Venture funds take shine to Indian tech startups

Amazon’s Jeff Bezos grinned widely from the window of a traditional Indian truck during a visit to Bengaluru last week, flashing a mocked-up $2 billion (Dh7.34 billion) cheque from the window — the sum the US online retailer plans to invest in the country.

“I’m super-excited,” Bezos said later of his group’s prospects in Asia’s third-largest economy, where it has launched an aggressive expansion programme that includes delivering food and beverages. The Amazon chief’s buoyant sentiment could just as well describe the sense of enthusiasm enveloping India’s start-up scene, after a period marked by rapid business expansion and a number of high-profile venture capital investments.

Much of this has focused on Amazon’s developing battle with two fast-growing domestic competitors: online marketplace Snapdeal, and ecommerce retailer Flipkart. The latter launched a new $1 billion fundraising round in July, valuing itself in the region of $7 billion — unheard of for an Indian ecommerce player.

A steady stream of other start-ups has also announced new funding, including online classified group Quickr, which announced a $60 million infusion last month, in a deal led by Tiger Global, a New York-based investment group. Silicon Valley venture capital groups have been upping their spending too, hoping to ride an ecommerce market projected to be worth $44 billion by 2018, according to broker CLSA. The eventual pay-off could be even larger, if India’s potentially vast online marketplace follows the path taken by China.

“I definitely see a big change,” says Nandan Nilekani, co-founder of Infosys, a leader of India’s previous generation of software and technology groups. “There is definitely a new energy in the air.”

An influx of money is the first sign of this shift. Silicon Valley-based funds such as Sequoia Capital and Accel Partners have helped to push venture investment into internet companies to $2.1 billion this year, up more than fivefold on the whole of 2013, according to Thomson Reuters. Total early-stage VC investment also topped $1 billion for the first time since 2007, according to Ernst & Young, the consultancy.

Homegrown technology businesses such as Infosys and Wipro have also started venture funds, as has India’s government, which pledged Rs100 billion ($1.6 billion) for smaller technology companies earlier this year. Wealthy business luminaries including Ratan Tata, former chairman of the Tata conglomerate, have started dabbling in e-commerce projects too.

Rising interest from global technology companies is a second development. In addition to Bezos, Satya Nadella, Microsoft’s Indian-born chief executive, addressed an event in New Delhi recently.

Facebook’s Mark Zuckerberg will also visit India, having acquired Little Eye Labs, a Bengaluru-based mobile development group earlier this year. His rivals have made similar moves, including both Google and Yahoo, which bought Bookpad, an online file editing and collaboration software company, for a reported $15 million in mid-September.

The third reason for India’s start-up excitement is the potential scale of the market. With roughly 240 million Indians online, the country has the third highest number of internet users in the world, and it is projected to overtake second-placed America this year.

Mobile penetration is forecast to rise especially quickly, as annual smartphone sales hit 200 million in 2017, according to research group IDC.

Add all this together, and it amounts to what Mohanjit Jolly, a partner at DFJ Ventures, a US venture capital roup, dubs India’s “Alibaba syndrome” — the expectation that homegrown internet groups will become global companies able to launch initial public offerings in the US. “There is a real sense that what Alibaba, Ten Cent or Baidu did in China, we can do in India,” he says.

If this is to happen, however, a number of obstacles need to be overcome. Poor infrastructure and difficult regulation afflict technology businesses just as they hobble other Indian companies, says Pravin Gandhi of Seedfund, which backs early-stage ventures.

The lack of a blockbuster technology IPO, either in India or US, or the emergence of a “unicorn”, that is super-valuable start-up worth $1 billion or more, has also hampered the venture investment industry. This is one reason why some prominent Silicon Valley funds, such as Kleiner Perkins, have wound down their Indian operations.

There are also concerns about a hype-driven tech bubble. Venture valuations are “frothy”, says Shailendra Singh, a director at Sequoia in Bengaluru. Most analysts also think larger Indian e-commerce players such as Flipkart and Snapdeal remain lossmaking, complicating any possible US flotation plans.

Even so, the sense of optimism remains pervasive. “It isn’t hard to look at China’s growth, and to see that we are heading for somewhere between $30 billion to $50 billion start-ups over the next three to five years,” adds Rishi Navani of Matrix Partners, a venture group. “I’m a conservative guy, and I’ve been looking at India for a while now... But this time it is for real.”

Online marketplaces Flipkart and Snapdeal dominate coverage of India’s e-commerce boom, alongside a handful of listed players, such as travel portal MakeMyTrip and local search engine Justdial. But a host of other earlier-stage ventures are attracting excitement and funding, including:

* Hike: Mobile messaging competitor to Facebook’s WhatsApp, said to be popular with Indian teenagers for its “hidden” chats, which disappear without having to be deleted. Raised $65 million in August.

* News Hunt: News reading app with a focus on local non-English Indian languages such as Hindi or Tamil, raised more than $16 million in its latest funding round last month.

* Jabong: Fashion portal owned by Germany’s Rocket Internet, set to be expanded following the flotation of its parent company in Frankfurt.

* RedBus: Popular ticket portal in India’s fast-growing city-to-city bus market, bought out by South African media conglomerate group Naspers for about $100 million earlier this year.

5. Quickr: Online classified portal, rapidly changing a market that was until recently dominated by newspaper adverts. Raised $60 million in September.

— Financial Times