The recent crisis of confidence brought by unicorn
meltdowns isn’t for real. India’s digital economy is actually poised for
a bright future
India
is arguably the most promising Internet market in the world. It has
attracted over $20 billion of global venture capital, primarily from
Silicon Valley. The Chinese will add billions more to this pool. We are
the third hottest start-up nation in the world—just behind the US and
UK, with over 4,000 start-ups. Facebook, Google and WhatsApp are betting
big on India. Our mobile penetration has crossed the billion mark.
We’ve got 300 million smartphones, and growing.
By
all counts, we should be happily dreaming of multibillion-dollar
initial public offerings and a vibrant exit system. Yet we are not.
Look
under the hood—you see a crisis of confidence today. Venture
capitalists (VCs) have pulled back. Series A funding is at an all-time
low and “consolidation” is the nickname for the desperate rescue of
investors in dud start-ups, which are quietly euthanized a few months
later.
Across
logistics, e-commerce, food tech and hyper-local services, several
hyped-up Western clones have been decimated. A deadpool list puts the
number at 800 but my hunch is that this could be double that.
In
excess of $2 billion has evaporated over the last 12 months—with
nothing to show for it, except jobless techies, sales people,
coordinators and courier boys. Over 10,000 pink slips have been issued
in the last six months, not counting the losses at ancillary businesses
that sprang up around them.
Founders
have realized that raising lots of money is not the recipe for success.
In the last five years the exact opposite happened: mega-funding killed
the innovation and hunger, the leanness and the sharpness. It created
sprawling teams without focus. Investors were blinded by the growth
story and did very little diligence on teams and their maturity to find
product-market fit. Funding became the distraction. The biggest startups
in India fell complacent by their own admission. Mega-funding rounds
ended up attracting foreign strategic competitors like Amazon and Uber
far earlier than planned.
Flipkart
and Snapdeal are estimated to have burnt through $3.5 billion so far to
generate gross merchandise value of $5.5 billion this year. If you
assume their “take rate” at about 8% (commission revenues they derive
from a transaction on their marketplace) their generated revenue will be
just about $400 million. This kind of capital inefficiency boggles the
mind.
So,
here’s the moot point: Did something go terribly wrong at the
confluence of young start-up founders, mega-round capital and proven
business ideas? Or was the huge market potential in the Indian Internet
space a chimera?
There
are two parts to this narrative: start-ups hitting a glass ceiling and
the fallacy of “one” market. Let’s take them one by one.
1. The glass ceiling: A
year ago e-commerce players realised that they had exhausted their
“consumer runway”. There was a limit to the number of Indians who speak
English, have money for data packs and have the personal disposable
income to fill their closets with clothes they don’t need based on
offers they can’t resist. The returns on customer acquisition and
retention costs were negative, and splurging on ads did not expand the
customer pool.
This
math was conveniently ignored because they had to show higher gross
merchandise value to attract investors. But there were other troubling
signs too. When they cut back discounts due to changes in government
policy, e-commerce shipments tanked across the board. Smartphone growth,
an indicator for the potential of our consumer Internet market, slowed
to just 17%. Telecom operators reported slowing data pack growth for the
first time in years. There is a growing realization that the Indian
market is not as deep as they thought. Almost on cue, the narrative
shifted from “India will be the next China” to “India is not China.”Does
this mean the market is small? Not at all.
2. The fallacy of ‘one’ market:
Google, Facebook, WhatsApp are huge, ubiquitous services with over 95%
penetration in our market. They will soon reach a majority of our
potentially billion-strong Internet users—most of these new users will
rely on their smartphones for digital access.
But
these services are free. They make money from advertisers and not
consumers. And their average revenue per user (ARPU) in India is a mere
fraction of their global average.
So
it’s not that our market is small, but the way it is configured that
trips up every player who tries to treat it as “one” market. The
multinational companies and big-box retailers in India learnt these
lessons the hard way a decade ago and now we are seeing the tech
startups face up to the reality. The reason to worry is this: most
Indians cannot afford a decent meal, let alone buying stuff online or
hailing an on-demand cab.
