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comScore recently came out with a report on the Indian Internet industry. Here are some of my observations and thoughts:

Search engines - One of the popular category of sites. This category pretty much reflects the global trends in terms of the popularity of search engines. (Google, Yahoo, Microsoft, Ask). The interesting thing to note here is that there is no Indian company in the list. Given the variety of different cultures and languages in India, one might think local players might have an edge if they really tried. Currently though, most of the Internet population is English, but this is certainly going to change as the penetration increases. If Chinese search engine Baidu is anything to go by, there is certainly room for a local player in India too. And hey, its not like no one is trying. But frankly, other than Guruji, no one seems to be anywhere close to the standards of the big global players. We have talked about Guruji here and here, let’s see how they progress in the coming years.

Portal/Services - A popular category from the Web 1.0 era. The sites in this category either have day-to-day utility or entertainment value. Lot of early local players here from the 90’s, yet only a few established ones. Google, Yahoo, MSN are again the big players, although the good news here is that there are at least a handful local players in the sector.
news/entertainment/communication - rediff, timesnetwork and sify - decent content but poor user experience (broken links, popup ads, flashy ads)
classifieds - This is one category which has achieved the best success rate as far as the local players are concerned. One of the reasons is the demographics that is online in India and the fact that these players jumped on to the opportunity quite early in the game and more importantly stuck it out at the time of dotcome burst. Naukri, Shaadi, Bharatmatrimony, etc. are a few examples. A few promising sites in this space - mapmyindia (maps and directions), onyomo (local yellow page listings)

Social networking / web2.0 - A rapidly growing category. Very few decent Indian sites. Mostly dominated by the likes of Orkut, Facebook, Youtube etc. Again this is a category where one would think a local player can gain an edge as they would presumably understand the sensibilities of the youth better. Like I mentioned above, once English ceases to remain the predominant language on the web, more possibilities will open up. A few promising startups in this space - Minglebox, burrp.

Ecommerce - My personal favorite but not a popular category in India yet. We really need to catch up here if Internet has to sustain. The reason is simple - the most popular business model on the Internet is advertisments and for ads you need companies who are ready to advertise in the first place. Yes offline companies do want to advertise online, but there is only so much they will do. Real spending will come only from ecommerce players as they can directly affect the sales/branding using this form of advertising. We are seeing growth in this category. Check out some good articles on this space at Darpan Munjal’s blog. Travel is definitely a hot sector which already has a bunch of players (makemytrip, yatra, travelguru, cleartrip etc.) followed by entertainment (seventymm). The next big sector is retail which is currently dominated by Ebay India, but definitely expect to see some action here. IndiaPlaza.in and Futurebazaar are upcoming players. Remains to be seen who will emerge out as the Amazon of India (how about Amazon India itself?)

While on this topic, you might want to check out an interesting discussion here about why Indian companies are lagging behind global players (as opposed to Chinese, Korean, European markets). You can read the complete article for details, but the summary is that dominance of English language and poor user experience of Indian sites are the two main reasons.

Conclusion
India Internet has come a long way just in the last 3-4 years, but I think we are still in early stages. It might still take some time to reach the maturity level of more developed markets. To me, it looks more like the pre-bubble period (’97-98) of the US market. A lot of investment is happening, user base is increasing, new companies are coming up - things seem to be moving in the right direction. What are your thoughts?

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[via Atanu]

Internet is still a niche market segment in India, a point borne out by the numbers. Anand Sridharan, in his analysis of the current state of the Internet in India, captures the reasons behind it and also takes a look ahead as to what it takes to increase the usage of Internet in India.
It is well understood that if the Internet economy is to really take off in India, it has to reach down from the upper (and upper-middle class sections) and penetrate the lower middle class. This is the population segment that the mobile phone market has been able to penetrate and consequently made India one of the fastest growing mobile markets in the world!

If cheap (”Made for India”) handsets and ever-reducing call charges have made the mobile ubiquitous in India, can the Internet (and computing) industry in India ride on the equivalent - cheap computers and affordable internet access? Novatium, a Chennai-based company co-founded by Rajesh Jain and Ashok Jhunjhunwala, seems to think so. Novatium which aims to provide “Computing for the next billion” uses thin computing to reduce costs for end-users. Thin computing, in Novatium’s own words, is “the process by which the complex computing tasks move to a central server (s) and the client desktop is relatively simple to just access what is being processed. The client desktop also becomes the interface between the human and the complex processor of the server. Some of the immediate benefits that this process delivers is a hugely manageable, secure and optimized computing setup”

MSNBC/Newsweek features Novatium.

