Snapdeal sifts vanity and sanity

Bahl (left) and Bansal

TT, Mumbai, Feb. 22: Snapdeal, one of the unicorns that played a role in changing the shopping habits of many Indians, has become the first e-commerce platform to admit mistakes and accept the traditional business maxim that says "turnover is vanity and profit is sanity".

Snapdeal founders Kunal Bahl and Rohit Bansal conceded they had erred in seeking to grow the business by "starting new projects while we still hadn't perfected the first or made it profitable".

They sent out an email to employees indicating that they were ready to make "tough choices and a conscious departure from a me-too race to the edge of the cliff".

The two young founders have decided to take a 100 per cent salary cut even as the organisation announced plans to lay off more than 600 employees from its 8,000-strong workforce at Snapdeal, logistics entity Vulcan and digital payments firm Freecharge.

Reports say the employees are being offered a three-month severance pay. "Many of our leaders have also stepped up proactively and offered to take a significant cut in their compensation," the two founders added.

Snapdeal has been locked in a dog-eat-dog battle with Flipkart and Amazon India to grab pole position in the world of online marketplaces that had hoped to knock the bottom out of traditional brick-and-mortar businesses. But these business neophytes soon discovered that the massive discounts they were offering to draw customers had blown a gaping hole through their balance sheets.

Bahl and Bansal said ambition and the frenzied quest to raise capital from big-pocket investors had become a "potent mix" that drove Snapdeal to defocus from its core business.

"We started doing too many things and all of us, starting with myself and Rohit, are to blame for it," Bahl said in the email.

The capital-raising spree was based on a woolly concept called gross merchandise value (GMV), which is the value of goods sold on an e-commerce platform.

It became the over-hyped metric that the unicorns (tech start-ups valued above $1 billion) trumpeted while drumming up capital to support their aggressive business plans. But GMV did not take into account the cost of freebies and the high-decibel advertising campaign on which they relied to drive traffic to their portals.

The result: huge losses. Reports indicate that Snapdeal's losses doubled to almost Rs 3,000 crore in the year ended March 31, 2016, from over Rs 1,320 crore in the previous year. Rival Flipkart has cranked up its losses to over Rs 5,000 crore.

"GMV is vanity, profit is sanity," Bahl and Bansal said in their letter, awakening to a harsh business truth that is central to the success of any venture.

The brittleness of GMV-based valuations is a throwback to the dotcom bust in early 2000 that counted eyeballs in the delirious pursuit towards a digital El Dorado.

Bahl and Bansal said the formula to revive the company was to "focus on only your core, stop all non-core activities, reduce costs drastically, turn profitable as soon as you can, and use those profits to spur further growth and new projects".

The note expressed the hope that it would eventually emerge as "a self-sufficient, profitable company".

"I am confident that we will be able to welcome back some of our colleagues who will be leaving us at this point," Bahl said.

In the past two weeks, Snapdeal has witnessed the exodus of several top executives.

SoftBank, the main investor in Snapdeal, has written off its investments in the company twice over the past nine months, which will make new funding rounds harder for the bruised unicorn.