India tech: Reality call

Posted on August 10, 2016

Deepinder Goyal had a moment of horror last year when he received an email from a would-be entrepreneur seeking funding.

“[The idea] was Uber for water: if you want a bottle of water, I have an app for you and I can deliver it within 10 minutes,” says Mr Goyal, founder of Zomato, an Indian restaurant search platform. “On a bottle of water the margin is about two rupees . . . there is no way that can work. He was looking for a $1m seed round at an $8.5m valuation. That is what we had created.”

    Mr Goyal, whose company last year raised money from foreign investors who valued Zomato at $1bn, has had a front-row view of an exuberant rush of funding into India’s fast-growing internet sector over the past three years.

    Having struck gold in Chinese ecommerce, foreign investors such as Japan’s SoftBank and New York-based Tiger Global Management turned their sights on India and pumped in billions of dollars, betting on its huge population, rapid growth in internet penetration and strong economic growth.

    By last year India had amassed eight “unicorns”, or unlisted companies valued at more than $1bn — behind only the US and China. The funding wave was a conspicuous vote of confidence in India’s economy, now the fastest-growing of any major nation, and in its ability to use technology to skip over 20th-century concepts such as hypermarkets, while driving higher living standards.

    “India never really had modern retail, so the leapfrog that will happen is quite compelling,” says Sanjeev Aggarwal, co-founder of Helion Venture Partners, an Indian venture capital group. “This is day one of India’s consumption going digital.”

    But both investors and companies now talk of a conspicuous cooling of sentiment
    , amid fears that the funding rush has led to widespread overvaluation. There has been concern about the scale of losses at some of the companies, stiff competition from foreign rivals and the knock-on effect on other markets of tech investment writedowns. Some businesses are shedding staff and withdrawing job offers as they adjust to a world in which exuberant foreign investors can no longer be relied on to underwrite losses indefinitely.

    “If you’d asked me — when we got the round — do you deserve the $1bn, I’d have said absolutely not,” says Mr Goyal. “But for anything, the value is about how much you want it. And then the market changed and suddenly everyone is sceptical about everything.”

    Chinese parallels

    When the influential venture capitalist Mary Meeker presented her annual report on web trends in June, she provided two estimates for internet usage growth in 2015: one stripped out India, which was growing so fast that it distorted the sluggish worldwide figure.

    The number of web users reached about 317m last October, 49 per cent higher than a year earlier, according to Ms Meeker, citing data from the Internet and Mobile Association of India. This growth was driven by smartphones, of which sales in India increased at a rate of 12 per cent in the first quarter of this year, while they stagnated or even fell globally, according to research groups.

    The smartphone boom has attracted the attention of tech leaders such as Tim Cook, the Apple chief executive, who made his first visit to India in May, and it is inspiring excitement among analysts about the outlook for ecommerce growth in the country. Most bullish is Morgan Stanley, which predicted in February that total sales in the sector will grow to $119bn by 2020, up from about $16bn last year.

    Such optimism has been fuelled partly by the dramatic rise of Chinese ecommerce groups such as Tencent, and especially Alibaba, which undertook the biggest ever initial public offering last year.

    Chart: India tech data

    But investors and entrepreneurs in India warn that any parallel should be treated with extreme caution. “I was very surprised that all these funds were so naive in treating India just like China,” says Kashyap Deorah, a serial technology entrepreneur and author of a book on the “hyperfunding” of Indian internet groups.

    India’s lower level of development — its per capita gross domestic product was $1,617 last year, against China’s $7,990, according to the International Monetary Fund — is one obvious difference. Just as important, Mr Deorah says, is the fact that US internet groups have struggled to make themselves felt in China.

    Google, Facebook and Twitter are all unavailable to most Chinese internet users but have won dominant positions in India, limiting the space for local players. Even where Indian start-ups have stolen a march on US rivals, some have seen that lead rapidly eroded.

    American rivals

    In September 2014,
    Amazon founder Jeff Bezos clambered on top of a gaudily painted truck in Bangalore wearing a white Indian wedding suit, and handed a giant cheque for $2bn — symbolising planned investment in the country — to Amit Agarwal, whom he had sent to run its Indian operation.

    The hilarity of the pantomime-style performance may have been lost on Flipkart co-founders Sachin and Binny Bansal, former employees of Mr Bezos who now found themselves in his competitive crosshairs.

    The Bansals — unrelated despite having a surname in common — met while working for Amazon at its Bangalore campus, which then provided back-office support. In 2007, with Amazon showing no sign of launching sales in India, the two men decided to put the company’s playbook into practice.

    Just like Amazon, Flipkart honed its service by selling books before branching into other products, and after a slow start began attracting investor attention. In 2009 it raised funding that valued it at $4m; in 2010 at $50m; in 2012 at $1bn, and in July last year, at $15bn, making it by far India’s highest-valued internet company. “In terms of market share, funding and the brand we have been able to build up in a very short amount of time,” Sachin Bansal told the Financial Times this year.

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    But losses have also grown rapidly. Flipkart’s most recent regulatory filings in Singapore, where it is domiciled, show revenue of Rs102bn ($1.5bn) in the year ending in March 2015, with a pre-tax loss of Rs29.8bn — up from the previous year’s figures of Rs29.4bn and Rs10.3bn respectively.

    And although the heady investor enthusiasm for Flipkart continued long after Amazon’s entry to the market, it is now showing clear signs of fading amid rapid growth at Amazon India, which received an additional $3bn funding pledge from Mr Bezos in June.

