An in-depth look into the controversies surrounding Evaly and the state of e-commerce in Bangladesh
“Valley of death” refers to a situation where a start-up has zero revenue and the highest chance of failure due to a lack of funding or a revenue model that keeps it afloat.
Today, however, we are talking about a start-up that has garnered significant traction in terms of revenue run-rate and eyeballs -- yes, we’re talking about Evaly.
Setting the context
Evaly claims to have booked 3.5 million customers, fulfilled Tk1,500 crore ($176mn) worth of orders, employed 700 direct employees and 3,000 riders, reputedly reached a monthly revenue run-rate of roughly $42m (Tk350 crore) that puts annual GMV (gross merchandizing values since e-commerce market-places deal with products from merchants rather than its own products and, as such, is not addressed as revenue) to half a billion dollars prior to the recent stalemate.
To put things into perspective, out of 10 households in Bangladesh, one household has an Evaly customer. Evaly, if it were allowed to continue its run unchecked, today would generate GMV comparable to the annual turnover of ACI limited -- a conglomerate which has been in business for many years, has around 10,000 direct employees, and also boasts an extensive network of dealers and distributors across the country.
Flipkart, an Indian e-commerce giant that has roughly 6bn in GMV and has raised $700mn, employs 5,000 people directly in its West Bengal hub alone (with a population of 90 million) with another 15,000 or so indirect jobs supported by its operation.
The key question that has been doing rounds is whether Evaly is a legit business. It is offering insane cashback offers and many people are complaining about delivery issues.
Before we comment, let’s note that most of the e-commerce transactions take place based on advance payments. E-commerce models differ between marketplace and inventory-led solutions as there are legit group-buying portals that accumulate orders and deliver later.
If you were to order in Ali Express, you would have to pay upfront and wait more than three months during Covid-19-driven logistics issues although usual timeframe is 30-45 days.
Where Evaly is an exception is in the way it offers cashback services to drive volumes. We will explore later whether it’s a trap to sponge off cash from gullible masses or a legit business model.
But clearly going by its depth as an organization, it doesn’t seem like they have the organizational capacity afforded by many of its regional peers regardless of the mammoth scale of Evaly’s operations.
Typically, there are a number of mechanisms to ensure trust in e-commerce and Evaly, to my knowledge, is not using any of these.
For example, the fact that an Evaly agent was arrested with cash advances from customers is not an encouraging sign -- why would an established e-commerce business deal with cash to such an extent?
Ponzi scheme versus pyramid scheme
So, before we start exploring further, let’s take a moment to understand the difference between a pyramid scheme (MLM) and Ponzi scheme.
A great number of experts are getting these two confused as many defend Evaly for not being a pyramid scheme, while others criticize it for being so.
A pyramid scheme or MLM (muti-level marketing) is a referral marketing system where old users are compensated for bringing in new users. People who get in are bound to use subpar products/services in the platform to recoup some value or recruit new users to recoup investments and make more money.
Ultimately, new user additions go down, top level operatives walk away with a lot of cash, and most of the low-level members return empty-handed.
Evaly is not offering any incentive to recruit members in its platform as far as I know. So, in the classic sense, it’s not a pyramid scheme.
However, when we review the definition of Ponzi scheme, we may have some fodder for thought. A Ponzi scheme -- which is more prevalent in the investment world -- attracts new investors by offering high rates of return with very low risk.
It attracts earlier users by offering them very high returns over a limited period, which prompts new investors to line up.
Like a pyramid scheme, Ponzi schemes pay old investors with new money. In the well-known case of Bernie Madoff, 1/3rd of the money was lost in this system.
Evaly started to offer very high amounts of cashback and, since early users were getting their orders with no fuss, new users came in.
Assessing the depth of the issue
Before we come to a conclusion about Evaly, let’s look at the depth of the problem. There have been wild conjectures regarding the amount of money Evaly has amassed through its system, and we know it has fulfilled Tk1,500 crore worth of orders as per the submission of the owner.
Evaly has taken e-commerce to every nook and corner of this country -- people living in places where only weekly courier deliveries take place are known to have placed orders driven by crazy cashbacks. Therefore, estimating how much money went into the system is important.
Drawing from the AliExpress example, 30-40% of the customers are inactive. That will put total active users to 2.1 million (60% of 3.5 million of total registered users). It has been said that there are users who have more than Tk30 lakh sitting in their e-wallets. Which sets the range of wallet balances from Tk0-Tk30 lakh.
If we go by the method used by globally renowned consulting agencies, around 20% of the active users should be responsible for 80% of the wallet balance/top-up/payment into Evaly.
Typically, these users will be on the platform for high-value products such as TVs, motorcycles, fridges, etc.
Therefore, their wallet balance can naturally be in the range of Tk50,000-Tk100,000.
