The Bull Case for India's Tech Sector
We have been hearing questions in 2016 about the sustainability of some of India's largest internet companies. Subsidizing growth through deep discounting isn't working out the way investors expected it to and is leading to a drop in investor interest. At the same time, companies with strong fundamentals and unit economics are being rewarded on a relative basis. The pullback from the heady days of 2015 is positive in our view; it forces entrepreneurs to be resourceful, and pace investment to the size of today's market. Entrepreneurs who have defined their addressable market expansively are better off. Often this requires thinking outside the box and looking at solving problems more expansively than their counterparts in the U.S.
To be clear, we could not be more bullish on the long-term prospects for India's economy, its people and its technology sector. India's macro indicators for GDP growth, Internet penetration, wireless infrastructure and the quality of Internet products and services look better than ever. In 15 years India will be one of the world's largest economies. As exciting as the long term prospects are, it is critical to appreciate that we are still in the very early innings. There are only 60-70 million people in India today with annual incomes over $5,000. India's online transacting customer base is still fewer than 100 million users. India's GDP at $2 trillion is far closer to that of the UK than China so today's Internet and technology economy will not resemble China for some time.
The businesses that will survive the current turmoil and capture the growing market opportunity understand these fundamental realities about India and see India as it is. They are not building clones of American companies and operating in markets almost 1/10th the size. They are defining their markets more expansively, either by offering broader solutions than their U.S. counterparts or by defining their addressable markets to include customers outside of India.
Cardekho, a CapitalG portfolio company, is a great example of doing something like this. They are building the equivalent of 5 companies in the US. There are a number of offline and online companies building solutions separately for new cars, used cars, car financing and car auctions. Some of these companies have been around for decades. In India, Cardekho does not face this entrenched competition and can leverage its resources to pursue all these opportunities together. The advantage of defining the market expansively is not just a larger market and bigger business opportunity but a stronger value proposition for consumers, dealers and auto OEMs.
Another example of thinking outside the box is to pursue international customers. Zoho, a B2B SaaS company, pioneered this strategy. They determined that they can sell to small and medium sized through the same online channels as their competitors in the US and benefit from operating costs that are 20-30 percent lower. Our portfolio company, Chennai-based Freshdesk, has built a very successful business using these sales and marketing playbook to compete with the leading software companies in the U.S. By pursuing markets outside India from day one, they are not restricted by the size and operational challenges of selling to Indian SMBs.
Indian consumer companies are also competing abroad. Zomato, for example, has expanded to Southeast Asia, the Middle East, and Eastern Europe. Indian consumer Internet businesses have the benefits of high quality tech talent similar to that employed in the U.S., but have more experience with the dynamics of businesses in developing markets. In particular Indian entrepreneurs are comfortable with a mobile first strategy, have a greater facility managing multiple languages, have built workarounds to imperfect payment systems, and have more experience dealing with inconsistent data speeds. Our portfolio company, Practo has pursued this strategy and has successfully launched its healthcare tech platform in Philippines, Singapore and Brazil.
The main message to Indian entrepreneurs is to respond to this financial market reset by taking an expansive mindset and thinking outside the box. Tracking startups in the U.S, Europe and China is a good exercise but should not be the basis for a business plan. Clones of successful U.S. and Chinese companies in India are typically restricted to serving only the top 60-70 million consumers. They are also likely to undershoot the opportunity by missing unique customer needs or untapped market opportunities. It makes more sense to expand the potential market by making use of the unique opportunity India presents.