Can Sources of Funds lead to an insight into the super competitive Indian taxi aggregator market

Indian taxi landscape has completely been changed (I believe for the better) by two poster boys: Uber, the world's most valuable young company (using the term startup wouldn't justify a company worth $50 billion) and Ola, India's third most valuable young company (after Flipkart and Snapdeal). Now, here I am not writing to praise these companies or discuss their business model. That has been done enough. What makes me write are the bewildering claims by these two competitors about their business in India. As per an article in Livemint , an Indian business newspaper, Ola claims to have a 75% market share while Uber claims to have increased their market share from 4-5% in January 2015 to 50%. Clearly, both cannot be correct.

With very limited financial information available on these two private companies, most people tend to rely on their personal experiences to judge how these two companies are faring against each other. Rather than discussing, which company is doing more business and gaining market share, let me focus to a slightly different observation. On almost all of my rides in the past one and half year (in excess of 100 rides in different cities like Bangalore, Hyderabad, Pune, Delhi), there is a universal complaint by Ola drivers of very late payments. I have this habit of having a small talk with these cab drivers to understand their experience with both Ola and Uber, and almost all (also referring to their friends) complain that Ola delays payments while Uber pays quickly.

What does delay in payments to cab drivers imply to the business? As we all know, taxi aggregators (Ola, Uber) collect taxi fares, charge a commission (20% or less) and then pay the remaining amount to the cab drivers. Delay in payments to cab drivers would mean sharp rise in Accounts Payable. So what? Increase in accounts payable can be a source of short term funds to push growth. Ola has been very aggressive in expanding to over 100 Indian cities and starting their grocery delivery business. Where does the money come for heavy marketing and discounting that Ola uses for customer acquisition. Major source has been PE/ VC funding. But as per the above observations, increase in Accounts Payable by delaying money to suppliers (cab drivers in this case) could very well be a significant short term funding option, especially when 80% of fares collected (20% is actual revenue) will classify as accounts payable.

Is squeezing money from suppliers as short term funding such a bad idea? Let's understand some of the implications of this strategy. Cab drivers might get dissatisfied because of delayed payments and shift to the competition, namely Uber. Now I cannot comment on actual figures, but anyone using these cabs regularly might have noticed increased cab availability on Uber platform in the past year or so. Real challenge in using accounts payable as a source of funds could show up in difficult economic conditions when liquidity in markets dry up. That time external funding slows down (if does not stop completely), and company does not generate enough cash flow. Also, the suppliers (cab drivers in this case) start demanding their payments immediately because of general liquidity crunch. It has happened before with Subhiksha (a retail poster boy during 2007-09) in 2009 when precisely the same strategy of using accounts payable as funding source to push growth backfired.

To conclude let me be very clear that I am not into predictions and generating forecasts of what would happen to Ola. I am no expert in macro economics to predict the next slowdown. But what I am trying to do is understand the implications of my observations. It is possible that my observations prove incorrect (as my sample size is small) or even if increased accounts payable is used as a funding source, the company could well turn profitable in 2-3 years without facing any economic challenges. Let's keep observing and analyzing and see how the future unfolds for the these two admirable young companies.


Credit: Arpit Tandon. Business Technology Consultant at Accenture