What do you think? Is this the way computing will reach the next billion? Does Novatium have what it takes?

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It’s that time of the year. Everyone is writing about the best of 2006. We thought it would be nice to look back at the happenings in the industry in the past year. Here is a collection of news that made the headlines in 2006.

THE News
The biggest event of the year was undoubtedly the IPO of Info-Edge (group owning Naukri, 99acres, JeevanSathi). This event has heralded a new era in the consumer Internet industry in India as it became the first Internet company ever to be listed on an Indian Stock Exchange. We hope to see some more companies to follow suit in the coming few years to keep the rally going. Some of the probable followers include the Shaadi group, BharatMatrimony group and the online travel companies.

Investments
Lot of money has poured in the market in 2006. As Venture Intelligence reports, VCs have made 53 early-stage investments in start-ups in India worth $355 million during the first nine months of 2006. That’s still nearly twice as much activity in that period than the two previous years combined. Here is a partial list of the investors and their portfolio companies.The leading sector in terms of investments has been without any doubt - Travel. Makemytrip, Yatra, TravelGuru, Cleartrip are some of the big names in this sector and all of them have already taken their second rounds of funding this year. The biggest of the VC’s from Silicon Valley including Sequoia, KPCB, Matrix, Norwest, etc. have made their presence felt in India. Some of the other companies that attracted big investments included online DVD rental company SeventyMM, leading community portal Sulekha, India specific search engine Guruji.com and online tutoring company TutorVista.

M&A
The only one that we know of is the acquisition of web2.0 companies Bixee and Pixrat by MIH networks. We hope to see more activity in this sector in order to sustain the bullish web2.0 scene and the overall ecosystem.

Web2.0
Although we raised our own concerns about the sustainability of web2.0 companies, this has been the most active sector because of obvious reasons - low barrier to entry both in terms of technology and investment. Following the trend from the West, loads of startups are trying to make a mark in social networking scene including photo sharing, video sharing, news/events sharing. Here is a partial list of companies trying to fight it out to acquire whatever small percent of users and advertising revenue that is available in the Indian market today.

Fun facts and figures

• Airline ticket customers formed 40% of online shoppers in India, followed by books comprising with 29% and music at 24% of the total purchases. 30,000 Indians buy travel tickets online everyday.
• The number of online shoppers in India rose 7% to 3.49 million in the first half of 2006 from 3.27 million a year earlier.
• High-speed connections in India more than doubled to 1.92 million at the end of October from 690,000 in the year 2005.
• Desktops account for 80 per cent of the total personal computer market as compared to 20 per cent of laptops. The latter will grow at over 100 per cent from 431,834 units sold in 2005-06 to 863,668 units in 2006-07 as compared to desktop sales growing at 22 per cent from 4,164,724 units in 2005-06 to 5,676,111 units in 2006-07.
• The number of total Internet users in India stands at 35 million currently; out of this 10 million are considered to be “power users”.

Next?
Overall, 2006 was an active year full of excitement in the industry among investors, entrepreneurs and of course the users of the Internet themselves. The year has kicked in the enthusiasm required for bootstrapping the so called “Silicon Valley in India“. 2007 is going to be very important to take these early developments to the next level towards realizing the Silicon Valley dream. At the risk of sounding obvious, increase in Internet penetration (esp. broadband) is on the top of my wish list for 2007. Without the Internet users equipped with good connection speed, industry cannot go much further. Other than that I think eCommerce really needs a boost because that is the main driver of the Internet economy. More eCommerce, more advertising dollars, more business models and more companies.

Where do you think the industry is heading from here? What’s in your wish list?

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I’ve referred to this multiple times in the past. Off the top of my head, here and here. I think offline presence is very very important to build a large user base esp. if the service is targeted towards general masses (as opposed to say social networking site that is targeted towards teen and youth demographics) Every Internet usage report that comes out, we get to see the same thing coming out - Internet penetration is still limited to bigger cities, main mode of access is still not home - more than 50% of the Internet usage is seen from cyber cafes, offices, schools.

