Looking Inside The Indian Startup Bubble

Posted on Tuesday, January 05, 2016 by Achyut Joshi

 

Being a budding entrepreneur in the fastest growing economy makes me a bit skeptical about the high-risk startup industry in India. Moreover,I feel that TinyOwl and Zomato are proof that something is rotten in India’s startup industry.

So what exactly is a bubble? Most of us would have heard of the very famous dot-com bubble of the late 20th century that derailed the world economy. It is basically an inflated valuation of assets or products, way beyond their intrinsic value, leading to the possibility that their prices will crash one day. So is the Indian startup ecosystem a bubble? It is an ongoing debate which has no particular conclusion, yet like most of the optimists out there, I am betting against it.

Are the Indian startups overvalued? Startup Grind took 10 popular startups and compared their valuation to their most well known international peer. Snapdeal, Ola, PayTM, Quikr, and InMobi are valued in line with their international peers and this suggests that there is some maturity in the ecosystem when we talk about valuation. On the other hand, Zomato, Practo, Oyo Rooms, and Grofers have their valuations inflated and they will have to double their base metrics every year to come in line with peers. Like any industry, the startup world too has it risks. Valuations have been overestimated and loads of money have poured in for rather very young startups. But is this enough to prove that we are staring at a bubble burst?

A recent study by the McKinsey Global Institute (MGI) suggests that if India continues to grow at the current pace, average household incomes will triple over the next two decades, making the country the world’s fifth-largest consumer economy by 2025. Led by a growth of 27.8 percent annually in mobile users, the Internet user base in the country is likely to reach 503 million by 2017. Moreover, 2015 has also proved to be healthy with reference to the policies. The present government committed to foster the startup ecosystem with various schemes such as Digital India, Startup India, Make in India along with easing the norms that govern FDSs and starting a business. So it seems that all is not wrong.

While researching for this blog, I stumbled upon some interviews where the VCs were asked the same question. The general sentiment amongst the experts is that the India is still in its nascent stage and what exists is just noise. An existence of a bubble would mean the whole thesis of investing in India itself was wrong. But that is not even close to the truth. There are still markets to capture and there are still new gaps to be discovered. For instance, more than 50% of the Indian online consumers do not prefer to pay by credit cards. In this high-risk market only 10-15 percent of the companies survive even the third anniversary – 1000 days is supposed to be that critical milestone. Across the world, startups die. So startups dying in India is not an exception. That is part of the game and will continue to happen. But what matters is out of say 100 startups, how to increase the probability of success.

According to an Economic Times survey, total venture capital dollars and deals hit a new low in October, with 24 deals worth $112 million closed during the month, down from a peak of 43 deals worth $831 million in March, according to research platform VCCEdge. Thus we can see a clear drop in the value of investments in 6 months.

In recent times, I have noticed very evident trends in the ecosystem. If I hear the news of a hyper-local marketspace startup raising a series A funding, for the next 30 days I see more of similar startups coming up. Are the entrepreneurs saturating the market? Many investors have a simple logic to this question. If the market still doesn’t have any clear category leader who has grabbed significant market share then the market is open for innovation and new companies will potentially emerge. Until saturation is measured as market share, investments will continue to happen in companies that innovate. For instance, horizontal e-commerce market has been captured by the bigshots like Flipkart and Amazon but the vertical e-commerce is still up for grabs and VC firms are open to invest in them.

These are indeed exciting times for the Indian market space. With the transition from jobs to entrepreneurship evident amongst the Indian youths, which by the way is the largest in the world, we can expect more disruptive ideas in the near future. Will the bubble burst? Only future will tell. But even if it does, I feel the Indian market has matured enough to survive it and bounce back. Until then, keep innovating!

 

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