May, 2018     

The Indian Internet Investment Story: Why is Indian Internet attracting VC/PEs across to the globe?


Where is the incremental private equity money going in Indian market:

 

Traditionally India has been a consumer growth story. Almost all the unicorns and the large internet companies which have come out of India are in the consumer space. So, whether it is Flipkart, Ola, Zomato or PayTM etc. The key reasons for this are the following:

Pretty much 70% of the india’s GDP contribution comes from the private consumption against 40% of the China’s.

The second big contributor has been the very size of the population, and the increasing percentage of the working age population. There are more than 1.3 billion consumers in India and 2/3rd of them are in working age group

The third big lever has been around the access to internet infrastructure. With around 500 million internet users and that 70% of them have smartphones.

 

Now the investments in Indian VC/PE space have responded to the opportunities in these sectors with majority of the investment going in the consumer space. That was the prominent story till 1-2 years back. The difficult part has been around the high CAC and low LTV in the consumer facing markets. And that’s where now there is an increasing appetite for the enterprise models as well. There is significant traction for the companies trying to solve the enterprise challenges in the SMB space.

So, to sum up, India has been a consumer focussed story in the VC space, which will remain the case going forward as well. But there would be increasing acceptance and presence for the enterprise tech companies as well. Within consumer space, the large areas of investments have been Retail, Hospitality, Mobility and Food delivery

 

Interesting opportunities we have worked with:

On the public market side, there are limited opportunities in India. But closest we have worked on is the OTA space, where MMT is a public listed company. The new entrant OYO has been able to disrupt the market in a big way. There are 900K room nights available in India on a daily basis, out of which just about 20% are online. The other side of the challenge has been a predictable experience in the Indian hotel industry, which is largely unorganized. OYO has been able to get about 7% of India’s inventory under its brand name. Giving users a seamless experience, and they are holding on to the largest room inventory in India. The model is exciting and is not only expanding in India but globally. This puts them ahead of the MMT in Indian market which is struggling to grow in the hotel space due to the limited inventory and lack of control on its operations. MMT has lost almost 12% of its market share to OYO in last quarter alone in terms of the room nights booked.

 

VC vs. the corporate investment opportunities:

The corporate investments are being looked at as a more strategic investment and are able to add significant value to the investee more than just the capital. Zomato – the online restaurant directory and food delivery platform is a case study. Zomato is being invested by Info-edge, which are the owners of the largest job portal in Indian market. The strategic direction they received from the investors have been able to help them execute and envision the strategy better. So, the investees are looking at the corporate investments more favorably. The challenge lies from the supply of such investors, and the kind of valuations they are looking at. Lately, the investments from the investment arms of Chinese corporate are doing fairly well in Indian market, and investees see a lot of value in them.

 

How important has payment technology been to development of the market?  What’s next in payment? 

In the markets like India where the credit card penetration is very low, less than 1% of the smartphone user base. It is important that there are payment solutions to shore the online business solutions. The current state of affairs is fairly simple, a majority of the transactions are happening offline. more than 2/3rd of the payments for the online purchase happens in cash. But there is a rising value proposition from the online payment options. Till few months back the wallets were the name of the game. Now increasingly India’s UPI is playing an important role. UPI or unified payment interface is the platform developed by the government of India to facilitate the inter-banking transactions. There are host of service providers which are using these platforms to facilitate the mobile payments. The latest entrant being Google. There are close to 400 million monthly transactions happening online through various UPI platforms. The unique feature about UPI is the ease of adoption and that there is no need to move money out from the primary accounts, which was the case with wallets. Having said that the role of cash in Indian internet ecosystem would still remain significant for the near future.

The internet markets and investments are tending to become more homogenous between India and China. There are increasing cases of Chinese strategic investments coming to Indian market, from likes of Alibaba. the investments in PayTM, Bigbasket and the Xpressbees is a clear case of how Alibaba is trying to extend its expertise of the sector in Chinese market to India. Similarly, there is China lodging in OYO and CTRIP in Make My Trip and so on. Going forward we expect a lot more such cases coming up – making the investments a lot more homogenous.