Today Jaaydaad.com announced that they will be opening 600 property shops throughout India. I think this is a very good strategy. Real estate market is not limited to 10 million active Internet users in India. So in order to reach out to real critical mass, this should be a great move. If properly executed, their target audience will be orders of magnitude more than an Internet only shop. Of course we know that the Internet usage will only rise from this point, and the offline presence will help them in building a brand which will seamlessly transfer to the online world as well. I have talked about this with a few players in the industry about their ideas on adopting this strategy and the common issue is that this strategy is a little complicated to execute right in terms of logistics as well the fact this can be quite capital intensive. Agreed, but I think this is where we will see some real innovation in the Internet industry in India - how the logistics are handled to mix the online-offline service mode, how offline presence can be made in a cost effective way (collaboration with existing retailers or even cyber cafes, adopting the franchise model, etc.)

Some of the other players who are already doing this is Shaadi.com with their Shaadi Point and BharatMatrimony with their offline centers. I’ve been informed that Madhouse.in (DVD rentals) is planning something similar, although I haven’t seen them doing that just yet (they do have other means such as phone, SMS, though). If I have to take a guess, I think we might see some of the online ticketing sites adopting this strategy considering how competitive this space is getting and the fact that there are already so many offline travel shops/agents (hence opportunity for consolidation).

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Mercury News is running this special series on India’s rise as a technological powerhouse, with a lot of Silicon Valley entrepreneurs returning to India as Venture Capitalists. Some of the striking points from the article:

“It took the valley 30, 35 years to get where we are today”, observed Ash Lilani, head of Silicon Valley Bank Global, which has an office in Bangalore and assists VCs looking for overseas investments. “We are trying to replicate that in India in two years”.
-Not sure what is the magic formula here!

In India, VCs have made 53 early-stage investments in start-ups worth $355 million during the first nine months of 2006. That’s still nearly twice as much activity in that period than the two previous years combined, according to Venture Intelligence, a Chennai research service focused on private equity and venture capital activity in India.
-We are trying to find out how many of these are related to consumer Internet industry, will report back here when we get the details.

Evalueserve, a Saratoga-based market research firm, estimates that more than 40 India funds have been raised, or are being created, by U.S. VCs. Silicon Valley Bank, though, figures the number to be closer to 24, with about $1 billion flowing into start-ups during the next few years. Either way, investors are now sensing India’s economic ascension is arriving.
-You can read more details here.

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 and a good slide show here.

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Online ticketing is big. It’s clearly leading the ecommerce industry in India. IRCTC (online railway ticketing) is the biggest player followed by air tickets. Not surprising that there are so many travel portals funded by the biggest VC’s in India. A quick look on Google Trends proves that search volume for tickets is quite significant in India (relative to other countries)

Search volume for railway tickets
Search volume for air tickets
Search volume for bus tickets

We had a chat with the three co-founders (Phanindra Sama, Charan Padmaraju and Sudhakar Pasupunuri) of India’s first vertical for online bus tickets called redBus.in. They launched the site just a couple of months back in August 2006 and have already partnered with 30 bus operators in India and are doing great in terms of sales. Below we share their experiences, insights and our thoughts on their business, industry and consumer trends.

1. What inspired you to start this venture?
This venture has come out as a result of a necessity. Last Diwali one of the co-founders was looking for bus tickets to travel home and missed the bus because of getting too late in buying the ticket. Thats when the idea struck that it would be really useful to have a service where people can buy bus tickets online.

iLeher: May sound clichéd but is still very true: “Necessity is the mother of invention”

2. Overview about how the company evolved from idea to “live” state?
Started off with talking to travel operators to understand how the industry works. Surveyed the bus operators and travel agents to figure out the logistics. Convinced the bus operators about advantages of online tickets sales. Provided the software needed to maintain their tickets inventory. While some operators signed up for real time tickets inventory update to redBus, most of them agreed for providing tickets to redBus on a quota basis.

iLeher: Market research, partnerships, logistics. Most important factors in ecommerce.

3. How does your team look like?
3 business dev and marketing people, 2 software people and 3 customer support agents. All currently based in Bangalore.

iLeher: Proves that writing code is easy, but evangelizing, selling and keeping customers happy is more challenging, especially in emerging markets. Makes sense to invest in resources that will help in changing the mentality of the people about ecommerce in India.

4. How is your company funded so for? Any plans of raise more funding?
Pitched the idea at a TIE Bangalore event and got $25,000 seed funding and mentoring from 3 TIE members.

iLeher: Just as important as money is networking and good mentoring to stay focused in the right direction.

5. What is your business model?
Commission from booking tickets and ads on the site.

iLeher: Easy question for an ecommerce site. Try asking this to the latest Web2.0 Social media startup.

6. How is redBus doing so far? Any feedback from customers?
There has been a growth rate of 100% every month since inception. Ticket sales for this month as of today (Oct 17) is already more than double the sales from the complete month of September. Customers have given very positive feedback and they have questions mostly around security of credit card payments over the web.

iLeher: Reassures the fact that people in India are really getting more and more comfortable with doing online transactions.

7. What are some of the key challenges in your business?
Making sure that assigned seat (during e-booking) remains when passengers board the bus. There is a lot of travel on weekends, but on other days occupancy is less.

iLeher: Shows that tech savvy are buying more tickets (since they tend to travel more on weekends). Need for more distribution channels for the people without Internet access?

8. What are the marketing strategies that you have been using?
Email distribution lists, pamphlets on bus stations, posters inside the busses. Google adwords (surprisingly number of clicks resulting from that is not very significant)

iLeher: Although Search Engine Marketing is small right now, its coming.

9. What do you have to say about competitors like Yatra Bus ticket service?
redBus has a big early mover advantage. Yatra started their bus ticketing service only recently. redBus already has partnership with 30 bus operators and are expanding fast. Yatra has very less partners compared to redBus.

iLeher: Big player doesn’t necessarily has big advantage. I don’t particularly like comparisons, but still just to illustrate: Google video v/s YouTube.

10. What is the payment method most used by users?
There is a 50-50 split between credit and debit card. Plan to introduce mobile payment soon.

iLeher: Good to see more usage of credit cards. Mobile interface can work wonders in India, considering the subscriber base.

11. What are the challenges of running a business in India?
Other than the obvious issues of Internet penetration and customers being hesitant of doing credit card transactions online, evangelizing and educating the customers is a big task. Working with different service providers such as lawyers, CA’s is not always a breeze. Things do not always get done as fast as you would like. Coding gets done fast, but there are lot of other variables and things can get delayed to them.

iLeher: We hope that as the markets become mature, other processes to support online business will start getting more and more streamlined in India.

12. How has TIE-EAP program helped you?
TIE was really helpful from day one. It was a source of continuous mentorship and direction. It provides a great network of relevant and useful people in the industry.

iLeher: Network, network, network

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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.”

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Rediff reports the launch of Guruji.com, a web search engine focused for Indian markets. The venture is funded by Sequoia Cap India and some angel investors. Reading this article immediately brings up the question if the company is trying to emulate what Baidu.com did in China. Baidu is the leading search engine in China with more than 60% market share, while Google has around 25%. So what were the factors that led to Baidu trashing the seemingly unconquerable behemoth Google in United States?

• The biggest reason: It has always obeyed the censorship laws in China. Google, for a long time maintained its position that information should be free and unrestricted. Turns out they finally gave in thanks to receding market share and have agreed to provide indication when the content is restricted.
• Baidu was founded in 1999 on the eve on Internet burst in United States when Google still wasn’t big.
• It implemented paid search advertisements model before Google in China. So they already had a good revenue model.

Unfortunately, most of these factors do not hold for Guruji.com. Global biggies like Google and Yahoo already have their presence in search engine market in India. There are no major censorship laws in India. Obvious question then is what is the value add that they could provide to users to stand out among the crowd?
From technology point of view, I think they can be following:

• One thing that they are already doing which Google or Yahoo do not provide is local search. Local search is a very useful (and popular in other countries) feature and they could use the early mover advantage here.
• If they can index content from local languages and make it searchable. Reason: As the number of Internet users keeps increasing in urban as well as rural India, more and more players are going to start (or already starting) providing content in local languages. There needs to be a good way to let users input search terms in other languages and provide best results.
• Mobile penetration in India is already huge and is growing at alarmingly high rate. If they provide mobile interface to search the web, they can attract at least 5 times more customers immediately compared to Web only interface.
• If they can target the demographics of the Indian population and serve up their results accordingly. For example according to NYTimes [free registration reqd], analysts say Baidu is playing to a different audience than Western Internet companies because the Chinese are far more interested in entertainment than news, books or car rental rates.

Other than the above features, following factors could also play a role:

• Ecommerce and Search Engine Marketing is still small in India. So potentially if they can innovative other business models?
• This may be far-fetched for Search but still just to speculate: If they could use the concept of “Assisted Internet”? Lot of online players in India these days have offline centers/kiosks where they help people with their services. An example is Shaadi Point by Shaadi.com. This is primarily to cater to the audience that do not have access to Internet at home or have not used computers enough to do things on their own.

We will wait and watch what happens, but more services and competition is always good for consumers!

Update: The Hindu has some more details on the company.

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