Intense interest from prominent investors is helping drive eye-popping valuations among Indian tech startups.
Venture capital firms, hedge funds and the likes of business executives such as Rupert Murdoch are all vying for a piece of India's rapidly growing e-commerce market – particularly companies aimed at the growing number of aspiring middle- class consumers.
This is a radical turnaround from a few years ago, when entrepreneurs and startups were hampered by fewer smartphones, a smaller number of internet users, government inertia and a lack of funding.
One example of the shift is how quickly the fortunes have turned around for Pranay Chulet, who returned to India in 2008 after consulting stints at PricewaterhouseCoopers and Booz Allen Hamilton.
When Chulet first set up an online classifieds portal called Quikr, the early years were gruelling: Every investor he approached was skeptical about the idea of selling used goods, a social taboo in India.
It took Chulet three years to find Quikr its first backer. Now Tiger Global Management, Warburg Pincus and eBay are among its investors. Quikr soared to a $1 billion valuation (vaulting it to the ranks of so-called "unicorns") after a funding round in mid-April involving its existing investors as well as Steadview Capital of Hong Kong.
Well-known investors, such as Murdoch; Masayoshi Son, the chief executive of SoftBank; and Jack Ma, the executive chairman of Alibaba, have all made investments in India's e-commerce companies. They are going head-to-head with other experienced tech investors, such as Sequoia Capital and Accel Partners.
Son said he would pump $10 billion into India, joking during a visit that he was "speed dating" entrepreneurs to gauge their passion. Amazon's chief executive, Jeff Bezos, posed on a festooned truck holding a $2 billion check to be invested in the company's India unit.
5m a month
India’s market potential is enticing. Only 300 million Indians, or less than 25 percent of the country, are Internet users.
That still makes it the second-largest Internet market in the world, after China, and five million users are added each month, according to Rajan Anandan, Google India's managing director.
The number of internet users in India is expected to reach 500 million in three years, he said.
"Half a billion is a huge prize," said Ravi Gururaj, who helps technology-backed startups in his role as chairman of the product council of Nasscom, India's technology industry trade body.
Such interest has created several technology “unicorns” – privately held start-ups worth $1 billion or more. The value of the online store Flipkart (whose backers include Tiger Global and Russian billionaire Yuri Milner’s firm DST Global) rose to $11 billion from $3 billion in one year. The valuation of Snapdeal, a leading e-commerce site backed by SoftBank, rose to $2 billion from $350 million in 2014.
“No major market has multiplied at these rates in the history of this medium,” said Kunal Bahl, co-founder and chief executive of Snapdeal.
The stampede brings its own set of challenges. Despite the optimism, none of India’s e-commerce players are profitable yet. For now, it is a game of capturing market share, and the expenses are high as rivals try to distinguish themselves in front-page newspaper ads and prime-time TV commercials.
There is also the matter of the aggressive valuations that start-up founders are demanding. News reports this year suggested that a deal between Alibaba and Snapdeal fell through because the two could not agree on a valuation.
With such inflated prices, investors ought to be wary. Any downturn could take with it hundreds of millions of their money.
“Follow-on financing offers land even before entrepreneurs have closed the previous round. It is a little chaotic,” said Shailendra Singh, managing partner at Sequoia Capital in India. Sequoia has investments in the cab-summoning app Ola and the restaurant and food platform Zomato.
Sticker shock
Investors get sticker shock as entrepreneurs demand outrageous multiples and stiff premiums. Singh said some demands were “uncomfortably high”.
Still, the investor interest and money are being aggressively put to use by start-ups such as Flipkart, which has tripled its number of employees in one year, to 33,000 as of March.
Flipkart says it has averaged eight million shipments a month (compared with three million a year ago). It recently hired two Silicon Valley-based Google executives: Punit Soni, as its chief product officer and Peeyush Ranjan as its head of engineering.
Already, the value of items sold on Snapdeal, which offers goods as varied as bulletproof cars and luggage made in Mumbai’s slums, exceeds that of India’s largest offline retailers, said Bahl, its co-founder.
Experts see India’s e-commerce market at an inflection point.
A recent Morgan Stanley report, The Next India, said Indian e-commerce would expand to $100 billion in revenues by 2020 from $2.9 billion in 2013, making it the world's fastest-growing market.
India’s youthful market makes it an e-commerce sweet spot, said Vijay Shekhar Sharma, founder of India’s largest mobile payments platform, Paytm.
“Only young people facilitate mass adoption of technology,” said Sharma. “This kind of e-commerce revolution could never happen in Europe with its aged populations.” Paytm is backed by Ant Financial, an Alibaba affiliate, which invested $575 million in January for a 25 percent stake.
India resembles China of a decade ago in internet growth, creation of digital-native marketplaces and rapid user adoption.
Even ideas such as online grocers, which are only gaining a foothold in Silicon Valley, could do well in India.
“So investors who won in China are playing in India. Those who missed in China, too, are playing in India. This is the land of opportunity,” Gururaj said.
– (Copyright 2015 New York Times News Service)
