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Startups: What Clicks, What Fails

Business World Nov 17, 2015

Startups in India will see consolidation in the next few years, and not everyone is going to survive By Vishal Krishna The moment you step into the cheery offices of InMobi, the youthful energy that pervades the place hits you. Not surprising, given that the average age there is 25. The mobile advertising company recently unveiled a platform called MiiP, which offers advertisers animations that are customised for each individual consumer. CEO Naveen Tiwari says, “This platform will be available to all retailers, and will make their advertising more interactive, and will engage consumers better.” Between 2008 and 2014, InMobi raised $220 million. And in August this year, it raised $100 million in debt. It has grown to become one of the big success stories among Indian startups, and Tiwari says he hopes MiiP will make InMobi a billion-dollar business. TalentPad, by contrast, lasted a little over a year. Funded by Helion Ventures, the company sought to make it easier to match skilled individuals with employers. It shut shop in August, citing its inability to build a scalable model. And sources say the valuation of Housing.com has dropped dramatically. In November 2014, when Softbank invested $100 million in it, Housing.com was valued at $400 million, and the current valuation is $50 million. The smartphone-driven economy is teeming with startups, big dreams, big money — and big investment risks. Conventional wisdom is difficult — perhaps impossible — to apply in an economy built with creative ideas, technological innovation, and budding business models. It is hard to separate the winners, from the companies that will sell out, from those that will shut shop. Of course, not all sellouts are losers. Fashion e-tailer Myntra cost Flipkart a neat $300 million, travel portal Ibibo paid $135 million for RedBus, a bus reservation app, Snapdeal acquired payment company Freecharge for an all-stock deal worth $400 million, and classifieds platform Quikr reportedly acquired realty portal CommonFloor for $130 million. <img alt="" src="http://bw-image.s3.amazonaws.com/ravi-narayan.jpg" style="width: 386px; height: 319px; float: right; margin: 6px;">Huge Growth Potential The smartphone economy is projected to grow rapidly. According to Gartner, there will be more than 500 million smartphones in India by 2018. Currently, sales are at 160 million a year. Smartphones are already spurring entrepreneurs in the fields of health care, retail, advertising, education, travel, hospitality, and payments, and this trend is bound to grow. Many of the new smartphones between now and 2018 will be bought by Indians who will use them to access the Internet for the first time. This segment of mobile users represents a huge area of potential for startups. A report by the Internet and Mobile Association of India and market research firm IMRB estimates that India will have 250 million mobile Internet users by the end of this year. “The next wave of growth has to come from services for low-income groups,” says K. Ganesh, founder of angel investing and business incubation firm, GrowthStory. He says there are opportunities in data analytics, payments, education, health care — any venture that can cut costs. That may well be why Tiger Global found Ather Energy’s electric scooter worth investing $12 million in: a single charge of the battery can power the two-wheeler for 75 km – twice the average daily city commute. Ather Energy is getting ready to launch the product. Then there’s a flurry of entrepreneurship in budget hospitality, with Stayzilla, Oyo Rooms, and Fabhotels. Stayzilla started in 2008 to connect travellers and hotels in small temple towns. Now it books some 300,000 room nights a month. Earlier this year, it sought to address the shortage of hotel rooms by introducing homestays. In two months, it registered 8,500 families. Before bringing them on board, each room will be verified. “With smartphones, we hope to convert every extra room in a house into a business opportunity for families,” says Stayzilla co-founder Yogendra Vasupal. Another area with potential is logistics. Flipkart and Snapdeal pioneered pan-India logistics some years ago, but more recently, the focus has been on local and hyperlocal solutions. This has spawned grocery delivery ventures such as Grofers, RoadRunnr, and Delyver, and meal delivery apps such as Swiggy. Some of them have also begun to deliver electronics, furniture, and other items.  <table style="width: 550px;" align="center" border="1" cellpadding="1" cellspacing="1"><tbody><tr><td>DEALSCAPE • Since 2011, India has seen 190 M&A deals totalling $2.3 bn, and 61 materialised in 2014 alone • Domestic deals accounted for 72% all transactions by volume. Of these, consumer Internet and e-commerce accounted for 60% • VC and PE investments in e-commerce/consumer Internet saw 101 deals totalling $4.2 bn in 2014-15 AVERAGE DEAL SIZE • India: $11.3 mn • US: $57 mn • Israel: $113 mn SOURCE: MICROSOFT VENTURES, SIGNAL HILL AND ISPIRIT</td></tr></tbody></table> “Smartphones and location-based, on-demand delivery, can change how merchants engage with customers,” says Mohit Kumar, co-founder of RoadRunnr, which started a year ago and has raised $11 million from Sequoia Capital, Blume, and Nexus Venture Partners. He says third-party logistics providers – even truck drivers – could profit from such businesses. Given that only a tenth of the $100-billion logistics industry is organised, he may be right. One of the growth areas identified by Ganesh of GrowthStory is payments. Paytm, founded in 2010 by Vijay Shekhar Sharma, started out facilitating mobile and DTH recharge, grew into a utility bill payment solution, and then into a retailer. Now it’s one of 11 companies with a payment bank licence. It plans to use its payments and ecommerce platform to collect deposits from customers and open bank accounts. This would increase access to banking and reduce the need for branches. Another innovative venture is Novopay Solutions’ virtual wallet, launched in mid-September. Started by Srikanth Nadhamuni, the architect of Aadhaar’s technology, Novopay lets individuals make deposits and withdraw cash via retail stores. The payment market, including mobile payments and mobile point-of-sale solutions, is expected to be worth $125 billion in five years. Governance is another area with potential. For instance, the Karnataka state police is in talks with