ShopX Shutdown Points to B2B Platform Traps

Like many FinTech companies, Indian e-commerce platform ShopX was once a high-flyer.

The company, backed by Infosys co-founder Nandan Nilekani and Fung Investment, has raised over $54 million and was valued at over $100 million during its latest round. Nilekani alone invested $18 million.

But the Indian e-commerce enabler had been unable to raise equity funding since April 2020. That coincides with the pandemic’s chilling effect on fund-raising by unprofitable companies that rely on the promise of growth to lure equity investors.

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Now it has shut down and filed for bankruptcy, according to Indian officials. And it offers a warning for other B2B marketplaces.

A look at regulatory filings reveals a series of failures that usually move in lockstep: low margins that torpedoed the original business model, a failed pivot to the consumer, and finally the inability to service the debt the company was forced to take on to continue the operation.

Low margins

ShopX tried to help create the e-B2B industry. Over time, it became unviable to operate on a large scale given the low margin profile of the industry, leaving the firm with no option but to shut down operations, according to a company spokesperson.

The business model for the B2B market is challenging, even if it is popular. Each platform needs enough buyers and suppliers and a value proposition for each. The platforms must add sufficient value to both buyers and sellers to get volume on both sides of the transaction. Like any market, the number of traders determines the level of liquidity. Only then can the network effect kick in, creating self-sustaining organic growth.

Low margins suggest that ShopX may have subsidized one side too much, and/or run a race to the bottom for buyers so that the suppliers got off the hook.

Pivot failed

The company transitioned from its core model – an assisted e-commerce solution that includes procurement, supply chain and credit line for five years – to an e-commerce enablement platform in mid-2021.

ShopX tested the crowded consumer website with the launch of a cash-back app.
For a company with financial problems, a high burn rate and limited visibility, this was a challenging path to follow. Marketing costs are notoriously high in the B2C space, while entrenched competitors like Amazon and Flipkart have well-entrenched and formidable moats.

Debt

Lacking cash flow from operations or new investments, ShopX took out multiple loans from its Singapore-based investor Fung Investment and was unable to meet its payment obligations.

Implications for industry

The failure of ShopX shows that the promise of B2B marketplaces can fall prey to the pitfalls of trying to offer a compelling value proposition to both buyers and sellers while maintaining margins at scale that can generate sustainable cash flow. As the capital markets have lost interest in unprofitable companies in today’s investment climate, such startups are forced to use debt. Rising rates make maintaining such financing challenging.

As companies rush into the space, they must therefore be aware of the headwinds. Given the circumstances, only the strong will survive and a shakeout is likely on the cards.

A survival strategy is to specialize in a narrow niche, which in itself provides differentiation.

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