Let’s turn to the math.
If you stacked up a 100 Indians, here’s how our income distribution looks:
One
Indian earns 30% of the total and makes over Rs1.5 lakh a month.
Fourteen Indians earn 30% of the total and make around Rs20,000 a month
each. The next 30 Indians earn 30% of the total and make Rs8,000 per
month each. The poorest 55 Indians earn 10% of the total and make only
Rs1,500 per month each.
Mind
you, this is total income. This is money they earn to spend on
everything—roti, kapada and makaan, and of course, data. Most of this
money is spent on food and groceries, and on things they “need”. Money
left over to buy things they “want” is much lower as you go down the
chain.
The wealth statistics are even more damning:
One Indian owns 53% of the wealth
Nine Indians own 23% of the wealth
Forty Indians own 20% of the wealth
Fifty Indians at the bottom own only 4.1% of the total
(Note:
These are rough calculations and I abstain from using the phrase
“Indian middle class”. There is just too much confusion around how big
it is.)
Simply put, we live in three countries:
India One:
Club the top two tiers above and you find that the top 15% of Indians,
i.e. about 150-180 million, earning an average of Rs30,000 per month,
are the ones who have money left over after buying necessities. These
15% of Indians control over half the spending power of the economy and
almost its entire discretionary spending. They consume their data plans
without thinking about the bills. They install the shiny new apps
without bothering about the gigabytes they consume on their oversized
and expensive smartphones. They have Wi-Fi at home and office, power
generators at home and are connected 24x7.
They
are equivalent to a country with the population of Canada and live the
lifestyle of a European nation (if you equate them on purchasing power
parity, or PPP basis)—and with better lifestyle to boot. They have
chauffeurs, maids, cooks, cleaners, peons to take care of onerous
chores. And no, they won’t step out of their air-conditioned homes into
our dirty streets and traffic—everything has to be served instantly, at
home. Assisted living at the age of 20, I call it.
India Two: This
is the middle 30% or 400-odd million Indians, earning an average of
Rs7,000 a month. This would be a country about three times the size of
Bangladesh with a similar level of purchasing power.
They
are the ones who “service” the $1 trillion market (yes, read that
again) that India One represents. That’s the money that trickles down to
them.
They
have managed to change their fate and climb out of poverty over the
last two decades by migrating from their tiny bits of non-arable land to
the mega cities of India and taken up jobs to serve the needs of these
markets. They work two shifts as Uber/Ola drivers or as cooks in our
burgeoning restaurant chains, or set up small businesses—and send money
back home to their families in the villages.
Luckily
for us, they still see hard work, family values and education as a
ticket to a better future. Most save all their money to get their kids
an education. Most of their income is spent on food and rent, and
whatever little is left they use to try and escape from life in their
smartphone screens by buying movies or songs on an SD card from the
neighbourhood store. They buy second-hand smartphones and tiny
sub-hundred rupee data packs to keep in touch. Of course, we report them
as Internet consumers in our slick presentations on Startup India.
India Three: These
are the forgotten 650 million who subsist and don’t have the money to
buy two square meals. Their incomes are on par with those of sub-Saharan
Africa. Many of them did not leave our roadless, school-less,
toilet-less, and powerless villages and instead chose to send a child or
a sibling to work in the big cities. They live on the mercy of our
monsoon and whatever little reaches them through our poverty alleviation
programmes. They live on the periphery of our economy and for all
practical purposes don’t participate in it. However, they are the ones
who form our vote banks and determine the political future of our
nation.
These
three Indias are not split geographically. The steady urbanization of
our nation has seen to it that all three mingle together in our
metropolises—from Dharavi to Dadar to Malabar Hill in a city like
Mumbai. We share the same roads, air pollution, and same GSM spectrum
from our favourite cellphone operator. What joins our existence at the
hip is the cellphone and the constant fear of its battery running out.
