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| CA. Yogesh Birla |
Second, if you are an internet company that’s been around for a while, there’s an even more attractive option—going public. Yes. For far too long, CEOs of Indian internet companies have made promises and teased the idea of wanting to do an Initial Public Offering (IPO), and finally, it looks like some of them have bitten the bullet. Zomato’s IPO is going live next week. And there are reports of companies like Paytm*, Delhivery, and Flipkart who are going down this path too.
Prime reasons are…… There’s a lot of liquidity in the private and public markets right now—which is true. Others may argue that this was inevitable, and represents the coming-of-age of internet companies, many of whom witnessed growth during the pandemic or in the case of Zomato, Flipkart, Paytm, have been operating thanks to venture capital for nearly a decade. This is the endgame. It’s here. It’s India’s moment.
All of this is true to varying degrees, but the actual reason is quite different.
It’s a secret that’s being whispered among some VCs, founders, and market researchers in India. It’s something many people have noticed, but are somewhat uncomfortable talking about openly.
And today, I’ll use it to explain why all of these companies are suddenly getting funded or going public. And along with that, we’ll also see why India’s internet sector, which boomed for over a decade with several companies going from smaller companies to unicorns and from unicorns to decacorns, will likely never see a global pure play 100 billion dollar internet company emerge anytime soon.
Here is the secret.... The number of active internet customers in India has stopped growing. This customer base represents the total addressable market for most Indian internet companies. Until now, this market was growing rapidly.
Now, this growth has essentially flatlined.
But if the number of customers has mostly stayed the same, then why are we seeing a surge in funding for these companies? And why are some companies going public?
Let’s dive in...... If you are an internet company in India and a VC asks you what your addressable market size is, you may be tempted to say that it’s 1.4 billion.
So you may say, well, it’s the number of Indians with a mobile connection in India, which is a little less than a billion. But not all of them have access to the internet. So you say, well, then, it’s the number of people who have mobile data. Which brings it down to around 400 million. But then that includes feature phone users, who can’t run most apps anyway. So you cut them out. Then users who technically have a smartphone, but it’s a smartphone in name only and can’t do much. Cut. Access to online payment mechanisms. Cut. Disposable income for consumption. Cut.
Then we remove the ones who have used their phones just to do digital transactions like, say, transfer money to each other or recharge their mobile plan. Also those who use it just as a free media consumption device, like watching videos on TikTok or YouTube.
After all of this, you’ll end up with an estimate of the number of annual active customers (AAC) in India. These are the users who have access to the internet through a smartphone, use mobile apps, have some disposable income, and have bought something online at least once a year. E-commerce. Shopping. Food Delivery. Rides. Subscriptions.
Well, if you really stretch it, it’s about 70 million users (realistically, it’s closer to 40-50 million, but more on this later). That’s about the population of the United Kingdom.
There are empirical ways to validate this. A great proxy is the number of postpaid mobile users in India, which is around 50 million, who form the bulk of this base. There are multiple reports from a couple of years back which validate this 50 million number as well. Maybe it’s grown since then to, say, 70 million users, but that’s more or less where the outer limit is today. According to a source I spoke to, that’s also more or less the number of unique customers who have bought a product at least once last year on the biggest horizontal e-commerce platforms in India—Amazon or Flipkart.
Essentially, if you want to make money online in India, you’ll need to take it from these 70 million users.
Well, let’s see. Broadly, these 70 million users can be broken down into three categories, assuming it’s a pyramid.
Level C : India’s entry shoppers. At the lowest level, with the broadest base, comprising roughly 40 million users.
These users are the ones who have bought something online, but have done it very sparingly. Maybe once or twice last year, and they have done it because they heard that one gets a good deal online for a really important purchase, which is usually a mobile phone. They buy one product, and almost never buy anything else online, certainly not from websites outside the big horizontal e-commerce players.
Level B : India’s occasional shoppers. At the middle level, comprising roughly 20 million users
These users may buy something online, but will venture outside online shopping very, very sparingly. Think of users like our moms and dads, who spend money online to get food from Zomato as a treat, or maybe take an Ola once a month if they are feeling particularly generous.
Level A : India’s California users. At the highest level, comprising 10 million users
If you are reading this, you are likely in this category. You are a digital native. You buy nearly everything online—from products, to groceries, to food. You may even have a Netflix subscription. You are the elite user—the one with a lot of spending power, and who is comfortable buying that lipstick from Nykaa or that cold brew from that fancy direct-to-consumer startup in Indiranagar, Bangalore. You probably use Dunzo, and maybe even pay your bills on CRED.
This is the customer everyone desperately wants, especially because India’s California users punch above their weight. They may be just 15% of the active transacting customer base, but according to one founder I spoke to, they account for nearly 40% of the money spent by this pyramid.
