India consumer-tech startups face unique challenges

India consumer-tech startups face unique challenges

A fast growing internet user base, a compelling Indian growth story, and a host of smart, proactive entrepreneurs are fueling a boom in technology startups in India. However, these entrepreneurs face a myriad of domestic risks and challenges.

E-commerce – Where it all began

E-commerce giant Flipkart, founded in 2007 and currently valued at $15 billion, triggered the initial interest in consumer tech startups. Firms such as Ola (taxi aggregator), Snapdeal and Paytm (e-commerce), InMobi (mobile advertising) have also broken into the $1 billion-plus club.

Startup ecosystems in Bangalore, Mumbai, and the NCR aim to replicate the success of Silicon Valley and are drawing in the best young tech and business minds from around the country. Executive roles at large startups are being filled by hires from leading tech firms, like Google, Yahoo, and others.

Why India?

The Indian internet-based market is predicted to expand from a measly $11 billion in 2013 to almost $140 billion by 2020. From 2007 to 2010, the Internet user base has doubled to 100 million, and is expected to cross 500 million by 2017.

This growth makes India the second-largest Internet market in the world after China, even though the user penetration rate is below 20%, less than half that of China and one-fifth that of developed markets, such as the US and Japan. A CAGR of almost 30% in mobile-based internet usage in non-metro cities, towns and villages will drive the next level of growth in user bases for startups.

Large global investors, including Tiger Global Management, Sequoia Capital, Alibaba, DST Global, as well as homegrown VCs, such as Nexus Venture Partners, and Kalaari Capital have fueled the growth in valuations & aspirations.

With Satya Nadella and Sundar Pichai, both of Indian origin, having been recently appointed as the CEOs of global tech giants Microsoft and Google, respectively, the world might start taking more notice of emerging technology startups in India.

Challenges ahead

Despite the euphoria regarding e-commerce startups in India, the country does not make it to even the top 30 in A.T. Kearney’s global e-commerce index, owing to issues such as onerous tax laws & poor transportation infrastructure. Also, cash is still the preferred option for payments, owing to the fact that electronic payment has not achieved complete penetration to Tier 2 and Tier 3 cities.

Public stock issuances are not yet on the cards, because firms have still not been able to draw in profits (or stitch together profitable quarters), and Indian retail investors fundamentally believe in profit-based, rather than revenue-based, valuation.

However, Indian stock and exchanges regulator SEBI is set to bring about a host of changes to incentivize startups to list domestically. One major expected change is the creation of an institutional trading platform, thus reducing limitations, such as a requirement to have three consecutive years of profits prior to flotation.

Overcrowding of “hot sectors” in B2C markets by a spurt of me-too startups also fragments the target segment, leading to more focus on cost leadership to win market share. The B2B market hasn’t been equally targeted, and presents more opportunities for an early-mover advantage.

The way forward

Nikesh Arora, representing Softbank’s investment arm, which has invested over $1 billion in some of India’s largest startups, now warns of unrealistic valuations.

The exuberance among investors might gradually subside as companies face challenges maintaining high levels of sales growth on larger bases, and fundamentals such as profitability and scalability begin to matter more than just revenue growth. Transitioning efficiently from the current discounted product-pricing model to a more sustainable sales strategy will be the key to survival.

Furthermore, the Indian government will need to deliver strongly on its promises of being a startup-oriented enabler, and continue to encourage foreign investment in the manufacturing sector as part of its Make in India campaign.

About Author

Sagar Sambrani

Sagar Sambrani is an FX & Fixed Income Trader at a global investment bank and has worked across multiple countries in Asia. He was the Gold Medalist in the Masters in Management programme from IIM Calcutta & has also received a Bachelors in Technology degree from IIT Bombay, India.