Failure of the smartphone proxy
The
failure to distinguish between “Internet users” (India Two) and
“Internet consumers” (India One) has messed up every estimate of the
market. This destroyed the Total Addressable Market (TAM) calculations
that have driven most venture capital funding and valuations. TAM—of
people who can afford to actually habitually spend on the current
offerings of our Internet giants—is not 1 billion people, it is about
150 million people.
This changes things. Let’s see how.
E-commerce
players talk about how their penetration levels are low and they have a
huge upside. But the moment you redefine the addressable base—i.e.
assume it’s not 250 million households but closer to 40-50 million with
discretionary income—our online shopping penetration suddenly rivals the
best markets in the world. It is obvious that with so much media
blitzkrieg and mind-boggling discounting, most of the households that
could afford to make online shopping a habit have converted. The market
has saturated, and growth will slow. Quite simply, investors and
founders who took our explosive mobile and smartphone growth as a proxy
for the potential of our consumer Internet market are paying the price.
The bubbles are not just in their valuations but in the business models
that assumed a far larger addressable market than there is.
So
how does one look at the market today? First recognize that the
smartphone is not an indicator of spending power, it is an instrument
for survival. Almost 60% of Internet users in India don’t access it more
than once a day. These are not Internet consumers, but just Internet
users—they use it like a utility, with an eye on the data consumption.
The addressable market for a start-up will now need to be tested for
real. Someone will have to go and check on the ground whether the
customer can actually afford it, repeatedly, or will it be a one-time
sign-up driven by the incentive of a free Rs20 talktime
recharge—something that sounds pretty good to someone living on a data
plan of Rs100 a month.
If
anything this “reset” augurs well for our future. The golden moment for
India’s Internet market is coming. VC dollars will now naturally get
directed towards India Two and India Three. But they need a different
mindset and solutions. They may not live up to the script of
I-will-be-a-unicorn-in-24-months, but will have the potential to give
birth to several “centaurs” for the next decade.
What
will aid them is the fact that the country is about to get
data-charged. We will add 200 million smartphone customers as smartphone
prices dip below Rs3,000. Reliance Jio’s entry will reset data prices
in India. My guess is that entry-level data packs will cost a third of
what they are sold for today—in just a few months.
And
wired broadband, which has been ignored far too long by our successive
governments, will take off finally. A 10% increase in broadband
penetration increases the per capita GDP by 1.38% in developing
countries, according to the World Bank. India ranks No. 4 on smartphone
ownership, but 122 on broadband. Access to cheap, good-quality bandwidth
will make vernacular and video the accessible language of digital
interaction. Data will be the new arterial network of India.
Cheap
Internet access and low-priced smartphones, combined with the public
digital goods (the identity and trust layer provided by the India Stack)
being built around Aadhaar, and a maturing startup ecosystem will
create the next set of uniquely Indian technology start-ups.
India
Stack will craft a new friction-free, lower-transaction-cost highway
that will be accessible on the mobiles of Indians regardless of their
income and literacy. It will create a truly integrated market. A year
ago, I had tweeted that there is a billion dollar opportunity in
building your business on this platform.
Though
we pride ourselves as a country of entrepreneurs, we make a big
mistake. Most of our self-employed in India are entrepreneurs by default
for lack of other opportunities. They work in small shops and farms,
often in poor conditions. They lack the capital and tools to grow and
are forever stuck in the uncertainty of self-employment and the vagaries
of the market and weather. These sub-scale firms that barely sustain
the livelihood of one family are a drain on our economy and resources.
We have to de-clog from millions of tiny businesses and get employment
going. As India Two and India Three go online, the people who could not
participate in the economy due to lack of physical and financial
infrastructure, will turn into consumers and “micro-entrepreneurs”. The
kind of entrepreneurs I am talking about will embrace technology and the
connected ecosystem to scale their business, creating wealth and jobs.
This
is the Green Revolution, the Milk Revolution at 100x the scale and
impact—something that has never been seen in any market in the world.
