Concerns from India’s booming Internet industry.

Written by: Madhur

On Oct 16th, 2006

I am sure you have read a ton of news on how so much money is flowing into the new hot Internet ventures today, how VC’s are betting on India as the next big explosive growth market and how startups are springing up all over the place trying to be the Expedia, Match.com, Myspace, et al of India. Check out the compilation in the Resources section for just a few of them.

In this post, I am going to give you the flip side of things. Inspite of the almost unanimous agreement on the tremendous opportunities and potential that Indian markets have, there are certain things that investors have expressed concerns about. Below, I have culled together some of the major issues that investors and companies have been talking about in recent times.

Internet population and penetration
Inspite of the much quoted number of 37 million Internet users in India, the actual number of “power users” to be considered for ecommerce purposes is still small at around 10 million. This is much smaller than compared to other markets such as US and China. Due to this reason, an additional challenge for any Internet service company is to provide alternative interfaces like mobile or even physical kiosks.

Perception of the consumers about customer service
As Rahul Khanna of Clearestone Venture Partners notes – In the ecommerce sector, Indian sites have not had a really good reputation for providing the best customer service. Consumers are not confident that if they buy anything online, whether there will be options for returns/exchanges and/or getting their money back. In other markets like US, this is least of the concerns. People pretty much take it for granted that returning/exchanging items is not at all a hassle.

Valuations of the companies are too high
Sunny Burra of Linus Capital is concerned that there is too much cash chasing in India and the valuations are out of whack. He says “(For company) in the US, if you take the multiples, typically it’s an average of 4-6 times EBITDA, and here, for a company of that sort, they’re asking for multiples like 3 to 4 times revenues. Being an investor, it’s a little hard to digest.”

A related concern expressed in one of the research reports by Delhi based Evalueserve states that “In India most VCs want to continue to invest in Indian start-ups in areas they are most familiar with, i.e., in IT, telecom and Internet products and services. So, it is not surprising that eight consumer-travel Internet websites have already been funded in India, and given that this sector only accounted for approximately $152 million worth of booking transactions in 2005, and given that this number is likely to grow to only to $1.2 billion by 2010, the actual revenue and profits earned by this sector even in 2010 are likely to be $75 million and $9 million respectively, which is miniscule by any standards!”

The research goes on to mention that “Also, since the Bombay Stock Exchange (BSE) has been growing quite rapidly (in spite of the recent 20% drop) and a company with $20 million in annual revenue can be easily listed on it, many Indian entrepreneurs would rather list their companies on BSE than give up a substantial share to the VCs.”

Finding and retaining the ‘right talent’
A number of investors have talked about this issue during the “Investing in India” conference hosted by International Business Forum in San Francisco.

Sumant Mandal, managing director of Clearstone Venture Partners, describes the “scarcity of middle management,” as one of the problems. Kleiner Perkins Caufield & Byers partner Ajit Nazre describes the same problem as “Indian startups often had the wherewithal to write the code to make an Internet service work, but not the skills to package that service and sell it to consumers.”

Even the much sought-after and hot company Google has also expressed the same concern. They have had a much harder time finding and retaining the right talent in Bangalore compared to other places in the world. It is not surprising that they have put the “We are hiring” line on the home page of Google in India.

The research report by Evalueserve also talks about the same issue. “We also found the entrepreneurs in India generally lacked expertise in marketing, sales and business development areas, especially when compared to their counterparts in the US. Most start-ups have to compete for talent not only with other companies who are exporting similar or dissimilar products and services but also with many Indian domestic companies. In fact, finding and retaining the ‘right talent’ has become an issue not only in marketing, sales and business development but also in research, technical and advanced development areas.”

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Entry Filed under: infrastructure,news

3 Responses

  1. 1. vivek garg said on October 16th, 2006 at 3:04 am

    all excillent points Madhur. I often wonder myself why outsourcing and back office services are the most succesful part of indian IT scene. India always had tough time creating prducts or Internet brands. I have trouble ordering products with the best of the indian brands and the service is not great at all. I talked about this in your ecommerce post as well where we recognized that there is a potential to improve.

    I think its an opportunity more than anything else here and that is why so much cash chasing it. With increasing demand of customer satisfaction and competition in indian market, supply side has to get better to scale. And new services will create value that is unheard of before. How fast this wil happen and what will be the medium are the main questions.

  2. 2. iLeher » No money for early stage ?- All about Internet industry in India said on November 30th, 2006 at 2:56 am

    […] We have asked if India is ready for web2.0 here. Also we raised our concerns about our booming internet industry here. Although we have our doubts about the industry, we are seeing a lot of money flowing into India recently. We saw guruji.com grabbing $7 million and then we saw sulekha getting $10 million and more recently we see that travelguru, the leading travel portal got $15 million. See a comprehensive list of investments here. We have stats and reports of VC firms raising billions of dollars to invest in India. New funds are coming into existence every day raising even more money. But the point to note here is that most of the investments we have seen till date are either late stage in nature or in the companies that mimic proven business models elsewhere. Some of the companies we recently interviewed like redbus here, onyomo here and picsquare here are all still working on angel funding. These companies are more or less in early stage now. The feeling we got after talking to them was that the VCs are queued up on the sidelines. VCs don’t want to miss the opportunity when the time comes but they don’t want to move in unless they see some traction in these markets. Is it the traction or is the risk of investing in early stage Indian startups way too high?  […]

  3. 3. iLeher » Silicon Valley in India?- All about Internet industry in India said on December 4th, 2006 at 9:29 am

    […] The report also outlines some of the risks of a tech bubble. Some more points include the lack of labor laws, the fact that judicial system moves slowly and the fact that there is no concept of preferred stocks. -We had covered some of the concerns here. In the end, the article talks about some of the rural possibilities coming out of entrepreneurial activity. For e.g. a Hyderabad based CoOptions Technologies. Also they have compiled a list of VC’s along with their portfolio companies in India. […]

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