So, if 20% of active users (that is around 400,000) are responsible for 80% of the total cash, and if these users on average have about Tk20,000-Tk100,000, Evaly potentially could have raked in around Tk1,000cr-Tk5,000cr taka.
Given that Evaly has fulfilled (per the CEO’s claim) Tk1,500cr worth of orders, let’s see how that range compares with the fulfilled order value as per Evaly.
Clearly, Evaly couldn’t have fulfilled orders worth more than the money it took. So, average wallet top-up of Tk20,000 by high value users can be ruled out. So, the range of the money that could have gone into the Evaly system is Tk2,100cr to Tk5,200cr.
The lower numbers are unlikely, given how many dissatisfied customers are crying foul. Therefore, a reasonable number is Tk4,000-Tk5,000cr ($450-$600mn).
Now, looking at that number, Evaly operations may look like a Ponzi scheme that solely depends on new money coming under its system to fulfill earlier orders. The music is also supposed to end at some point, leaving a large scale of dissatisfied customers.
Similar models like Evaly
A oft-heard comment about Evaly is that it’s a local innovation and a unique idea that needs to be patronized and saved. Let’s explore similar ideas globally which underwent regulatory backlash. Several e-commerce players/start-ups were accused of running similar operations:
1) The US SEC termed Saivian Cashback International as a Ponzi scheme as its program essentially was paying off old users with new user money without creating value through product delivery and the usual cashback was 20%
2) In China, full cashbacks saw significant rise in 2016 and many operations were busted and those allowed to operate had to curtail cashbacks significantly
3) In 2010, Wanija Shopping which was second to Taobao in GMV that time (again, some similarity), established a rebate model based on usage that can potentially earn back every penny spent. Their GMV reached 300mn Yuan per day (Tk370cr per day in today’s currency) while total amount involved in the scheme was 24bn Yuan (around Tk30,000cr in today’s currency).
They later moved to the MLM model as well, incentivizing old users for bringing new users. Zhejiang Jinhua Police seized the website and put an end to its operations; the founder was sentenced to 15 years in prison
4) In 2013, Paytm started offering cashbacks designed as lotteries and received harsh criticism for promoting gambling. For context, Paytm raised $1bn in 2019
A note on investigation
Given the extent of money involved, a transparent probe should be launched on Evaly while ensuring it can’t appoint lobbyists or sway the investigators by any means. Below are the measures that can ensure that a fair probe is carried out:
● Evaly needs to disclose the list of customers and their wallet balances to investigators. To ensure customer privacy, a message on the app as well as an SMS to each subscriber should be sent and customers should be requested to report to a complaint cell if there is any discrepancy.
Otherwise, a lower than actual cash transaction value can be provided to the investigator
● An ageing schedule of customer advances and dues to be computed to assess the extent of problem, if any
● Further, investigators should review its quality of human resources, accounting system, internal control, and processes to run this significantly large operation
● Also, need to consider the ownership structure of Evaly. In great start-ups, there is a healthy equity share of CXOs (chief of technology, CFO, etc. An absence will mean Evaly is not an appealing start-up for future external funding
● Anyone with a conflict of interest (personal/professional relationship with Evaly and its associates) should not be involved in this investigation process
On the issue of investment
News was doing rounds about Evaly and Amazon having merger discussions. Per my experience, such discussions are governed by non-disclosure agreements (NDA) and, therefore, it is most likely a fraudulent claim, whoever made it.
More importantly, the alleged official of Amazon was on personal leave to visit Bangladesh and didn’t possibly have the authority to take part in such discussions.
This tactic of rumour mongering has been employed by firms to drive up share prices or to hide/take away attention from poor financial health.
Evaly has not been able to build a robust logistics network yet, and whether or not its revenue traction is sustainable if cashback tapers off is a question mark, and its ownership structure most likely doesn’t include CXOs having meaningful stakes.
A start-up is funded based on its team, scale potential, business model, and traction. For Evaly, its traction, its image among the people, and, mostly importantly, the kind of media stunts being pulled will make it very difficult to qualify for funding.
If the operation of Evaly or similar businesses are to be allowed, the authorities should make it a ring-fenced system.
All the money from customers should be deposited to escrow. Monthly reports should be sent to the central bank on customer advances.
There should be a way, using customer login and phone number, to verify this at the individual customer level.
Any payment from escrow to supplier must be done through bank transfers or crossed checks.
The cashback exposure should be calculated and it should be tied to the net worth of the company. No one should be allowed to run a cashback book significantly larger than its net worth (should include paid up capital and reserves).
Let's hope the nascent e-commerce industry will not suffer from any image crises over this episode and will resume its strong growth.
I also expect that Evaly will come back stronger if it is found to be innocent of the charges made against it.
Mehran Chowdhury is a freelance contributor.