December 2011. Late on a cold Delhi night, two twentysomethings were poring over a laptop screen, giving final touches to a blueprint for a robotics company they wanted to set up. Samay Kohli and Akash Gupta, who had built robots for a few firms, would present the business plan the next day to Wolfgang Hoeltgen, a former senior executive of IBM Germany on a visit to India. Hoeltgen trashed the plan, but when Kohli and Gupta sent him a revised one after he had returned to Germany, he replied: “I like what you guys are doing. Let’s begin.” As a pat on the back, he wired €25,000 (Rs 19.4 lakh at present rates) for Grey Orange Robotics, the venture in which he would be co-founder with Kohli and Gupta.

Unknown to Hoeltgen, he was teaming up with the two young men at a time when Indian e-commerce was at a turning point. In January 2012, Snapdeal, a prominent e-commerce player, decided to ditch its inventory-led model and go marketplace. The latter is more nimble because operations such as inventory management, cataloguing, logistics, and warehousing are outsourced to sellers and enablers (the people and companies managing the back-end, enabling a smooth transaction), allowing the e-commerce business to focus on user experience and customer acquisition.

Samay Kohli (L) and Akash Gupta, founders, grey orange robotics
Samay Kohli (L) and Akash Gupta, founders, grey orange robotics

India was beginning to resemble the U.S. of the late ’90s, when retail giant Walmart began spreading across the country. It not only made a lot of manufacturers and distributors rich, but also created an ecosystem of large supply-chain, logistics companies, and warehousing units. Banks and financial institutions gained because all this growth needed capital; marketing and advertising agencies blossomed; and together, these nudged the GDP higher. A similar scenario was beginning to unfold in the Indian e-commerce space, with the emergence of a wide pool of sellers and service providers to run the marketplace model.

Doing business online, especially trading, has some advantages over brick-and-mortar set-ups. The entry barrier is low because of savings on marketing costs and rent. Samir Kazi, founder of Gadgetbucket, an online seller, has used these advantages to break into the e-commerce space. Son of an autorickshaw driver, he grew up in Kalyan, a town around 45 km north of Mumbai, and studied in an Urdu-medium school. After stints as a store assistant and a call centre employee (that’s how he picked up English), he rose to the post of team leader at an outsourcing firm in Mumbai.

On a weekend in mid-2011, Kazi, then 27, posted an offer to sell mobile phones on eBay, knocking Rs 1,000 off the going price. Within two weeks, he had sold four handsets. He soon included batteries in his portfolio, and, in November that year, made a cool Rs 90,000. Despite a home loan, a car loan, and a family of five to support, Kazi quit his job and started selling gadgets and computer peripherals online. His wife, Razia, also a team leader at a call centre, joined him and they started operating from a small rented office, with his bedroom doubling as warehouse. “I remember waking up next to masking tape and polystyrene. But the harder we worked, the more we sold,” Razia tells me over vegetable stroganoff, a dish she’s trying for the first time.

Gadgetbucket closed FY14 with a turnover of Rs 3.6 crore and has registered a top line of Rs 3.7 crore for the first half of FY15. Along the way, the Kazis have gone through aborted expansion plans, rushed back from family get-togethers to fulfil orders, learnt the basics of corporate taxation, grown out of two smaller offices, and hired a team of 30. They have an office in Delhi, too, and stock 1,200 articles—ranging from apparel to household goods, and sourced from wholesale markets in India and China. “Apparel is the next big category after gadgets,” says Kazi. So, these days he’s busy working out the beta launch of his apparel portal.

Rajiv Sinha, fopunder, Vanca
Rajiv Sinha, fopunder, Vanca

Sellers such as Kazi want to take the online route as it provides instant access to a large consumer base. “You can build a national presence in one click. This changes the dynamics of a traditional business model. For a seller, that is years of scaling up in one shot and at a negligible cost,” says Ankur Bisen, senior vice president at retail consultancy Technopak Advisors.

