Mass-scale layoffs, shaky business models, poor financial management — Ecommerce startups are creating news for all the wrong reasons. What's wrong?

In August 2015, real estate portal Housing.com announced its decision to lay off 600 of its 2,251 employees over the next three months. Less than a year ago, its flamboyant and outspoken founder-CEO Rahul Yadav was the toast of the nation; by July this year he was fired for bad behaviour.

The same month, TinyOwl, a food delivery startup with two offices in Pune and Mumbai, laid off 100 employees citing cost-cutting as the reason. But it was the November 4 decision of the company to sack 112 more people from four cities and shut operations there that brought TinyOwl’s revenue concerns into national focus. Employees from the Pune office held Gaurav Choudhary, one of the co-founders, hostage for several hours. So much so that he said he feared for his life.

Zomato, another food tech player, laid off 300 employees earlier this year. The Deepinder Goyal-led company is one of the country’s hottest startups and also one of the few Indian ecommerce entities to have a multi-country presence, including the United States.

So what has gone wrong with the startup ecosystem that is forcing many companies to shut operations or lay off people in large numbers? Nasscom, the apex body for software and software services providers in the country, says India is the world’s third largest startup ecosystem, with more than 4,200 registered new-age companies.

It is not the attention that is in deficit, experts say. Instead, there is a darker side to this growth, where false promises made by startup founders to lure talent are just one of the many problems. Lack of tight financial management, shaky business models and access to easy money among many new age companies is leading to a bubble, similar to that of a dot com bubble burst in 2001, they feel.

Says Commonfloor.com’s founder Sumit Jain, “The fundamental problem with food tech startups is that they are unable to justify high customer-acquisition costs.”

There are too many players fighting for the same piece of the pie, he feels, and “the low use of technology at the restaurants.” Mr. Jain would know; he invested in food tech startup Dazo along with Google India chief Rajan Anandan. The venture has shut down.

In a recent conference call with investors, Mr. Goyal of Zomato, agreed with Mr. Jain. “Higher customer acquisition cost is one of the challenges for the food delivery startups,” he told them. But he also stressed that all is well with Zomato, and that it can meet its revenue target.

In an email response to The Hindu, Tiny Owl’s spokeswoman said the company is working towards a viable business model. “Due to current reports we might be unfortunately perceived as an employee unfriendly organization, however, the ongoing restructuring developments have been conducted with all due diligence for employees being followed,” it added.

“Employees working in multinational companies think joining a startup is a good way of making money,” says Titash Neogi, founder of education tech startup Themeefy. “That needs to change soon.”

He adds: “Our culture does not teach us to handle failure, uncertainty and innovation; our ecosystem only talks about valuations.”

Serial entrepreneur K Ganesh who sold his company TutorVista to the UK publishing giant Pearson in 2011 for Rs. 1,000 crore, says startups are not like public sector units or government firms where one has got job security.

“There is risk,” Mr. Ganesh says. “It is like taking money from a fixed deposit and buying stocks,” said Mr.Ganesh. “Employees need to be mature before jumping to join a startup; they should not do it just to get a 10 or 20 percent hike.”

Industry experts say there is a need for more experienced directors, mentors and investors to help young entrepreneurs when they are sacking employees. TinyOwl and Zomato are prime examples. India is the youngest startup nation in the world, with 72% founders aged less than 35.

“Be sensitive,” Mr. Ganesh says. “Don't sack employees just before Diwali or Christmas, it a period when companies don't do any hiring.”

Another concern is the flow of private money into the system, which startups have used to acquire customers through discounts.

Some startups then use that transaction as an increase in the gross merchandise volume for a higher valuation.

“You are then using the funding capital or a major portion of it to just buy your future valuation,” said Nitin Jain, cofounder and chief operating officer of Hyderabad-based tech startup NowFloats that enables small and medium businesses get an online presence by simply using an SMS.

Mr. Jain says that the flaw in the business model arises when customer retention is also based on discounts.

“I don't think it is a sustainable model.” But it might tend to become a bull you don't know how to get off from as it tends to help ride up the valuations.”