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After confirming layoffs, Snapdeal founders to take 100% pay cut

Chillicious News

E-commerce company Snapdeal confirmed on Wednesday that it would cut jobs as part of its efforts to turn profitable, even as its founders admitted to “errors in execution” and pledged not to take a salary.

In a letter to the company’s employees, co-founders Kunal Bahl and Rohit Bansal said that in keeping with a roadmap to “realign resources with continued focus on efficiency and profitability” and turn into a lean, focused and entrepreneurial company, a hard decision had been taken to say goodbye to a number of staff members.

The letter did not mention a number. However, sources told CNBC-TV18 that 500-600 jobs would be cut and the retrenchment process would begin in a week’s time, possibly in tranches. Employees will have the option to leave voluntarily and avail of a severance package of three months’ salary.

The company last reported a strength of 8,000 employees and the jobs are likely to be cut across Snapdeal, Vulcan Express (logistics) and FreeCharge (payments).

The letter went on to say that the industry and the company had been going through a tough time and that with all the capital coming into the market in the last two to three years, everyone had “started making mistakes”.

“We started growing our business much before the right economic model and market fit was figured out. We also started diversifying and starting new projects while we still hadn’t perfected the first or made it profitable. We started building our team and capabilities for a much larger size of business than what was required with the present scale,” the letter stated.

The co-founders said that many of the company’s leaders had also offered to take a significant salary cut.

The SoftBank, Foxconn and Alibaba Group-backed Snapdeal almost doubled its losses to Rs 2,960 crore during the financial year ending March 31, 2016. It had reported a loss of Rs 1,328 crore during the previous financial year. The revenue of the e-commerce major, rose to Rs 1,457 crore from Rs 933 crore during the same period of the previous financial year.

The letter mentioned that steps taken to boost efficiency had seen the company increase its EBITDA by 40 percent in the first nine months of FY17. In a recent interview with Reuters, Bahl had said he expected the company to turn profitable in the next two years. 

Former Infosys Chief Financial Officer V Balakrishnan said Snapdeal’s plight was similar to that of many other companies in the startup space.

Speaking to CNBC-TV18, he said that investors had initially focused on pumping in more money to get market share and in the process, the management had forgotten fundamental principles like profit and cash flows.

“It’s a good churn to happen but could have been avoided,” Balakrishnan said. “Companies in the tech space have converted capital into loss, which is an unsustainable model.”

He said he expected a similar fate to befall other startups and the Snapdeal founders’ letter should serve as an eye-opener for peers not to be greedy.

Below is the transcript of V Balakrishnan’s interview to Shereen Bhan on CNBC-TV18.

Q: As I pointed out, this letter, in a sense, is not just telling us the story of Snapdeal. It is telling us the story of what has gone wrong in India’s start-up ecosystem. What do you make of what is going on?

A: Exactly. In the initial stage of the sort of ecosystem developing in the country, a lot of free money came into the system. So, there are greedy investors who are pumping in more money than required into the company and telling them to go aggressively and grab the market place, in the whole process, the management forgot there is something called profit and cash flows.

So, in their thirst to get more of market share, they forget the fundamental things and most of the consumer companies, not only Snapdeal, many of the large companies are in the same position today with the money drying up and investors focusing on profitability. These guys have to take the tough decision which is a good churn to happen. Of course, it could have been avoided, but at least now it is happening. It is a good sign.

Q: You hit upon what I was going to ask you and it has again been articulated in this letter from Snapdeal founders. They say in the letter this will mean tough choices and a conscious departure from a me-too race to the edge of the cliff. Let us remember, gross merchandise volume (GMV) is vanity, profit is sanity. Unfortunately, the story so far has also been about touting GMVs as the next big milestone, as the big achievement and at the end of the day, my worry is that this is only the start. While Snapdeal may now be talking about retrenchment and making these tough choices, we are probably going to see a lot of other companies having to follow suit.

A: There are lot of \’x\’s that has happened in the consumer tech space and some of it will unravel in the coming months because their ability to raise money has come down with investors focusing more and more on profitability. There is a problem with the consumer tech space because it is a winners-take-all market, so the investors also became greedy, put more money and asked them to go and grab the market share. And the promoters also wanted to grab more market share so they started giving more freebies and they are making too much of losses. So, basically, they converted capital to loss. It is an unsustainable model. Anybody in the financial space will know that finally, profitability and cash flows are much more important and many more companies will realise this and probably change track in the coming months so that they do not come into the same position.

Q: Who would you blame for what has transpired in India’s start-up space and what do you see happen next because we are now seeing investors quite literally taking control of companies. We are also seeing forced consolidation perhaps being the order of the day. What do you see as the next few moves that could be expected?

A: Both, investors and the management has to be blamed because investors pump in more money than required. When you fund a start-up ecosystem, it is a dangerous sign if you fund more than what is required than some excesses will happen at the management side. So, greedy investors are the first ones to blame and of course, management had not seen the reality coming in and when they got free money, they started spending more and more and they have come to a situation where they cannot manage, they cannot raise money and that is why they are in a soup.

Having said that, I saw the letter. I think it is a very honest letter. It clearly says that they made mistakes and they want to correct and also leadership by example. When you put a pain across the country, the leaders should take the pain first, then it will be easy for them to communicate and make the change happen. I think it is a very honest and open letter and it is an eye opener for many start-up companies. All sort of companies in India should read this letter and change track and make sure they become profitable and do not become greedy.