies is, how do they make the moat deeper? Only then do they have a convincing case to raise more money. A seemingly obvious solution is to think of these unicorns as giant water turbines churning the water, or dollars in this case, to keep adversaries out and suck customers in.

Indian unicorns know who their customers are, their homes, signatures, the size of their clothes, what they like, dislike—putty to be moulded. Can they think up more ways to churn value out of these customers, improve monetization, show investors sustainability, create holding companies that will own large chunks of the Indian Internet market by 2020?

To do that, a few things will have to happen.

  1. Higher margin categories will have to be added to core offerings. Product e-commerce companies will need to add services and vice versa. It is entirely possible some tie-ups between the online and offline world fall in place. Flipkart and Snapdeal may buy vertical players who are great at execution, but suffer from unsustainable customer acquisition costs (CAC). That is why Flipkart acquired Myntra. In much the same way, Jabong looks like a good target for Snapdeal. Categories like furniture, jewellery and upscale brands will be add-ons to their portfolio.
  2. They will have to find ways to get more out of the consumers’ wallet. Can you cross-sell to them other services like payments, media and local services? Swap equity, pay cash if needed, but keep deepening the moat. The moves we’ve seen at Flipkart and probably will at Snapdeal fit into this pattern as founders move into “holding company” roles. Think of them as scouts who need to find businesses that keep the giant turbines moving.
  3. Next, think up ways to defray the cost of running these huge ships. That is why Flipkart and a few others have spun off their logistics arm. Some players may even offer platform solutions to merchants for payments, micro-ERPs (enterprise resource planning) and SaaS (software as a service) solutions (much like Amazon did with Amazon Web Services and cloud solutions).

Taking a deep cut in operating costs is not a real option. You do that and curiously funding will get tougher. That is why unicorns will have to dig as deep as they can into the paper-moats they’ve built. I suspect we’ll see “seemingly” unrelated diversifications. The early signs are already there. So don’t be surprised if you find yourself comparing car insurance policies on a Flipkart-owned platform tomorrow.

It is the only way to justify multi-billion-dollar price tags. Some of these companies will make these transitions successfully, others will falter. But a plan is a plan. And you see the holding company model seems to have worked. In China, such entities dominate the market. Between Baidu, Alibaba and Tencent—or BAT as they are called—they control most internet transactions. 

“Nobody panics when things go ‘according to plan’. Even if the plan is horrifying!” – The Dark Knight

Running out of unicorn fuel

Now that the plan seems clear, where is the money going to come from? Goldman Sachs estimates Indian e-commerce businesses (which have attracted $6 billion until now) will likely need another $20 billion before they become sustainable. That is going to be hard to find, especially in 2016.

In September last year, I had argued that large Indian e-tailers have reached a point of no return. Their capital efficiencies are low, unit economics look bleak, and they seemed to generally ignored the fact that e-tailing is a business that at its best generates a few percentage points of operating margin. 

While valuations look stratospheric in the press releases, privately they are tempered by structured instruments, special rights and liquidation preferences. These exist to protect the downside for investors even if the exit happens at one-third of what is reported. So while a down-round will make for noises in the media, it is an irrelevant event in the journey of these unicorns. That is if they survive the battle without consolidation or a sell-out. It hardly matters if Flipkart is valued at $10 billion or $15 billion today—if it creates a $50 billion behemoth holding company, with a one-third market share of Indian e-commerce transactions in 2020.

From the looks of it, the big guys are stuck between a rock and a hard place—too large to fail and too fat to fit, and the road to sustainability is a long way off. Initial public offerings (IPOs) are dangerous. For e-commerce poster boys Flipkart and Snapdeal their valuations sound unsustainable. This was evident over the last couple of weeks as unicorns across the world got mauled. LinkedIn dropped 43% in a single session on the New York Stock Exchange (NYSE). These are shocks our unicorns can do without—not when you still need shareholders to keep funding you. 

But there is salvation a few thousand miles to the east. In China. Internet behemoths there are salivating at the prospect of practically doubling their addressable market if they add India to their footprint. Western markets are either too small or unassailable. India is free, democratic and ready to follow as the second largest internet economy in China’s footsteps.

And with our Prime Minister’s Office (PMO) whipping up frenzy about attracting overseas capital into startups, the Chinese have never felt so welcome any place else. The implications of sharing control over our population’s digital footprint with a not-so-friendly foreign power is an altogether different debate.

Let’s take Alibaba as a case in point (and Baidu and Tencent as well with a few tweaks).

What if Alibaba were to take a substantial stake in Flipkart and Paytm? Between e-commerce and payments, it would resemble the Taobao, Tmall  and Alipay ecosystem they’ve built. The price? Anywhere between $10-15 billion. That’s just about 10% of Alibaba’s now-halved market cap (from its peak since IPO).

Winning more ground on the other hand in China will be an expensive battle for Alibaba. That money is better spent in India. Their shareholders will love it and it’s a trick that can keep their stock buzzing for the next five-seven years. For Jack Ma, the founder of Alibaba, this ought to be a no-brainer. In fact, given the ongoing meltdown in the Chinese economy, which will directly impact Alibaba, not investing in India could be hara-kiri.

Flipkart and Paytm can sing beautifully together. Refocus Paytm solely on running payments for the market (via wallets and payments bank). With the kind of monies Alibaba has, it can pretty much offer a commission-free payments infrastructure to small merchants and change the game, especially offline. Leave product e-commerce to the experts at Flipkart. The only call they need to take is whether they ought to pick up Snapdeal or Flipkart.

Then there’s the other Big Daddy—Amazon. From Amazon’s point of view, India is core. This is a large e-market. India has huge potential for media and cloud storage too. If Amazon gets its act right in India, its market capitalization can zoom. No one punished it for getting it wrong in China. But if it loses India, repercussions are bound to follow. And Jeff Bezos, Amazon’s founder and chief executive, doesn’t play to lose.

It isn’t difficult to imagine an Indian version of Amazon that bundles free delivery plus media, and subscription products to lock-in consumers here. In 20 years, India will be the most significant international e-commerce market outside China. And from Amazon’s perspective, to aspire for a 50% market share and back it with capital doesn’t sound outlandish.

No choice but to sell?

In the early stages of development, home grown Indian e-commerce companies did not focus on creating a well lubricated payments system. They did not find workarounds when the Reserve Bank of India (RBI) came up with a regressive move—the two-factor authentication mechanism. They did not think up a credit system, a pay-once-a-month strategy, or wallets. They were happy pushing cash on delivery (COD) and expanding pincodes they served. Doing transactions took precedence over enabling transactions. They imagined the first who got to deliver to the boondocks will emerge the winner.

Flipkart made a fatal error of working only on one leg of the problem. If they had built an ubiquitous payment system, their moat would have been defensible. But they took the easier path and stuck to COD. Instead, Flipkart ought to have poured its monies into solving the payment problem for the market like Alibaba did with Alipay. It shouldn’t have given up on its fledgling payment effort PayZippy even while building the logistics out.

And finally, Flipkart’s capital inefficiency is legendary. Close to $3 billion spent on a business that will generate about $6 billion of gross merchandise volume (GMV) in 2015. This is a term used in online retailing to indicate the total sales dollar value for merchandise sold through a marketplace over a period of time. It will perhaps need another $2-3 billion to hit sustainability. They have few choices. We will see how this unravels over the next few months.

That is why it is now facing heat on execution and internal friction. If it doesn’t become the holding company, it stands the risk of becoming a part of one. 

“Smile, because it confuses people. Smile, because it's easier than explaining what is killing you inside.” – The Dark Knight

What holding companies can look like

In China, the BAT trio is loosely clustered around its core strengths: Baidu for search, Alibaba for e-commerce and payments and Tencent around social media and messaging. Each of them has created ecosystems that try and serve most of the needs of a Chinese consumer. For example, the Tencent family covers shopping, banking, entertainment, travel, real-estate, gaming, healthcare, jobs and food-tech—all driven by its social network offerings. The three compete to create a one-window “super app”, but between them have a stranglehold on the Chinese internet market.

Sure, prospective Indian holding companies will have a weaker grip on Indian consumers than their Chinese counterparts because Western players like Google and Facebook control search and social media in India.

But once the Chinese start playing, the Westerners won’t be interested in staying at the periphery of the ecosystem. They will want to go deeper and that creates a whole new set of opportunities. Imagine Google or Facebook investing in Flipkart. Suddenly the game changes once more. If WhatsApp, a Facebook-owned company, continues to stay a pure messenger chat system, it will be playing to its weaknesses. Question is, does WhatsApp (Facebook) have it in it to become the Tencent of India? Or will it leave that opportunity wide open for a similar app called WeChat—the Chinese equivalent of WhatsApp and built by Tencent? Social media capabilities apart, WeChat supports a host of transaction capabilities like payment and money transfer that allows users to transfer funds and make electronic bill payments. You can even make a passport application on WeChat. Incidentally, WeChat competes with Alipay as well.