So what does it mean for VCs and start-ups?
The
traditional VC model bets on a few winners and deep markets, which are
quickly penetrated by access to mobile-connected audiences and are
mega-funded to disrupt traditional markets. Indian VCs will need to
balance a “nurture and grow” versus a “spray, burn and pray”.
In
China, Internet retailing grew 50x in the seven-year period 2007-2014
on the back of 7x growth in user adoption and 7x growth in annual
spending on e-commerce. In 2014, China had 10x the number of
middle-income households compared with India. We can’t catch up with
that anytime soon. That kind of growth is still 10 years (or more?) away
in India. So VCs need to recalibrate their thinking. Of course, you may
find a startup with great product-market fit, but the viscosity and the
shallowness of the Indian market will slow you down. So you have to
have the patience to see it achieve scale. Start-ups will have to play
the game very differently. First, they have to recognize that India One
will remain hyper-competitive with the global players always ready to
jump in. This market needs start-ups that tailor their offerings to
these audiences who value convenience over economy. Here the challenge
would be to drive both usage and ticket size. This will be a tough
market to fight.
There
is an opportunity in India’s traditional businesses. Every sector has
infirmities and yawning gaps that a start-up can drive a truck through.
Most Indian old-economy companies are caught like deer in
headlights—every CEO wants an app or a website but few have a clue on
how to make it a real business. A quick glance at the websites of the
offline retailers will tell you that even after they were hit by the
online tsunami over three years ago, they’ve yet to put up a semblance
of a fight. There’s a huge opportunity here.
Winning
here won’t guarantee that you will still be relevant in a few years’
time, since you’ll miss the benefits of scale if you ignore the India
Two and India Three markets. We need a “Nirma moment” in our start-ups.
And the Nirma moment does not strike you while you sit in the cozy
quarters of Koramangala.
The
consumer Internet businesses for India Two and Three will have a
different agenda—they will need to focus on reducing costs and friction,
and not just on overloading the consumer with choice. So how can one
frame the opportunities? While it’ll be most interesting to get the
reader’s take on it, I’ve tried to bucket them into three types:
1. Bridging the divide:
These are firms that would build the bridge between India One and India
Two—that rework their offerings to match the aspirations and
affordability of India Two. Who can refurbish goods, sell more
affordable unbranded products, and communicate with the India Two
consumers in their language. Group-buying platforms for consumers and
small and medium enterprises, second-hand cars and two-wheelers are some
examples. A player like ShopClues is the Indian dollar store or the
flea market has made a dent here.
2. Create new markets:
Start-ups need to learn how to “sachetise”—how to strip down ideas and
services and match the affordability and aspirations of India Two. For
instance, they need predictable and cheap transport. Can’t we create a
bike-hailing service, like Go-Jek in Indonesia?
3. Inform, empower and entertain:
India Three customers need start-ups that can disintermediate
exploitative middlemen. For example, “direct to farmer” m-commerce
platforms like AgroStar. They need apps that can make a village act as
one and increase their collective bargaining power. They need
information apps that can help them choose the right crop, do the right
investment, take care of their health and fitness, lead a better life.
These are lessons for founders: A big round of funding doesn’t translate
to success. Ingenuity comes first. If you get that right, the funding
ecosystem is now large and deep enough to back you as you scale.
Get
fascinated with India Two and Three for the next five years. You can
create moats and stickiness in these markets. They are first-time
Internet consumers. They need guidance and solutions that can transform
their lives. You don’t have to go far to understand their needs; they
live next door, in the chawls of your city. Learn from Patanjali as much
as you learn from Amazon and maybe you’ll truly find the pot of gold
beneath our pyramid.
Every
start-up doesn’t have to be a unicorn. No need to burn up like the
legendary Icarus as he affixed wings made of wax which melted when he
tried to embrace the Sun. I’d say, instead work on growing real wings
and soaring—they take time to grow, and the journey is longer, but they
won’t melt at the first sign of heat.