For enablers, however, scaling up is more complex. In mid-2011, Flipkart took Gupta and Kohli to its Mahipalpur warehouse to see if the robotics geeks could help it manage its logistics. Until then, the two had been custom-making robots to clients’ specifications. Making robots aimed at a particular industry would help them scale up. The Flipkart project allowed them to build expertise to focus on the e-commerce sector.

Grey Orange went on to develop two types of robots, one for sorting and the other for moving goods, and now also has Chinese logistics companies as clients. Tiger Global has invested $10 million (Rs 61.4 crore) and Blume Ventures $500, 000 in the startup.

Enablers function as a bridge between e-commerce platforms and vendors, their revenues coming from both. Which is why Gurpreet Singh, co-founder of Browntape, a Goa-based order and inventory management solutions company, believes competition is good. “In developed markets such as the U.S. and Britain, there are large ancillary firms that specialise in certain categories. Some focus only on the top 2,000 vendors because their operational dynamics are different from the rest of the 150,000. India has a long way to go towards increasing the number of online sellers,” he says.

Here’s the math that’s driving the enablers: Currently, about 25,000 merchants sell on Snapdeal, while both Flipkart and Amazon have about 4,000 sellers each. A recent report by PricewaterhouseCoopers and Assocham states that e-commerce firms are expected to spend up to $1.9 billion by 2017-2020. The three companies will spend a chunk of this on acquiring customers as well as vendors. “There’s talk that both Flipkart and Amazon want to expand their vendor base to 50,000 over the next 15 months,” says a private equity investor.

In early 2012, among the first to realise the import of Snapdeal’s decision to adopt the marketplace model were former Bain consultants Sahil Barua, Mohit Tandon, and Suraj Saharan, who had co-founded an e-commerce logistics company, Delhivery. Those days, consulting firms and industry bodies predicted that the Indian e-commerce industry would reach $10 billion by 2020 (the figure has since been revised to $70 billion). Instead of merely being a link between e-commerce portals and customers, Delhivery saw the opportunity in servicing lakhs of manufacturers, traders, and sellers across the country. In the second quarter of 2012, Tandon came back from a meeting with Snapdeal with an Excel sheet containing details of 600 vendors. Until then, Delhivery had been doing pick-ups from warehouses in 15 locations; now Snapdeal wanted them to do it from 600.

Razia Kazi, Gadgetbucket
Razia Kazi, Gadgetbucket

“We had to quickly shift to a drop-shipment model, where an item is picked up from the vendor and delivered to the customer without routing it through a central warehouse,” says Barua. That needed a different set of operational systems—smaller processing centres, a pick-up fleet, and a new order-fulfilment solution.

Suvir Sujan, co-founder of Nexus Venture Partners, which invested $5 million in Delhivery in 2013, says the company has done well because it’s not wedded to a single model. “It’s agile, which is crucial in a market evolving so fast.” The company now delivers around 51,000 shipments daily across 180 cities. A top line of about Rs 200 crore and a recent fundraising of $35 million has pegged its valuation at Rs 500 crore, making it the poster child of the e-commerce ancillaries sector. “We’ve made mistakes—we didn’t know where to have our distribution centres or how large they should be. But we learnt along the way,” says Barua.

Razia attributes Gadgetbucket’s success to Kazi’s knack for predicting and rolling over inventory, but for most sellers, estimating and planning the inventory cycle is a huge challenge, especially with fast delivery deadlines. Over the past two years, firms such as Unicommerce, Browntape, and Eye and Buy have made a mark in this area of e-commerce’s backend—IT solutions for inventory management, channel management, and order fulfilment.

Ankit Pruthi, who built Unicommerce, along with his IIT Delhi batchmates, says its niche is inventory management platforms that link vendors with marketplaces. “We realised that vendors needed solutions that are integrated with those of the marketplaces. The idea is to get everyone on our platform,” says Anup Gupta, managing director at Nexus Venture Partners, which has invested in Unicommerce.

