Rs 500-Rs 1000 notes ban : Initial hiccups lead to “good days” for startups

Rs 500-Rs 1000 notes ban : Initial hiccups lead to “good days” for startups

10th November, 2016, New Delhi : When I spoke to Hyderabad-based entrepreneur Ashok Reddy yesterday morning, he was a hassled man. It had much to do with what happened  the day before i.e. the evening of 8th November 2016. Indian Prime Minister Narendra Modi announced the ban of Rs 500 and Rs 1000 notes in the country, in a move to eradicate fake currency, corruption and illegal income. More details here.

Reddy’s phone did not stop ringing the morning after this announcement and he was busy wondering how he would  manage the same number of orders in his business for the next two to three months. He runs a startup called Mywholesaler which is a web based B2B startup in the grocery space meeting the needs of retailers, who experience gaps in the existing arrangements and are looking at facilities beyond just stock procurement. He sells products to retailers in a more organized way than other distributors. On an average, he gets around 120 orders every day, but 75 of them had been cancelled or postponed yesterday as local retailers were facing lack of cash to pay to him. Even Reddy’s delivery van drivers were more than willing to exchange their 1000 Rs notes for bundles of Rs 10 which they often refused earlier. Reddy’s challenge is only a tip into the temporary iceberg of the condition of SME’s and startups at this very moment. Entrepreneurs operating in rural areas are even under more stress.

The good news is that despite these challenges, startups confess that there is a bright light at the end of the tunnel. They only need to look for innovative ways to sustain themselves for the next two to six months.  Reddy knows what will work for him, “I just need to increase my customer base- from 2000 retailers right now to 5000. I can envision the benefits of this effort by the government in the long run. A company like mine will have more acceptance by retailers, they will have no reason to pay me ‘just’ in cash. The next three to four months will be tough, but eventually the retailers will have to use mobile wallets and deal in a more structured way through our mobile app.”

While startups are dealing with these small hiccups, industry anchors are very positive and cheering the decision by the Government. Prajakt Raut, who mentors various startups in India says,

“Quite a few startups will benefit, particularly the ones that are organizing traditionally cash driven segments like grocery and fresh-produce distribution. Most startups are born with the idea to bring unorganized sector to organized and this initiative will encourage 100 percent formal trade in India.”

Pranay Gupta, Founder, 91 Springboard echoes the sentiment and mentions that there might be a cash flow issue in the beginning, but there will be no fund-flow issue. He is optimistic about the ripple effect of this decision by the Government. “Suppose, say a farmer is forced to open a bank account, then he will be also eligible for loans.”

Startups in the rural sector

Sanjog Sahu of Māti Farms, a startup located on the banks of Chilika Lake in Khordha district of Orissa, is facing the real-time ground level realities of this move by the Modi Government in rural India. He feels that it is already evident how India’s hinterlands will be disproportionately hit; the agriculture sector is especially vulnerable because of its unorganized nature and reliance on informal workforce, and startups in this space might struggle initially to operate under the new restrictions imposed on cash withdrawals.

Sahu offers some food for thought amidst the optimism in the urban startup ecosystem over this move. “Even if the Government overcomes the sheer logistical challenge of integrating the entire casual workforce into the formal banking framework within a short period of time, it is difficult to see how existing banking infrastructure in rural areas – with banks and ATMs often being half a working day’s journey away – can implement the Modi Government’s directives without seriously impeding rural economy and its people.”  According to 2015 data, In India, not only account penetration is comparatively low, at 53 per cent, but so is the use of accounts for paymentsmere 15 per cent of adults reported using an account to make or receive payments.

Hemendra Mathur, a venture capitalist who specializes in food and agricultural sector agrees to the positivity of the long run and explains that Fin-tech companies as well as data analytics companies have a lot to gain by this move. Even if 50 percent of consumers shift to online transactions, there will be huge amount of data available for the marketer.

Regarding impact on startups in rural India, Mathur says,

“ I am talking to a lot of companies that deal with farmers regarding this step by the government. The good news is that middle men will disappear in all transactions with the farmers. I also see more of smartphone penetration in rural India in the future. I am delighted as an investor- this will lead to more compliance and governance in all companies across all sectors.”

The big boys of consumer Internet

The consumer facing Internet companies might face challenges at their own level- they have more at stake when it comes to numbers. According to a media report in Mint, this year in the month of July, both Flipkart and Amazon reported gross sales or gross merchandise value (GMV) of approximately  Rs.2,000 crore , whereas Snapdeal (Jasper Infotech Pvt. Ltd) reported gross sales numbers of roughly Rs.600 crore. These Internet companies thrive on the business model of Cash-on-Delivery. Industry estimates say that 60 percent of the transactions for these companies are still COD. The numbers involved are huge here.

One can be sure that sales of the Flipkart or Amazon will slump. Cite the example of  Ankur Warikoo’s company Nearbuy which did a smart move two years back by going cashless. Warikoo recalls that two years back when the company completely shut COD and moved to 100 percent online transactions, there was definitely a slump in sales. Warikoo was prepared for the decline in orders with this move and he does not regret it one bit today.

“It was the smart thing to do at that time. Our transaction value of selling products online is half of what it was to sell products offline. In the long run, this decision has played up very well for us.”

One could say that Nearbuy is ahead of the curve and nothing changes for the company in terms of orders.

Karan Kalia,Member, Startup Committee, Indian National Bar Council concludes on an optimistic note, “The Government planned this initiative in an extremely organized manner. Last year, the it introduced Pradhan Mantri Jan Dhan Yojana which encouraged everyone to open a bank account. It completely depends on the startup how they are going to deal with the situation. Some will catch up early, and some will take time depending on the sector they deal in.”

Diksha Dutta is an Indian columnist and media professional. She has a wide experience of writing on startups/VCs/PE during her six-year long stint as a full-time business journalist. At present, she is also working on a book on Indian businesses with Bloomsbury India. Diksha works at Ashoka University, a pioneer in liberal arts education in India. She is based in New Delhi, India.

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