Indian startup industry will start to consolidate. Why?
Shalini Prakash
Early stage investor | Startup Advisory| Author 'Clueless at 30' | LinkedIn Top Voice | LSE
Let’s start at the top. India has been hot favorite for investors –with its emerging middle-class, young population and rising income levels, everyone wanted a piece. The rise of start-up enablers (accelerators/ incubators, seed VCs), FDI inflows and VC investments between 2012-15, fostered an environment wherein consolidation has emerged as the natural solution to attaining stability within the industry. We have started seeing traces of that consolidation especially in the last 2-3 years.
A little bit of economics.
A functional relationship between price, gross profits and number of firms implies profits drop steadily, as the number of firms increases – Econ 101. The narrowing of price cost margins induced by excessive supply (of a service) has lead to an environment wherein market leading start-ups acquire rivals who may otherwise find it unsustainable exist in the increasingly competitive landscape. It is important to emphasize that we don’t equate startups that find it unsustainable to exist with inefficiency (more on this in the next section). The point we are trying to drive home is this- the rise in “toughness” of price competition, increases concentration by reducing the number firms through consolidation.
The graph illustrates the economic intuition of how this “toughness” pushes the lower bound of concentration upwards.
HBR claims that every industry in every industry will go through four stages on its Consolidation Curve – or disappear.
Stage 1: Opening- Top three largest firms, hold 10 to 30 percent of market share of new industry.
Stage 2: Scale- Top three largest firms, hold 15 to 45 percent of market share, as industry consolidates
Stage 3: Focus- The top three firms will now control between 35% and 70% of the market. By this time, there are still generally five to 12 major players.
Stage 4: Balance and Alliance: The top three companies claim as much as 70% to 90% of the market
E -commerce and on-demand service startups in recent times have found it notoriously difficult to generate positive cash flows on account of this toughness in price competition. Excessive discounting to build a customer base warranted extreme efficiency for the firms to profit through volumes. The acquisition of Jabong by Flipkart owned Myntra, Flipkart’s ongoing acquisition of Snapdeal, Future Group’s takeover of fabfurnish.com is the result of the sector maturing, induced by competitive pressures. On the consolidation curve this would imply a rightward move, with concentration rising through acquisitions. E-commerce would be in the “Focus” stage of the curve. The online real estate sector in India, similarly, has numerous players offering buying, selling and renting facilities. The merger of Housing.com with PropTiger and Quickr with realty portal Commonfloor is predicated upon high cash burn due to competitive pressures. This sub-sector would lie somewhere in between the scale and focus stage. We will see more consolidation over the next few years in the e- commerce space.
In essence, consolidation allows companies to tame competitive pressures, gain talent, technology and domain knowledge through acquisitions. In a maturing industry, wherein investors are tightening their purse strings, aligning with the natural life cycle is not only prudent, but necessary for firms to thrive. There exists a real possibility that other sub-sectors such as health- tech, ad-tech, ed-tech (which are receiving investor interest and occasional mergers) may experience the intense consolidation faced by sectors such as e-commerce in the next few years. These are over- funded spaces with intense price competition; and these spaces require high synergies and efficiency.
What’s important for firms to solve the “pain point” for the segment you seek to serve in the most efficient way possible. Also, competition encompasses the race by larger players to acquire their innovative and efficient counterparts before other significant rivals. So, whether the firm is a market leader or a small player, success is predicated on efficiency (operational and capital), innovation and staying true to the problem you’re trying to solve as an autonomous venture.
**This piece is compiled by Shalini Prakash and Raj Snehil Juneja
illustrator at sobigalpa
6 年Shalini should use the word--fake otherwise impress some one sothat that fellow/company would send Shalini to Singapore? to do what was impressed upon.
Single Family Office / Private Equity / Venture Capital
7 年Really interesting perspective.
Manager at EY-Payroll and payroll related compliances
7 年Aman Sharma...very nicely written and explained regarding e-commerce.????