Global investors bet $1 billion on India's Internet, mobile start-ups

MUMBAI: Global investors have placed a billion dollar bet on India's Internet and mobile start-ups during 2011, reposing confidence in the fast-growing base of digital consumers in the country. Marquee venture capital and private equity investors made aggressive investments in start-ups - most of which are less than five-year old - as they backed the story of rising disposable income and Internet penetration.

These investors have already ploughed more than $900 million between January and November, while deals worth another $250 million could be clinched by December-end, said an Avendus Capital report titled 'India Goes Digital'. The boutique investment bank, with work expertise in internet and technology, said the domestic e-commerce market would quadruple to $24 billion by 2015.

These global investors are bullish on India's Internet economy even as there's a waning appetite for the core sector investments stymied by high-interest rates and lack of policy reforms. The belief in the Indian digital consumer story has been so robust that start-up e-commerce firms managed to raise follow-on investments within six months, at significantly higher valuations.

Online retail, or e-tailing, will lead the internet consumer story catching up with online travel, classifieds and advertising which dominate the digital consumer industry in India right now. E-tailing will develop into a $12 billion-strong business, accounting for half of the total e-commerce market in the next four years.


"The e-commerce sector has reached an inflection point this year and will surely surpass the online travel industry over the next few years. India's online story currently is where China was five to six years back," said Niren Shah, MD, Norwest Venture Partners. The Silicon Valley-based-VC just announced an investment of $5 million in a soon-to-be launched shopping portal, Pepperfry.com.

The number of deals more than doubled to 66 in the first 11 months with investors rushing to board the digital consumer story. The top e-commerce firms emerged as big advertisers and employed hundreds of courier boys in the most tech-savvy neighborhoods to grow their businesses.

"There seems to be a belief that you need to start working with the online players early because if they might become expensive. But next year, valuations and deal flow is likely to temper as 2011 was an exceptionally aggressive year," said Prashant Prakash, partner at Accel Partners, a US-based VC fund with investments in Flipkart.com, LetsBuy.com and Exclusively.in.

India's emerging e-tailers are burning cash - many of them incurring heavy operational losses - to emerge winners in an industry that is poised for a shake-out and consolidation. "We see the potential for online retail in India become larger than that of online travel in next five years, perhaps by a factor of 2:1. Regular commerce will create more transactions as compared to travel since consumers need regular things on an everyday basis unlike travel which is mostly driven out of necessity," said Mahesh Murthy, founder, Pinstorm, and co-founder, Seedfund. Globally, e-tailing has cornered 6% of the US and 4% of the China retail markets.

A McKinsey & Co estimate said India will have about 450 million smartphones in the next four years even as 3G roll-out gathers momentum. The country's 3G subscriber base swelled to 10 million within the first six months of the launch. Internet will reach about 380 million Indians by 2015, a five-fold jump from the current level and there will be 38 million active online shoppers compared to 9 million now, the Avendus report added.