eLsys, which built a disaster and accident management platform, to manage transportation during natural calamities. Vinod Khosla, founder of Khosla Ventures, says: “Startups will be the drivers of change in Indian society. They are already becoming the people to go to for solutions.” <img alt="" src="http://bw-image.s3.amazonaws.com/ganesh-krishnan.jpg" style="width: 400px; height: 273px; float: right; margin: 5px;">Where there is potential for rapid growth, there is also the risk of overcrowding. There are quite a few companies in the budget hospitality segment, for instance, but given the $180-billion opportunity, as estimated by the Indian Brand Equity Foundation, there’s enough room for now. From Web To Street While some startups are spotting opportunities in underserved segments such as hyperlocal delivery and budget stays, others are making room for growth on Main Street. A brick-and-mortar complement to online business makes sense for products that customers want to see and feel before buying. For example, three-year-old home design e-tailer Pepperfry now has “studios” in Mumbai, Bangalore, Gurgaon, and Kolkata, where, customers can browse, get ideas, consult, and customise solutions and products. Travel portal MakeMyTrip opened dozens of offices nationwide, to serve customers who prefer to make travel plans after consulting with a staff member, rather than simply researching their options online. Paytm has set up more than 50,000 kiosks for its customers, and baby products portal Firstcry has more than 100 stores around the country. Online eyewear retailer Lenskart and fashion apparel brand Freecultr also now have brick-and-mortar stores in several cities. Other brands use the concept of pop-up stores to enhance their visibility and cut through the clutter. While some are branching out from the Internet to the street, Flipkart is mulling over plan to go from the website to app-only. Currently, 80 per cent of its user base shops on mobile devices. Running Out Of Juice For every InMobi or Paytm, there’s a TalentPad. The ones that shut shop or sell out early on are not necessarily bad ideas. Sometimes the challenge is to scale up before the money runs out. For example, home-buying site RealtyCompass, founded in 2012, has fallen behind its competitors in attracting traffic. One reason for this was that home buyers tended to go directly to builders’ sites – an issue that even 99acres, Magicbricks and Housing.com struggle with. “It’s not easy being a realty portal, because the consumer today is going straight to the builder’s website,” says RealtyCompass COO Sankara Srinivasan. The second reason is that some of the company’s rivals raised money that enabled them to aggressively drive traffic to their sites. That has made it harder for RealtyCompass to raise Series A funding. Another example is DocTree, a mobile portal that lets patients compare the cost of treatment at various hospitals. Its creators had hoped to eliminate the middleman role of general practitioners (GPs). But DocTree has had to struggle with the fact that most hospitals insist on referrals from GPs.  The company now has to choose between integrating GPs into its business model and raising more money so it can find more hospitals that work without referrals. “I do not want the idea to fade away,” says DocTree founder and CEO Sreenivasan Narayana. “I have to survive at any cost.” Despite raising half a million dollars from individual investors a couple of years ago, DocTree has been unable to raise Series A funding. Four-year-old CarIQ’s story illustrates the life-and-death issue of timely funding. With the help of an angel investment, CarIQ developed hardware and software products that gather real-time data from a car’s systems, and provide the owner service alerts and other useful information. For funds to market the product, founder Sagar Apte approached more than 100 investors, and just as CarIQ’s money was running out, he managed to raise $500,000 from Snow Leopard Ventures. Shake-Ups And Consolidation Industry insiders mull over questions such as whether Snapdeal and Paytm will merge to take on Flipkart and Amazon. This year’s festival season discount wars are already under way. As BW Businessworld reported recently (“Caught in the Big Sale”, issue dated 13 July 2015), deep discounting and unaccounted-for losses could be as big as Rs 9,700 crore for the country’s top three e-tailers. Shakedowns seem inevitable, and not everyone is going to survive.  “Consolidation will be a major part of the startup over the next five years,” says Sameer Brij Verma, partner at Nexus Venture Partners. According to a report by research agency iSpirit, Microsoft Ventures, and Signal Hill, there have been 190 tech product mergers and acquisitions between 2011 and 2015, worth a total $2.27 billion. Domestic transactions accounted for 72 per cent of buyouts, and 23 per cent of the total value came from e-commerce acquisitions. About a year and a half ago, meal delivery company Foodpanda acquired TastyKhana and JustEat. But it’s not just retail businesses that are seeing consolidation. There is action in the business-to-business segment as well. Restaurant locator and review app Zomato has been on a global acquisition spree, and among its purchases is Delhi-based MaplePOS, which will enable it to offer restaurants services such as cloud-based menu and inventory management, analytics, electronic receipts, and payment gateway integration. Some of the consolidation is a shortcut to growth. For example, Flipkart bought mobile engagement and marketing automation company Appiterate to beef up its own app, and Snapdeal bought Doozton and Wishpicker for their tech platforms (Doozton is a fledgling fashion products discovery site, and Wishpicker uses machine learning to deliver recommendations for gift purchases.) “Most of these acquisitions are termed as acqui-hiring, where the quality of the founding team and the technology that they have built is imperative for a large organisation,” says Ravi Narayan, Managing Director, Microsoft Ventures. Mohandas Pai, co-founder of Aarin Capital, says, “In consumer Internet services, only one or two businesses will survive in each category.” The average deal size in India is still small ($11.3 million), when compared with a tiny country such as Israel (average deal size $113.8 million). Looks like the next five years are going to be exciting.   îvishal@businessworld.in,   @vishalskrishna (This story was published in BW | Businessworld Issue Dated 02-11-2015)