The marketplace model has also helped existing players diversify their portfolio of services. Parkal Suhas Kamath, Ankit Asthana, and Archit Arya had been running Eye and Buy Retail as an inventory and order management solutions firm for a year when some of their existing clients sought their help in building an online catalogue. “One thing led to another and soon we were spending our days arranging photoshoots, co-ordinating models, and setting up equipment,” says Kamath. As Flipkart was on its way to become a marketplace, it approached Eye and Buy with its list of vendors who needed cataloguing and listing services. Within a year cataloguing and listing had become two-thirds of Eye and Buy’s business.

“Eye and Buy has done good work with cataloguing. We have worked with it extensively and now offline brands are also approaching them,” says Ankit Nagori, senior vice president, Flipkart.

Online retail might have triggered the biggest gold rush in India since the IT revolution in the ’90s, but the sector is not prepared to deal with the explosion of sellers, who are all aiming at near-vertical growth. Sometimes, a slowdown can even make the business unviable, as Puja Kapila, owner of online apparel brand Erato, is realising.

Three years ago, Kapila quit her job as the category head of Fabindia, a large apparel retailer, to start her own business. “I understood fabrics and design, and I wanted to do something on my own,” says Kapila, who started a factory to make ethnic wear for men.

For the first four months of 2012, she chased large offline retailers to stock her brand but they refused. Writing off the investment of Rs 8 lakh, she shut down the unit and decided to outsource production and sell online. Initially she was selling goods worth Rs 2.5 lakh every month, but sales have come down to a trickle in the past few months. “Online marketplaces expect that the seller will put up 10 new designs in a month. That’s not easy for someone operating on my scale,” she says.
The lack of working capital also holds up the growth of small businesses. Vendors, who do not manufacture the goods they sell online, have a tough time getting loans because they have no factories or assets to inspire lenders’ confidence. Creditworthiness is evaluated on the basis of the firm’s balance sheet and tax returns, so if these are not robust enough, a vendor is not welcome at banks.

Harshvardhan Lunia, a chartered accountant from Ahmedabad, set up Lendingkart to address the needs of such businesses. After seven years as a banker, of which two were spent in London, Lunia returned to India to set up a financial advisory firm for small- and medium-size companies. He soon realised that scaling up was difficult because “there was a lot of information asymmetry between their financial statements and actual businesses”.

Drawing on his experience in London, where loans were pegged to cash flows and not just financial statements, Lunia devised a creditworthiness model to lend working capital. Kazi, who met Lunia at an event in Delhi, became Lendingkart’s client, the first of the 15 it now has. A few months ago, Lendingkart raised $1 million from Indian and U.S.-based venture capital firms.

“There’s a lot of investor interest because working-capital loans add directly to the gross merchandise value, which is the basis for valuation of large e-commerce players,” says Lunia.

Mohit Tandon, co-founder, Delhivery
Mohit Tandon, co-founder, Delhivery

A similar Bangalore-based startup, Capital Float, has teamed up with apparel portal Zovi to provide working-capital loans to its sellers, helping it retain the vendor base and ease demands on its cash flow.

Sunil Dhingra, founder of Jazzmyride, India’s largest online distributor of car accessories, agrees that scaling up is by far the biggest challenge for a seller. “After a point, it gets difficult to grow because seller-side processes haven’t matured and returns policies favour the customers.” Delays and errors in settling payments, weight reconciliation issues, and inability to plan inventory can upset the cycle. Recent successes of brand tie-ups with large e-commerce portals have convinced him that sellers will find the going tough in future. Therefore, he says, building a brand could be a solution. “Sellers have to identify a niche or a product that will help build a brand—something that is not easily replicable.”