Again, there are ways to triangulate this. In its recent pre-IPO report, Zomato, which is a food delivery service and had a strong use-case during a pandemic, reported an average monthly transacting user base of...10 million users. Netflix has about 3 million subscribers in India (and has started tapping out) CRED claims to have about 6 million. Amazon Prime has 6-7 million users.
10 million users. …..That’s the population of Sweden.
The reason why everyone is fighting for the same users is because this base of 70 million users isn’t growing as rapidly as it should. The growth of this pie is tied to one thing, and that’s the per capita GDP of India. If more Indians make wealth, then more people will fall into this consumer pyramid. Right now, that does not seem to be happening fast enough. Here’s a graph of the GDP per capita growth of India. Notice the growth rates below in green bars. See how they’ve gotten smaller with time.
India’s current per capita GDP is a little over $2,000 right now. There’s a direct link between the per capita GDP and the number of active transacting customers online. And it’s not linear.
Take China for instance, which has a per capita GDP of around $10,000. That’s five times of India. Alibaba, their largest online horizontal commerce platform, has an active transacting customer base of 800 million users.
India has just a tenth of that, assuming the best case scenario.
And this was before the pandemic. We still don’t know the full impact of Covid, but it has almost certainly set us back by several years, with millions thrown back into poverty. China, on the other hand, has rushed ahead. Remember, any growth we may have seen in the GDP per capita has also almost certainly been inequitable— it’s gone to the rich people and less to the poor. This is likely why we probably haven’t moved much from the 70 million number.
All of this leads to a few implications........
Implication 1 : Horizontal players like Flipkart and Amazon are at the outer limits
Both of them have practically captured most of this pyramid, and are now in the business of trying to maximise repeat purchases or even a second purchase from a large part of the 70 million of this pyramid, and a first purchase from those outside it.
This does not mean that they won’t grow. They will. But it will be a long, hard, and expensive grind.
Implication 2 : The rise of vertical-specific players from this 50-70 million pyramid
Any new internet company has to play within this pyramid, and the more successful ones are creating use-cases for verticals. Food Delivery. Rides. Fashion. Groceries.
The best part is that winning that vertical is good enough. If a company is able to get just 2-3 million users, especially from that top 10 million India-Californian customers, they are golden. Take Licious, which recently reported that it had delivered to over 2 million users. Poof. Unicorn.
Take my money, says the VC. You are a market leader in that vertical, so I’m going to back you.
This is one of the reasons why leaders in individual verticals are getting a surge in funding. VCs have decided that winning a vertical is good enough for now, and so they are backing the leaders.
But why? Because...
Implication 3 : It doesn’t take a lot to compete in a vertical and stay competitive
Remember that these 10 million users aren’t value conscious. They are product and service conscious. If something is a better product, these users switch to it. Everyone was buying cosmetics and beauty on Myntra and Flipkart until Nykaa came along. Licious took money away from offline groceries. Pharmeasy took money away from medicine stores.
You don’t need a lot of money to stay competitive if you are a vertical leader. Maybe $200-300 million a year tops, according to the aforementioned founder I spoke to. It’s a no-brainer for a VC to fund a vertical leader for that amount and give them a unicorn valuation.
This is why we are seeing a sudden rise in unicorns in India. Salaries go through the roof. All these companies are competing for the same talent in India. The pie of qualified, smart developers in India is also not growing.
Implication 4 : However, at a certain point, it gets harder to justify valuations from VCs
From a VC standpoint, returns are expected over a 3-5 year period. And that’s why we’ll see the rise of many unicorns in India, and maybe even a couple of decacorns, but no more.
There are limits to vertical companies. And that limit is 10 million users. Once a company hits that number, very few private capital players are willing to fund companies because it’s clear that the next level of growth is going to take a long, long time.
Much more than 3-5 years, which is a typical VC horizon.
Implication 5 : So some companies go public
At this point, companies just choose to go public. Public issue markets have more liquidity, and they have more patience with companies, which need a place to wait it out until the pie grows, which may take 7-10 years. And if VCs can’t wait that long, maybe the public will.
The question is how many companies can enter into the public issue market, and at what point does the valuation stop making sense, even for an excited public market.... That’s the real question based on entrepreneurial capabilities with smart working professionals....
Year 2021 & beyond.......
~ Data is new oil
~ Technology is new consumption
~ Equity is new real estate
~ Rural is new middle class
~ Retail is new institution
~ Small to mid quality companies will be chased
~ Famed sectors of old days will face slow death
~ Millennials dictating the trend
contributed by : (expert advisor for raising private equity and entrepreneurial funding for innovative start-ups)
Birla WP Management
read my blogs : www.YogeshBirlaCA.Blogspot.com
