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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.”