Start ups in the e-commerce space attract huge amount of investment. Is it a case of too much money chasing too few companies? Some fear that there could be a crash just like the one the dot.com companies faced in 2000.

Most start ups have been bench-marked against those in the US and China, and unless some disruption occurs in the environment there, there is no fear of the valuations tapering down. Indian start ups have scaled very fast. The issue is whether these investments will fetch healthy returns or not. Many global funds, especially the hedge funds have limited exposure to the Indian digital market. The global capital inflows, therefore, will insulate India from the adverse effects. As long as there is liquidity in the market, the valuations are justified. And the exit environment must be supportive.

These e-commerce entities have been valued at 2-3 times their Gross Merchandise value (GMV ). Most retail companies are valued at 1x their sales. These e-commerce companies are growing fast — say 200 per cent. Why can’t we value them at 2x.

The problem is with their business model — heavy discounts, selling below cost, negative goose margin. Valuations are based on too much future assumptions.