As I write this, Baidu is talking to Zomato—a restaurant search and discovery service founded in 2008 and which operates out of 28 countries including India. Look hard at Zomato and you’ll realize it’s close to Baidu’s core—curated-search around food and communities.

Zomato too is trying to be a holding company for food-tech. That is the only way to justify the unicorn tag. We’ve seen what happened to Yelp, an American company that publishes crowd sourced reviews about local businesses among other things. It chose to be content and ad-driven only. Zomato has tried to stretch its boundaries by offering reviews, ordering mechanisms, a POS (point of sale, or retail management) system, and an ad platform for restaurants. They even tried their hands at becoming an Apple Pay for restaurants. Strange things to do for a company that started out as an entity intended to aggregate user-generated content. But strange is in fashion. 

Is it possible then that the currency in the Indian moat will not be the dollar, but the Yuan? Is it time for the Western players to enter the game too?

What changes for everyone else?

Every dollar has a best-used-before date stamped on it. From a VC’s perspective, it is typically five-seven years—a bit longer if you are an established one with a record of exits. But money from strategic investors is usually permanent capital. It carries no use-by date. 

Suddenly Indian VCs are now at a table where the player sitting across them has near infinite capital and near infinite time horizons, and isn’t looking for an exit.

In the Internet business, those playing cloned and undifferentiated models like e-commerce and on-demand services know it is a game of poker. The one who blinks first loses. But for VCs betting on large consumer internet startups in India, the path is clear. They necessarily will become sellers to these holding companies. 

They will run startups with an eye to make them attractive "for" the strategic, versus battle “against” a strategic. They will be acutely aware about how long they can play the game.

It may not be apparent today. But from Series C and D funding onwards, the funding rationale will change dramatically. These are the investors who come and fuel market share dominance in startups. These are the real “unicorn-shepherds”. They will know to look at the “strategic” fit of a business idea versus its intrinsic potential. They are in the business to make money, not to win noble battles. They also realize that once they give a foothold to a strategic investor, chances of exit elsewhere narrow. The ripples of these changes will eventually impact how Series A and seed investors evaluate their investments too, especially in the e-commerce transaction space. 

“Tell your men they work for me now, this is my city!” – The Dark Knight

Clearly, Indian startups will be built for sale. We saw what happened with Makemytrip. Ctrip will always be a buyer of Makemytrip stock with a willing cheque book. It leaves VCs in other online travel companies in the lurch. How does one start competing with a player that has “permanent” capital? In fact, the next big move for Ctrip could be to buy Oyo Rooms as well. That will create a holding company that’s got the air travel market and the hotel rooms to bundle and bid out everyone else. How do VCs with five-seven year horizons then compete?

We are seeing it in the pull back of funding from the much hyped up Grofers and Peppertap. VCs don’t have a strategic buyer in sight and have gone cold. They seemed to have poured in over Rs 800 crore just to discover that there is no product-market fit. Aren’t investors at Series C and D intended to do this due diligence?

Founders took this as a validation of their business models and pumped away recklessly. They’ve learnt the hard way that customer acquisition costs are disproportionally higher than the transaction fees they earn. These wannabe unicorns are suffering on account of unit economics and retention. Ironically, the model they cloned, Instacart, is facing exactly the same issues in the US. They can’t seem to make the economics work given the manpower intensity and complexity of the business. These businesses are likely to burn up like badly run airlines. 

“If you’re good at something, never do it for free.” – The Dark Knight

Anyways, Round One has gone to the kirana-wallah, who is willing to bundle-in delivery, credit and loyalty for the consumer. Given the unit economic and density issues, a new model where whoever co-opts the neighbourhood merchants and brings them onto the marketplace via chat and payments could be a winner. That’s a direction a player like Shopclues may head into to differentiate itself. Else, it will be difficult to survive as a low-value, low-aspiration e-commerce marketplace, especially since the bigger guys will step-down to take that market out.

VCs and founders are finding that it takes no skill in throwing money at a problem. The real skill lies in collecting money for the solution you’ve created. It’s there that you get into the metaphorical “chakravyuha”. A vyuha is an arrangement and a chakra is a circle. In ancient Indian military parlance, it is the arrangement of soldiers in the form of a wheel. Getting in and out of it requires great skill.

Abhimanyu, the son of that great warrior Arjuna, knew how to penetrate one. He learnt of it when he was in his mother Subhadra’s womb as his father was telling her all about it. But while Arjuna was trying to tell her of how to get out of it, she fell asleep. So in the epic battle of the Mahabharata, Abhimanyu managed to penetrate the chakravyuha, but didn’t know how to get out of it.

