I attended TiEcon Delhi for a day in October. The energy in the main hall and the deal-making in the lobby outside, spoke volumes about how hot the Indian venture scene is. I met old friends as well as some new entrepreneurs. And came away with much to chew on.
Startups in India have opportunities and challenges that are quite different from the ones in the US. Ditto for VCs. A few observations:
– Unlike in the Valley, Web 2.0 has no relevance to the Indian domestic market. Internet penetration is low (5.4%), broadband is lower (<0.5%). Even if you include use at work, account sharing and internet cafes, the consumer internet is a tiny market. It may be interesting for some compelling ideas or if someone wants to bet on growth. But in my opinion, it is not going to attract much investment unless there is a broader ‘global Indian’ or a ‘click and mortar’ play.
– Mobile however is hugely interesting. Mobile penetration in India is twice that of the internet and is growing at rates close to 50%. There are opportunities to develop mobile applications that the developed world never needed because of high internet penetration. Booking a cinema ticket in the US is probably done 95% of the times over an internet connection and 5% on a cell phone screen. In India it may be totally different. This also holds out the opportunity that Indian startups may develop mobile applications for the Indian market and then take them to Europe and other developed markets. I hear that OnMobile, a Bangalore based startup that does voice-based mobile apps did its latest round of funding at about $250 million pre-money. I’ll be surprised if they aren’t already selling their services in other countries in APAC or Europe.
– B2B Tech does have a play but in global markets, not in India. This poses a unique problem. Startups targeting the global markets need help from VCs in those markets – access, hiring and advice – which can’t really be expected from a VC based in India. Most VC firms will tell you that when you do a deal with them, you get the connections of the whole firm, but it is a rare firm that operates like that. On the other hand, no US based VC is comfortable funding a management team based in India – the distance is too much. This is a hard nut to crack. I hope some VC can come up with an innovative solution.
– Most people agree that plain outsourcing is no longer a great investment idea. There is a lot of competition and you have to get everything right to build a defensible business. However, managed services – services combined with a software platform – can be very competitive.
– The big opportunity, and one that doesn’t get talked about much, is in non-tech consumer oriented products and services. The Indian middle class is growing and so is its buying power. Every category is growing at a rate that should interest any VC. The discerning Indian consumer wants quality products and services that meet her very unique needs. Food, recreation, entertainment, leisure travel and retail are huge and growing markets. Seeking funding for startups in these areas is also going to be tricky if the entrepreneur wants expertise. Most of the VC expertise in the Indian market is technology and services related, reflecting the expertise in the US market where technology and healthcare are the two largest areas of venture investing.
– Listed companies offer significant opportunities to VCs via PIPEs (private investment in public enterprises). Because of the low hurdle to a public listing in India, many listed companies remain small and in need of growth capital.
In conclusion, the Indian venture business is going to be quite unique. VCs and entrepreneurs, who take a cookie-cutter approach to it, are in for a rude shock.