An idea is not enough to start an e-commerce business

Now that e-commerce is being seen as even more disruptive than FDI, the rush to set up business in this sector has grown that much more

The biggest hurdle in starting a business in India is not government regulations but families, said Sachin Bansal, chief executive and co-founder of Flipkart.com, in a recent interaction with Business Standard. He spoke about the difficulty in convincing his family about the early risks and insecurities while turning an entrepreneur more than six years ago, that too in e-commerce, a sector that was just a tiny fraction of the retail industry with hardly any signs of growth to come.

Now, e-commerce is estimated to be a $13-billion sector, with projections of it touching $50 billion by 2020. While family still remains a hurdle, an entrepreneur needs to look at a host of other things such as legal permissions, finding the right business model, efficient delivery and payment mechanisms to build a successful e-commerce company. To start an e-commerce venture, you need at least Rs 1 lakh to register a private limited company, say experts. However, the cost varies depending on the scale and categories of the product that you want to sell and the kind of business model you adopt.

The set of government permissions you need for an e-commerce venture is not different from setting up any other company, says Anant Nahata, who recently ventured into selling high street fashion clothing online on Koovs.com.

Format
The inventory-led model, where a company stocks its products, is cost-intensive and the initial capital infusion is high. Among others, Flipkart followed this model till recently and Myntra still does. Then there are others such as Snapdeal, Shopclues and now Flipkart using a marketplace model where thousands of sellers are integrated through a technology platform. Such companies define themselves not as retailers but information and technology services. “We are merely enablers for merchants to sell online. We are not a retail company,” says Rohit Bansal, co-founder & chief operating officer of Snapdeal.com.

Most e-commerce companies which use marketplace model use border terms such as information and technology services when they make the company registration. “It’s important how you define your objective in the memorandum; it affects the kind of permission and the whole nature of business that you will do and, more importantly, the foreign direct investment you can take,” says a company secretary with a leading e-commerce company.

Up to 100 per cent foreign direct investment is permitted in companies defining themselves as ‘information and technology’ companies.

Even before the business model comes the team. “As the market is maturing and entry barriers are going up, it is important that you have the team with the right experience,” says Anshoo Sharma, principal, Lightspeed Venture Partners, a venture capital firm specialising in early- and expansion-stage investments. He adds any model (inventory, marketplace or hybrid) could be a success, depending on the overall product and category.

15 STEPS TO YOUR E-COMMERCE COMPANY

1. At least two people needed to register as a private ltd company (preferred over other partnerships because of limited liability and perpetual succession issues)
2. Minimum investment Rs 1 lakh
3. A memorandum with the objective, liability of member, capital clause of the company and article defines powers of the management
4. A clear objective of the company crucial. A marketplace company defined as IT services, marketing, etc
5. A marketplace company needs to registered with the service tax department for providing services
6. An inventory company defined as retail, wholesale, cash & carry or retail trade
7. An inventory-led model needs Trade Identification Number or TIN from the state sales tax department
8. If company working from leased or self-owned premises and has at least two persons, it needs to register under the Shops and Establishments Act, 1954, of the state
9. If there are at least 20 workers, registration with the employee state insurance necessary
10. Mumbai asks for special professional tax & local body tax and compliance with the labour department. No such taxes in Delhi and Haryana
11. If customer care services isn’t outsourced, other service provider (OSP) registration needed for bandwidth & phone
12. If labourers on contract and more than 20, registration with the contract labour department and compliance with labour rules needed
13. To launch the platform, registration for domain address, Microsoft and other software licences needed
14. Marketplace company needs to pay service tax of 12.36% and 30% tax on profit
15. Twin-company structures used to avoid foreign direct investment (FDI) rules. In inventory-led model, where FDI is not allowed, one company is wholesale/cash & carry which have no FDI cap. Enforcement directorate looking out for such companies

Sellers
Seller or vendors are critical to the business in the marketplace model. Sellers or small merchants listed online on the website are the backbone of the this format. “After we registered our company, we went literally out on the streets to find our merchants and sellers. We will just go to any normal shop and ask them if they were interested in getting listed online without any cost,” says Sanjay Sethi, co-founder & CEO of Shopclues.com, an online market-place that started operations in 2012.

He even sat for two days in a computer shop to put the catalogue online. “There is no organised way of finding sellers,” Sethi adds. Of course, sellers can be found through advertisements in local trade magazines, database of merchants, cold calls and word of mouth once merchants start making money.

“After the coupons and the servicing deals turned out to be a success, a lot of merchants approached us that they wanted to sell their products online and today we have over 20,000 sellers with us. The key to the success of your market-place website will be finding good sellers who offer great products at low prices,” says Kunal Bahl, co-founder and CEO of Snapdeal.com.

It’s the promise of faster delivery that has become a clincher in e-commerce after the price war, irrespective of the model you are using with most websites venturing into same day and next day delivery. “When I walked to my first courier service provider, he did not know and understand the dynamics of e-commerce,” says Sethi. However, the industry has come a long way since then. These days, there are various formats of contracts in place with liabilities and penalties. The nature and form of your contract will depend on the volume and the kind of products that you ship, said Bahl from Snapdeal.

However, it takes time to build an ecosystem and integrate the fragmented chain of courier partners in India. Private couriers can reach over 2,000 towns and with India Post, 4,000 towns and cities can be accessed.