    A fund run by Morgan Stanley has twice this year marked down its stake in Flipkart, giving it a sharply lower valuation of $9.4bn, and other shareholders have made similar moves.

    Funding trends suggest a broad turn in sentiment. In the nine months to the end of June, Indian technology companies raised $3.1bn, down from $6.7bn in the preceding nine months, according to Tracxn, a research company.

    Chief executives and investors say the slowdown was triggered in part by sharp falls in US and Chinese technology stocks last summer, and most argue that well-run Indian tech companies will still be able to raise capital, with funding far from drying up. ShopClues, an ecommerce platform, in January became India’s ninth unicorn through a financing round led by GIC, Singapore’s sovereign wealth fund.

    But even Sandeep Aggarwal, a co-founder of ShopClues, perceives a chillier funding environment. “The fear of missing out was so great that [investors] went for spray and pray,” he says. “And when the market started slowing, reality hit them in the face.”

    That blow was especially violent for Nikesh Arora, the former Google executive who became one of the most prominent investors in the Indian tech sector after being recruited by SoftBank in 2014. Within weeks of his appointment as president, Mr Arora led investments of more than $800m in Flipkart rival Snapdeal and in Ola, a competitor to Uber in ride-hailing, and made further large capital injections into other Indian tech companies.

    But shareholder unease grew as Snapdeal fell far behind Flipkart and Amazon in sales. Ola slashed its prices to fend off a fierce assault from Uber, which is set to redouble its focus on India having sold its Chinese business to rival Didi Chuxing
    last week.

    Mr Arora resigned from SoftBank in June shortly after being cleared by an internal investigation prompted by anonymous investor allegations of improper conduct, largely in relation to his Indian investments. Mr Arora and SoftBank deny that his departure was linked to these complaints, but his brief career at the Japanese group is viewed by some investors in India as a cautionary tale that sums up the rollercoaster ride of the past two years.

    The quieter funding market of recent months has come as a relief to some entrepreneurs.

    US founder and CEO of Jeff Bezos (R) hands over a two billion dollar cheque to Indian Vice President and Country Manager of, Amit Agarwal atop a lorry in Bangalore on September 28, 2014. The investment will go towards raising the bar for online shopping in India. AFP PHOTO/Manjunath KIRAN (Photo credit should read Manjunath Kiran/AFP/Getty Images)©AFP

    Amazon founder Jeff Bezos hands a cheque for $2bn funding to Amit Agarwal, the company’s vice president in India

    “We’re very happy that phase has ended. In the long run that’s the right thing for the company and for the country,” says Rohit Bansal, co-founder of Snapdeal. “No company can exist just by raising money from investors.”

    Global battleground

    Despite their newfound global status, China’s leading ecommerce companies have been slow to make incursions abroad. In India, their expansion has been limited to portfolio investments: Didi Chuxing took a stake in its counterpart Ola while Alibaba invested in Snapdeal and in PayTM, a payments and ecommerce business.

    However, Alibaba announced in March that it planned to start operating in India as soon as this year and the country looks set to become the first major market to host a full-on fight for supremacy between US, Chinese and local ecommerce companies, says Nandan Nilekani, co-founder of Infosys, the IT services group. Now a venture capital investor, Mr Nilekani argues that companies that have niches least exposed to well-resourced foreign competitors are best placed to succeed.

    Among these are groups tailoring their offerings to the many millions of Indians taking their first steps online, typically through newly acquired, low-cost smartphones. Such companies include DailyHunt, a news aggregator that provides content in local languages rather than English.

    Chart: India tech data

    Asked to demonstrate the product, Virendra Gupta, DailyHunt’s chief executive, reaches for his unfashionable mid-range Chinese smartphone, waiting patiently while its basic 2G data connection grapples with downloads. For Mr Gupta such inconvenience is part of an effort to understand his target audience. With his focus on the “next 400m” Indian web users, he has little patience for questions such as how many Indian companies deserve a $1bn valuation.

    “People get into a mad rush when there is [a successful model] somewhere else and they just put a multiplier around it,” he says. “It’s important for people who invest in the companies to realise: the growth will happen, but India just takes a bit more time. Throwing money doesn’t solve problems.”

    Value for money? The unicorn generation

    Flipkart India’s biggest online marketplace by volume. Started by selling books before expanding into general merchandise. Founded in 2007 Valuation at last fundraising:
    (May 2015)

    InMobi A platform for buying mobile advertising that competes with Google and Facebook. Founded in 2007. Valuation at last fundraising: $2.5bn (December 2014)

    Mu Sigma A data analytics company with operations in the US and India. Founded in 2004. Reported valuation at last fundraising:
    (February 2013)

    Zomato Online restaurant directory that offers table bookings and food delivery services. Founded in 2008. Valuation at last fundraising: $1bn (April 2015)

    Ola A ride-hailing app that competes with Uber. Founded in 2010. Valuation at last fundraising: $5bn (November 2015)

    PayTM Payments and online shopping platform backed by China’s Alibaba. Founded in 2010. Valuation at last fundraising: $3.4bn (September 2015)

    Quikr Classified advertisement site that supports payments and deliveries. Founded in 2008. Valuation at last fundraising: $1bn (April 2015)

    ShopClues Marketplace with a capital-light model. Does not own any warehouses. Founded in 2011. Valuation at last fundraising: $1.1bn
    (January 2016)

    Snapdeal Started by offering discount vouchers but became a general marketplace a year later. Founded in 2010. Valuation at last fundraising: $6.5bn
    (February 2016)

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