Rajeev Sinha, who has built apparel brand The Vanca, is what Dhingra is referring to. After more than a decade and a half in the corporate world, Sinha quit his job in 2010 and took on a business development role at Expressions India, a Delhi-based export house at which he is a partner. “We’re doing about 900 orders a day. Even if we witness sharp growth, we will stagnate at 2,000. If I create a brand, it adds a lot of authenticity to the story,” says Sinha.

After getting systems and processes in place in the first few months, Sinha began selling Western dresses for women online from April 2011. “Our competency lies in quickly creating new styles,” he says. When others approached him to supply for their labels, Sinha declined. “Money will eventually flow after a couple of years. I want to build my brand,” he says. The strategy is paying off. From August, Shoppers Stop online and five of its stores have begun stocking The Vanca.

Ahmedabad-based Ashutosh Valani and Kunjan Chauhan’s foray into brand building was by accident. They had been running an online business of low-priced electronics accessories for four years, but volumes stagnated at 1,000 orders in 2013. They were brainstorming for a new idea when Valani’s new Samsung Galaxy S4 began playing up. “[When I tried to sell it off] I was offered Rs 8,000 for what I had bought for Rs 38,000 just a few weeks ago. We were curious to find out the cost of making a similar mobile. It was around Rs 6,000,” says Valani. Back-of-the-envelope calculations and some informal data from Flipkart and Snapdeal indicated that together they were selling mobiles worth Rs 500 crore every month. “So, Kunjan and I decided to build a phone and sell it.”

For the next four months Chauhan, a fashion design postgraduate, co-ordinated with handset makers in Shenzen, China, to design a new phone, while Valani sorted out the paperwork and licences. “You need a hundred approvals before you can register a company to sell a mobile phone in India,” he says. In May 2013, Valani went to China and came back with 500 units of Alpha Feather, a Rs 12,374 smartphone with specs similar to those of the Samsung S4. The stock ran out in two weeks. “Snapdeal helped us market the product under its Launchpad initiative,” says Valani.

As the delivery of another batch of phones would take about a month, which is too long in a market where a new smartphone is launched every third day, Valani realised that the Alpha Feather that worked in May and June might become outdated in July. So he ordered 5,000 handsets of a dual-SIM candy bar phone with a camera, radio, torch, and Wi-Fi that can send Whatsapp and Twitter messages, to be sold at Rs 799. He’s now looking to build a war chest to advertise online and build the Alpha mobile brand.

(l-R) Archit Arya, Ankit Asthana, and Parkal Suhas Kamath,co-founders, Eye and buy retail
(l-R) Archit Arya, Ankit Asthana, and Parkal Suhas Kamath,co-founders, Eye and buy retail

Singh of Browntape is often asked how artificial intelligence will shape the e-commerce space; Browntape co-founder Piyush Goel has a Ph.D. in the subject. “There’s a new level of solutions that will flow into the system soon—analytics,” he says. “It’s about using data to tell the vendor, ‘This is your seasonality and these are the products that do well during that time’, or ‘When you do a deal or a promotion, this is how you should plan your inventory’.” He’s also upbeat about automatic re-pricing, a system where a product’s price moves in tune with the competition.

Barua of Delhivery believes the next opportunity lies in making processes simpler for the merchant. Payment solutions are also an area of interest. The lack of an escrow service for merchants is a glaring gap in the system, considering the success China’s Alibaba has had with Alipay, its inhouse payment solution. So far, payment gateways started by Indian e-commerce firms have failed.

Alibaba’s story in China, where e-commerce contributed 4.4% to the GDP in FY13, shows the impact it can have in India as well. In a decade and a half since Alibaba was launched, the Chinese e-commerce industry has grown to $215 billion. More than two-thirds of this belongs to Taobao, an Alibaba company that connects consumers with sellers, many of them in rural China. There are reports on farmers from Chinese villages who have become millionaires by selling online. In India, which is second only to China in population, with a chunk of it in villages, e-commerce could be the road to inclusive growth.