India’s Online Shopping Spree

In 1999, Alok Mittal joined the thousands of Indian entrepreneurs scrambling to take part in the global dotcom boom. His Delhi-based business, JobsAhead, which launched as a two-man gig with $500,000 from friends and family, aimed to connect Indian employers with local job seekers. By 2004, Mittal had grown the business into a 150-employee shop that was sold to online-job-search giant Monster for $8.8 million. Mittal was one of the lucky ones. Practically every other Internet start-up in India went bust during the dotcom crash of 2000 as rich Western investors pulled their venture capital out of emerging markets to concentrate on repairing their portfolios at home.

Mittal is once again back in the game, this time funding new businesses and hoping to profit from India’s second dotcom boom. After a decade of relatively slow growth in Internet use in the ’90s due to India’s sluggish, red-tape-riddled economy and poor infrastructure, the number of Internet users in the country is skyrocketing thanks to new investment in the sector and a growing number of middle-class consumers who can afford access. The number of Indian Internet users is expected to nearly triple in the next three years, from 80 million today to 230 million in 2015. The number of broadband users, critical to the success of Indian e-commerce, is also forecast to rise over the same period, from 1.7% to 12.5% of the population.

It’s not just local players who are looking to cash in; there’s Silicon Valley money pouring into the subcontinent too. To many investors, the growth prospects of tech firms in India are more attractive than those in other emerging markets like China, Brazil and Russia, where Internet penetration has grown to roughly 30%, compared with only 7% in India. China’s Internet boom has matured over the past decade thanks to heavy infrastructure investment and support for homegrown companies. Its e-commerce sector is worth an estimated $74 billion, according to the Boston Consulting Group, whereas India’s is worth $10 billion. The Indian government is playing catch-up, but if it makes good on its recent promises to boost the number of broadband connections more than tenfold by 2017, the payoff could be huge.

India already holds certain advantages for private investors. Unlike those in Russia and China, where state-run companies rule the roost, tech investors and entrepreneurs in India stand to benefit from the country’s more open markets and rule of law. “In India, you don’t have to worry about the government shutting you down or asking you for your Internet user base,” says Prashant Agrawal, a Mumbai-based tech analyst at Boston Consulting Group. If local entrepreneurs capitalize on the country’s strong tech roots and their inside knowledge of the Indian consumer, he says, they could beat out Western players like Amazon and Groupon to become India’s first crop of tech giants.

The money is already pouring in. More than $230 million has been pumped into India’s dotcom market this year alone, with additional funds coming down the pipeline from eager local and global investors. The bulk of the funding is going to e-tailers, which are raking in buckets of cash from India’s rising consumer class, which, at 160 million people, is roughly the same size as China’s. Snapdeal, a daily-discount site similar to Groupon, expects to pull in $29 million in profit this year compared with practically nothing a year ago. This year it secured $40 million in the largest-ever capital injection into an Indian Internet company. Flipkart, the Amazon.com of India–which sells books, music and gadgets online–may soon win $150 million in funding, according to venture-capital intelligencer VCCircle, which would put its value at $1 billion after a mere four years in business.

Deals like those still pale in comparison with tech investments in China, where online retailer Jingdong Mall has raised $1.5 billion from a group of high-profile investors like Digital Sky Technologies, which also invested in Facebook and Groupon, and Robin Li, the boss of Chinese Internet giant Baidu. But even India’s smaller money rush is raising questions about whether its e-boom is a bubble. Indian e-tailers argue, not surprisingly, that the growth is real, chiefly because of the country’s dramatic rise in Internet users, which is coming later and with less hype than China’s. And since many investors have been in the market for over a decade, they have the benefit of hindsight, which means, says Snapdeal CEO Kunal Bahl, that “no one gives any free lunches now.”

They’ll have plenty of competition from outsiders. Savvier foreign investors have better access to India’s e-market than they did a decade ago. A new law that will allow foreign retailers to become majority shareholders in Indian businesses has opened the floodgates to large foreign deals. The biggest player on the scene is Amazon, which is rumored to be scouting India’s business community for senior executives and staffing up in Hyderabad, Bangalore and Chennai (formerly Madras). “Amazon didn’t become the market leader in China, which is why it’s looking to get an aggressive head start in India,” says Boston Consulting Group’s Agrawal.

But ramping up its e-commerce business in India will be harder than recruiting. Internet companies like Facebook and Google have been successful in India, but their businesses don’t require much local knowledge. E-tail, by contrast, demands on-the-ground logistics and a shrewd sense of local tastes in areas like jobs, matchmaking and travel. That’s what hurt Amazon in China: “It got outsmarted by the Chinese local guy,” says Agrawal.

Catering to the Indian pocketbook will be critical for any e-commerce start-up. Unlike consumers in the U.S., many Indians aren’t yet comfortable with shopping on the Web and handing over their credit-card numbers online. “India’s mass market still responds to cash upon delivery,” says Vani Kola, co-founder of venture-capital firm NEA-IndoUS Ventures. And there’s the matter of India’s sluggish infrastructure. “In the U.S., you’d just FedEx a parcel back if you weren’t satisfied with the product,” says Ishita Swarup, founder of online retailer 99labels. “That’s very difficult to do in India.”

Those complications give e-commerce locals a leg up over big foreign competitors like Amazon. Flipkart, which sends out 15 million shipments a day, has already built a network of 400 delivery personnel across 27 big Indian cities. Those advantages make it difficult for big foreign operations to wield power over smaller local shops. Flipkart, which has denied rumors that it is in acquisition talks with Amazon, says it wants to scale up on its own after securing seed money from Silicon Valley venture-capital firm Accel Partners and $31 million in funding from New York City’s Tiger Global. “We have no plans to sell,” says Flipkart CEO Sachin Bansal, who quit his job as an Amazon software engineer in Bangalore to co-found the company with Binny Bansal in 2007.

He can afford to wait. A major Internet growth spurt is coming in India; it’s just a matter of how soon and how big.