One97 Communication’s Paytm Mall was expected to script an inspiring success story. However, it has only burnt investor time, money and patience.
- One97 Communications launched Paytm E-commerce Pvt Ltd in 2016 to invest in India’s growing e-commerce space.
- The company became a unicorn in fairly less time, with investors being highly optimistic about its O2O model.
- However, the company’s actual performance has been quite the opposite of investor expectations.
- E-commerce has proved alien to One97’s DNA, preventing it from scripting a success story similar to Paytm Wallet.
One97 Communications is a rare unicorn startup in India, which has another unicorn under its umbrella. The company itself tops the unicorn rankings in India with a valuation of US$ 10 billion. Its subsidiary Paytm E-commerce Pvt Ltd (Paytm Mall) became one of the fastest unicorns in India with an investment of US$ 200 million in 2017. The company was hived off its parent entity in 2016.
But is valuation everything? Paytm Mall relied on the same cashback-based approach of its parent company to drive high growth with VC money. In fact, Paytm founder Vijay Shekhar Sharma was also involved in a Twitter debate on the same with UTV founder and serial entrepreneur Ronnie Screwvalla.
And investors Alibaba, Softbank and SAIF Partners also exhibited the same bullishness. But it
did not have the same success. In fact, Paytm Mall’s business has fizzled out almost as fast as it rose.
Paytm Mall bet on the Offline-to-Online or O2O model, of T-Mall in China to be successful in India, a departure from the usual inventory-led business or creation of private labels. Offline stores account for over 60% of its sales and it operates across 700 towns in India. Products are delivered from local brand stores, who also have their web pages on Paytm Mall.
The company posted revenues of Rs 774.8 crore in 2017-18, growing by 100% yoy. However, net losses ballooned by 150 times yoy to reach Rs 1,787 crore during the year. This is in fact close to the annual budget of Rs 1,800 crore earmarked by the Modi government for the bullet train project!
Source: DKODING Intelligence & Media Report
Source: DKODING Intelligence & Media Report
The company’s cash reserve was a negative Rs 1,062 crore as compared to Rs 1,282 crore in FY 2016-17. It got an investment commitment of US$ 450 million from Softbank and Alibaba in four tranches in 2017. It has raised around US$ 640 million till date, with a valuation of US$ 2.23 million.
Recently, it was reported that Paytm increased its working capital loan limit from Rs 400 crore to Rs 1,400 crore by hypothecating its current assets and mutual funds with ICICI Bank. This shows that the liquidity position is quite inadequate to meet its working capital needs.
Black hole for investor money
Cashbacks do not seem to have worked to drive either volumes or unit economics in Paytm’s favour. In fact volumes are dropping every month according to reports. So neither Alibaba nor Softbank seem interested in funding the model anymore.
The company last raised around Rs 2,900 crore (US$ 445 million) on a valuation of US$ 2 billion in April 2018. But it has burned Rs 2,000 crore since then, excluding expenses like customer access and royalty fee that were given to the parent entity.
Around Rs 500 crore was spent on cash backs during the festive season itself. It is estimated that the company has already burned around Rs 2,600 crore during FY 2018-19, if royalty and access fees are included.
As a result, Paytm is reportedly looking to shift its focus from the B2C business to B2B according to a media report, with a model that enables small merchants including kirana stores to purchase products from large sellers and manufacturers.
Paytm has simply been unable to crack e-commerce, with the market largely dominated by Flipkart and Amazon and concentrated on a few categories like mobile phones. It overplayed its hand in an arena where it had little expertise, and has suffered miserably as a result.
- Paytm Mall’s failure shows that just high valuations are no guarantee of a company’s true worth.
- Cashbacks have worked in favour of Paytm, but the e-commerce business is far more than plain discounts.
- Instead of repeating the success of its wallet, Paytm Mall has only bled money without even sustaining volume growth.
- Entrepreneurs have to be wary of following the cashback model blindly without understanding the operational metrics of a business.
You may like to view our related coverage here: