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I discussed “no money for early stage” earlier and I said there is not enough money flowing into early stage investment. I also cited a couple of reports that corroborated my thoughts. But after that post, I found following comment on mercury news.

“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” .

This statement directly contradicts where I was going with my entire theory as it seems that there is a lot of dough flowing into the market. So I wanted to look into this in more detail. After talking to some people, I got mixed comments and I thought it would be best to contact Arun Natrajan of Venture Intelligence. According to Arun, Over 90% of early-stage investments went into IT & ITES companies. Among sectors, Online Services, Mobile VAS and BPO (high value and vertically focused) companies are attracting the most interest.

Top 10 companies in terms of amount raised are Travelguru, PharmARC, 24X7 Learning, Mauj Telecom, Applabs, Bubblemotion, Newgen Imaging, Secova, Billdesk, Seventymm. I am trying to compile a list of investment funds to understand what really constitutes early stage for a startup. To start with, I created this table in our resources section, from various sources to give us a start on different firms and their portfolios. I don’t see a lot of online services companies here. Where is the money going? I want to investigate various portfolios from seed fund, early stage and later stage to understand where money is flowing and which companies are making best use of it. Let us know if you know of any such funds that are not covered in the list.

In comments to the post “no money for early stage“, an interesting question was raised. How much money is good enough to bootstrap a web2.0 startup in India and how much money is required for subsequent stages? It seems there is not one good answer. $355 million in 53 startup means ~$6 million each but Arun says this amount varies hugely by sector and the inclination/ability of the company to bootstrap. Travelguru has taken in $25 million, while Seventymm has attracted $8 million. The number is also driven by the VC industry’s economics: given their growing fund sizes, they can’t be bothered to deploy anything less than $2 million per investment. Santosh from Sukshma.net argued for somewhere like $500,000 to bootstrap which looks more realistic to me personally. All this makes the line between seed, early and later stage funding blurry to me. I think the most essential is bootstrapping and with low startup costs for internet companies, a lot of people are turning to self/angel funding instead of going to VCs. Like onyomo and redbus founders told us that VCs are waiting on sidelines for traction. And they will get in sometime after early stage (midstage anyone?). Once their concept is proven it is the series of rounds (we can call it early or later), that will make or break the companies in longer run. Collecting more data will shed some more light on sector and willingness of VCs to participate in these rounds.

As always, your comments are most welcome. Also, read more on seed, early and later stage from our trusted sources powered by Google custom search which I use extensively for my own research.

Last week, had a talk with the founders of two players in the online photo printing service - MeraSnap and PicSquare. While I think that this service is useful and has much clearer business model compared to some of the Web2.0 ideas, this market is already getting overcrowded. The list of companies (eYaadein, RangeelaPhotos, PhotoMasti, 123shots, iTasveer, add more here) is getting bigger every day due to the inherent nature of this business - low barrier to entry for companies and no switching cost for customers.

So the natural question is what can these sites do to gain an edge over others, esp. considering the specifics of operating in the Indian market? I posed this question to both the companies, but didn’t get a convincing answer. (although I do understand that they may not want to reveal whats in the works) Obviously, providing top notch customer service goes without saying and both the companies mentioned this point as their main strength. More and more of these companies are now providing options for personalized gifts such as mugs, tshirts, etc. with your photos. These are good features, but it is clear that the winner has to really provide something that will keep users coming back to use their service, and not switch to another serivce easily (to avail that Re. 1 difference). So here is my attempt at thinking up some features that could differentiate one from the rest of the crowd:

1. Internet penetration is still small, so go offline: I think the offline angle should be there in any Indian consumer Internet startup if they plan to build a large user base today. People in smaller towns also own digital camera. Imagine if they could drop off their memory card into any of the local offline centers (maybe self-owned or tie up with cybercafes, etc.) and pick up their photos without having to even use their credit card for payment. I think that can really give them a big upper hand in acquiring customers who do not have Internet access or have slow access where the upload speed sucks.

2. Mobile penetration is huge, so go mobile: If I could download any of my stored photos from their server on my mobile (with GPRS or Picture messaging), wouldn’t I love to show them off to my friends and share them. This can really help spread the word about the company in a viral way.

3. Web2.0 features: Yes you can share the pictures with friends with these services, but none of these sites provide the tagging/sharing/browsing features of photo sharing sites like Flickr or Webshots. Isn’t it a pain to upload to Flickr for sharing and using some other service for printing?

4. Basic editing features: Would be nice if they can even provide one simple “Feeling Lucky” feature from Picasa for correcting the photo before printing. If you don’t know about this feature, what that does is with one click of a button, it removes the red-eye, adjusts brightness/contrast thus making the picture much more nicer to look at. This type of feature is esp. useful since since people have intentions of printing the photo, when they are using one of these sites.

Invite your comments/ideas.

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?

There is a lot of buzz about a maturing investment ecosystem in India with impressive exits. We saw that with the Info Edge IPO recently that is trading at 85% premium. This article here states how early stage funding has grown YOY in India listing some good examples. Still it’s not scratching the surface of billions of dollars already waiting to be invested. In the report “Is the Venture Capital Market in India getting overheated” - Evalueserve reports that over 44 VC firms are now seeking to invest more than 4.4 billion dollars in India over next 4 to 5 years but cautions that there will be a glut of VC money. It also highlights that it is not possible to invest in 150+ startups if the VCs are going to be sticking to their favorite sectors and just the late stage investments for that matter. Well, we are not saying that they should start throwing money at every startup out there. What we are trying to understand that if the VCs will be at ease with the risk levels associated with early stage funding in India, compared to rest of the world. While looking for an answer, we found a paper on “Accessing Early-Stage Risk Capital in India” by Rafiq Dossani, a senior research scholar at Shorenstein APARC. Some of the points in the paper resonate with our thinking about web 2.0 companies in India. Following points might be the reasons why a lot of early stage ventures are not getting funded. We have read similar arguments earlier in the blogosphere in some form or the other and this paper actually goes in much more depth. For the sake of discussion we will reiterate some of them

1. Lack of confidence on early stage entrepreneurs.
2. Lack of weak ties network like the one in Silicon Valley.
3. IP creation and protection not clearly defined.
4. Domestic consumption and market not easily identified.
5. Govt. hurdles - redbus founder confirms this sentiment after spending a day in offices to register their company.
6. Poor internet penetration and computer illiteracy.

As per this paper, India has 6.9% of total risk capital invested in seed and early stage ventures, compared to 12.5% in China, 29% in US, 32% in Israel and 39% in UK. What can we do to change this? Is getting into a proven business model the key for Indian startups? What will drive business process innovation? India is a different market and what works elsewhere might not necessarily work in India. Key dynamics are different. We access internet not from schools or homes but from cyber cafes. We do more texting than typing on keyboard. Mobile penetration and growth far exceeds internet and broadband penetration. In our opinion we will need some serious business process innovation to build good companies and this can only be possible with money going into innovative and not yet proven ideas.

Let us know why do you think early stage is not getting funded or if you think otherwise. Read more on early stage investments at iLeher trusted sources powered by Google customized search.

Introduction
Recently came across this post at Mashable (thanks Vaibhav for point this out to me) that exposes how Meravideo.com is a rip-off of a $300 product from some software company. And if you haven’t read before, they recently claimed to be close to closing a round of funding worth $1.5 million. The interesting thing that I wanted to discuss here is whether this is a joke (how can you launch a company by buying an off the shelf product and get funded!) or a sign of a boom time (when you can convince investors that doing your laundry online is the next ground-breaking innovative idea to be implemented as a web service).

Reality check
I tried to contact Meravideo to get the real scoop, but there has not been a response so far (rather I did get a response that they would love to chat about this, but haven’t heard back since then). Personally, I think India is not really ready for video right now (I might be wrong, but I would not invest my time/money in doing this type of thing considering the Internet and more importantly broadband penetration and the online ad market, more details here). I know that a simple strategy is to build up a large user base and get acquired by a big company, but then again, would any big company be interested in acquiring such a site that is full of mostly sleazy bollywood videos?

What if you still want to play and try your luck?
Now just playing a bit of devil’s advocate: I do not think that this is a joke as Pete Cashmore of Mashable thinks, I just think this is more a sign of boom time. But lets say you ignore all the reality and are convinced that you can build a large monetizable user base in a short time. What would you do in this type of case when you are just trying to copy a web2.0 idea from the US market and do it for Indian markets. I think instead of building the technology from ground-up, you might as well focus on more important aspects such as marketing and trying to attract more users and innovating ways to get users to generate more and more content on your site, compared to others. The main idea is anyways validated in the original concept, the most innovation that is required in Indian Internet (Web2.0) companies I think is how to get users to come to your site and spend maximum time there and generate content for you (for example, I believe Meravideo is going to try revenue-sharing for attracting users to submit videos). So what’s wrong with the approach of taking an existing product and building on top of it? Think about this - what is the barrier to entry for other players in such a venture? Its not the idea, its not the technology (these are copied anyway from a model that has already worked bigtime). But if there is already a player who has strong foothold (in a small market) - thats a real barrier. After all an investor is much less interested in how you build the UI or the technology, and more interested in the fact that you are able to show them that there is a considerable market and you are successful in acquiring a large chunk of it.

Bottomline
Where I am going with this? The point I am trying to make is twofold:

• If the news is really true, to me this is a sign of boom that such sites are getting funded.
• If you are trying to catch on to the boom to kind of just try your luck, it may not be a bad idea to start with some thing existing and add features suiting to the targeted demographics and more importantly focusing on trying out new business models and marketing gimmicks to attract users and spend more time on your site. Of course you can do slightly better by not being as blatant and changing the skin a bit so as to not look as conspicuous, for example like ApnaTube. If you look closely, do you really think they are any different?

Invite your opinions.
Sphere: Related Content

I asked a question last week that generated a lot of discussion. In that post, I had concluded that market is hot and there is definitely a need for some of the Web 2.0 services like online social networking joint, India specific news/media sharing etc. Now how to take these needs and turn them to viable business models with the constraints of operating in Indian market (less Internet penetration, small online ad market) is the interesting aspect of it. There are a lot of players and they are applying different strategies to work through these constraints and make their model more appealing than others. I am talking to some of the players in the market and getting their views on the strategy that they are using and why do they think their model will succeed. In this series, I present one strategy in each post as quoted by these players to me. I do not know how well these strategies are going to work, just bringing them to fore to have discussion around them and see where they go.

Strategy: Experiment with slew of services, build organic and loyal traffic over time
Case in point: Better Labs, India
I talked with Vaibhav, the founder and CEO of Better Labs, India. Their strategy for India angle is to launch a slew of useful services targeted towards a particular demographic and build organic traffic. The set of services they offer (termed as india 2.0 by them) are news aggregation from newspapers/blogs, social bookmarking of news/events/links. The problems that they are trying to solve are the following:
1. The user experience of a lot of news sites in India is not very pleasant because of overload of ads, pop-ups etc. With indiagoes, they want to come up with a service that provides a much richer news reading experience on the web.
2. It is very difficult to find good India specific user generated content on the web. With indiamarks, indiaevents and indiahappening, they want to device ways to incentivise people to participate and create great new content or label already existing great content.

None of these are ground breaking ideas and they realize these will not become the next youtube, but they think these are useful services which at least the IT people (the demographic that they are targeting) who have Internet access for a large part of the day care about. What I found interesting is the “experimentation” strategy that they are adopting to try out these services. They do not plan to raise VC money until they hit a critical mass and the reason he quotes for that is once you have VC funding you are under pressure to deliver and get your google analytics numbers ticking up all the time. He further says that once they build a steady organic traffic by rolling out new features and relying mostly on word of mouth marketing, they will be able to create a set of loyal users that will keep coming back to use their other services. Once they reach that level, they may plan to raise money to expand their operations. Of course this strategy can only be applied if you have access to personal funds to sustain during this “build up” time.

One notable company that has adopted this strategy in the past is mouthshut. They probably have the best user generated India specific content (other than Wikipedia maybe) and this has resulted with a sustained effort of over 5 years. They had a bad patch from 2001-04, but now with the market picking up I think they are are in a very good situation for monetizing the content they have and expand their operations. Another company that has adopted this model in the past is Sulekha that has over the last few years (since last dot com bust) built a good user base and has now raised a bunch of money.

If you are an entrepreneur and have adopted a new model for playing in the Indian market, ping me and we can talk about it and I will put it up here for discussion.

Depending on who you ask, you will get a lot of cool sounding definitions full of buzz words for Web 2.0. In simple terms it is a combination of two things:
1. It is about user generated content. Majority of the content on these sites is not from publishers but from users themselves using wikis, blogs, profiles, etc.
2. From technology standpoint, it is about the use of AJAX, which is a combination of Javascript and XML to interact with web server asynchronously, so every time something new needs to be displayed, the whole page does not need to be refreshed. As a result, pages get reloaded quickly and they don’t look clunky like traditional web pages.

Turns out that in India we have a bunch of Web 2.0 sites related to social networking, social bookmarking and such. You can find a partial list here. So when you have a Web 2.0 service focused for consumers, where does the money come from? It is all about advertisements. Look at any of the signature Web 2.0 companies in the US like MySpace, YouTube, Digg, flickr, etc, for most of them there is no other source of money other than ads. And how do you maximize revenues from ads? Get more eyeballs. So the bottomline is try to attract huge number of users visiting your site for long long times, serve ads on the side and embedded in the content (the more relevant ads, the better) and make money. Clearly this model works when the user base is large and online ad market is as big to support it.

Now let’s take a look at some of the market statistics in India

Internet usage numbers:
We still have very less number of Internet users compared to say US and even China. The latest report from IAMAI says that 38% of the users are “heavy” (usage of around 8.5 hours per week) users of Internet in India. If you take the total user base of 35 million, this translates to around 13.5 million users. Now most Web 2.0 sites (esp. social networking, social bookmarking, media sharing) are targeted towards college going students and youth which comprises of 60% of the total number of Internet users according to the report, which reduces the target customers to around 8 million users.

Total available online ad dollars:
Another report from IAMAI says that the online ad market will cross $57 million in 2006-07 and will be around $150 million in 2010. Compare this with the current number of the US market that is $12.5 billion and Chinese market that is $500 million today.

Competition:
There is a good number of existing well established players of the Indian online industry who are already behind these dollars. Just to quote some figures from a recent issue of Business Today magazine, here are the ad revenues of the top 5 players.
1. Rediff = $13.21 million
2. Google = $10.44 million
3. Indiatimes = $8.88 million
4. Yahoo = $7 million
5. MSN = $4 million

Its not even worth calculating how much money is left over if you subtract these dollars from available dollars. Of course I do not mean to say that small players cannot come up and give the big players a run for their money (the perfect example is YouTube and Google in video market and in general that’s how companies evolve), but this is just to give a picture of the current market.

How much people care?
The latest report from AC Nielsen survey says that in India Internet advertising is still not as effective as other parts of the world. They have found various reasons for that and you can read the details here, but the point is that this is not a good report from the point of view of promoting online advertising to new players.

Bottomline
So if you put the above pieces together in today’s situation, you have at least 20 players in a market of 8 million users, who are using Internet for less than 10 hours per week vying for a few million dollars of revenues? You can extrapolate the above numbers to 2010 and still the picture won’t look any prettier. I would love to hear any catches in the above analysis, but given this data I would not invest or start something that relies completely on ad for revenues from Indian markets, unless there is a killer app in mind that will acquire a really massive number of users quickly and probably get acquired by a big company. I think in India it still makes more sense to start web services with alternative sources of revenues - more like traditional ecommerce services . Not surprising that most of the VC money is going to such services. Of course there is need for sites where youth generation hangs out or where people share bookmarks or latest stories, but the market is small and it will be very interesting who emerges out as the winner. More interesting to see will be what innovations come out considering these facts about the Indian market, both in terms of type/quality of service and in terms of business models.