Much like Abhimanyu, Indian unicorns have gotten into the chakravyuha. They haven’t figured how to get out of it. To exit, Abhimanyu needed to know how to fight his way out.

Indian unicorns need the cash. But 2016 is the new 2008—a funding and confidence crisis looms. By the looks of it, these businesses will have to be rolled up into one of the holding companies, or be left to die. 

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Shiva Kumar on Feb 29, 2016 8:29 p.m. said

enjoyed the article... small observation about consolidation in the commerce space in India. Most of what has happened is what I will call consolidation of comfort or mutual investors consolidation. Almost all the Unicorns are operating as market model. But there are several segment / niche unicorns in India... name it toys, kids, industrial products, movies, music, household, eye wear, even books... Several among them in my opinion are opportunity for cheap acquisitions now... in the present FDI scenario, in market place model, they cannot sell directly... but i have noticed that the SKU offered in some category / niche retailers are very large... these can bring huge traffic to the market place and there is possibility of cross buying across categories... not to the mention the entrepreneur expertise of the segment which can be bought.... Amazon US has in the past bought several of the category leaders.... Lets see if any of the UNICORNS leads the race while the price of acquisition is still cheap.

Balaji on Feb 25, 2016 10:24 a.m. said

Good read! A bit of pedantry - It was Lord Krishna and not Arjuna, who was telling Shubadra on how to enter a Chakravyuha.

Partha Dash on Feb 24, 2016 8:57 p.m. said

Its an excellent article... Thank you Haresh for writing such a master piece !!!

Shashidhar Jayaraman on Feb 18, 2016 9:18 a.m. said

Haresh, Very detailed and thought through - hope the investors and the promoters are seriously reading this article as they firm up their next steps...

Vasudevan Srinivasan on Feb 18, 2016 7:16 a.m. said

Haresh this is an insightful treatise on Unicorns ! Thank You.. I stand educated.

Sriram S.padmanabhan on Feb 17, 2016 8:26 a.m. said

Incisive analysis with apt analogies! Kudos Harish!

rahul joshi on Feb 16, 2016 1:38 p.m. said

One of the finest Article ever read on Indian Unicorn's and way ahead for them.. I am sure this article will be referred for long time

Vijay Simha on Feb 16, 2016 12:21 p.m. said

Timely opinion. Love the analogy too.

Sanjiv Saraff on Feb 16, 2016 5:43 a.m. said

Superb thoughts Haresh. Great analogy. The only caveat is that this entire biz is like the Clouds ...everchanging and continuously evolving ..and when will it rain will be everyone's guess!

Prateek Shah on Feb 15, 2016 5:28 p.m. said

Another brilliant read! Thanks for this.

About the author

Haresh Chawla
Haresh Chawla


True North (formerly India Value Fund)

Haresh Chawla is currently a Partner at True North (formerly India Value Fund Advisors). True North is one of India's most experienced and respected private equity funds, with over $1.5 billion under management. At True North, he focuses on investments in the food and consumer sectors where he identifies and helps transform mid-size businesses.

He is best known though for his leadership in transforming the Network18 Group into a formidable media network. Under his watch as Founding CEO, Network 18 became India's fastest growing Media and Entertainment network.

In his dual leadership roles at Network18 and Viacom18, he built a media conglomerate that reached over 300 million households across platforms including television, print, films, mobile and internet.

His career at Network18 spanned 12 years, and he grew revenues from $3 million in 1999 to $500 million in 2012. He transformed the company from a TV production house to India's leading multi-media house with over 11 TV channels including Colors, CNBC-TV18, CNN IBN, MTV India and Nick India. He forged joint ventures and long-term partnerships with the world's largest media companies including NBC (Comcast), CNN, Viacom, Forbes, A&E Networks.

Haresh has also been keenly engaged in the consumer internet revolution in India from the early nineties. He is credited with building India's largest most well-known internet businesses like Moneycontrol, Bookmyshow, Yatra, Firstpost and Homeshop18. He continues as a successful investor and mentor to several internet and consumer start-ups today.

Earlier, Haresh has been part of founding teams at the HCL Comnet; ABCL, where he set up the Film Distribution Business, and at the Times of India Group where he launched Times Music.
Haresh holds a Bachelor's degree in Engineering from IIT Bombay and a Master's degree in Business Management from IIM Calcutta. He lives with his wife and two children in Mumbai.

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