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Business Management

How the Alibaba syndrome is impacting investors in Indian tech

The Indian startup scene is suffering acutely from Alibaba syndrome. The symptoms of Alibaba syndrome are typical – high valuations across the spectrum. We have caught this fever from China where thousands of Alibaba spores have sprung up from thin air.

It’s interesting to note the origins of Alibaba. The group was founded by Jack Ma in December 1998. It attracted investment of $20 million from SoftBank which is a modest sum by any standards. Fast forward to the present and Alibaba’s IPO was the biggest in US history. As a result, SoftBank’s investment in Alibaba ballooned to $58 billion, an unprecedented gain even by American standards.

Once SoftBank’s appetite was whetted for more of the same, the first question it needed to ask was: why has Alibaba been so successful? And the answer was simple and obvious - China is a huge market and transactions on Alibaba’s online sites totaled $248 billion last year, more than those of eBay and Amazon combined. Where else would you find such a huge market? India.

SoftBank began its foray into India with big bang announcements. It intends to invest a whopping $10 billion in Indian companies in the coming few years. Masayoshi Son, Chairman and founder of SoftBank fired the first volley by declaring an investment of $627 million in Delhi-based eCommerce player Snapdeal. It then followed up with another deal worth $210 million in taxi hailing startup Olacabs. In December last year it went home with $90M in India’s Housing.com. And Bharti SoftBank, a joint venture between Bharti Enterprises and SoftBank Corp, acquired 36.5% stake in ScoopWhoop, an India-focused media startup, for an undisclosed amount.

SoftBank is not alone in this race to acquire Indian ecommerce entities. In fact there is a long queue of investors suffering from the very same Alibaba syndrome. Tiger Global, another investor with a big appetite, has bet close to $800 million on Flipkart. Tiger has also bought a stake in taxi app Olacabs, online marketplace Shop-Clues, and online property search platform CommonFloor. Other known investors include Sequoia Capital, Helion Venture Partners, IDG Ventures, Nexus and WestBridge.

But there are other reasons why these investors are digging the Indian soil for more Alibabas. In addition to the huge market, the potential for growth is immense. According to a KPMG report [PDF], higher education levels, youthful population, rising household income and deeper penetration of technology are reasons why eCommerce trade will boom.

The prospect of a billion plus customer [PDF] base with a contribution of $700 billion to the retail market is attracting investment. The revenue from the eCommerce segment is growing at a whopping 50% and is predicted to touch $40 billion this year. These are truly astounding figures investors can ignore only at their own peril. Those who missed the bus in China are no doubt repenting and likely to hitch themselves to the Indian growth story.

Meanwhile, valuations of ventures are skyrocketing. Some experts even opine that valuations of online ventures are financially unrealistic, but no one seems to care. Zomato, a restaurant search platform is looking for $100 million in funding with a valuation of one billion. Flipkart valuation at $15 billion has not raised eyebrows. VC funds argue that they bet on potential return and therefore their valuations are different and higher than traditional estimates.

Sometimes I get a feeling that we are getting into another dotcom-like situation. It’s scary as well as exciting. The frenzy which we are witnessing can have disastrous consequences. News that online marketplace Snapdeal could record a five-fold increase in losses going up to $250 million is certainly not good. What else can you expect from entities who are competing to pile up losses in the hope that they can survive and eventually dominate the online space? Experts concede that there is not enough space for all these eCommerce platforms.

So, where do pure play tech startups like app developers stand in this Alibaba centric scenario? The traction gained from the big ticket investments is rubbing off into tech startups as well but in small amounts. A few investments can be seen but nothing exceeding a few million dollars. Freshdesk, a SaaS-based solutions provider is an exception; it recently received $31 million from Google Capital.

The reasons for this lackluster interest are many. Firstly, investors don’t see Indians building a global software product. Secondly, the Alibaba effect has taken hold. Venture funding is, anyway, not a science. In the Indian context, investments are based more on sentiments and herd mentality. It seems as if everyone wants to bet on the same horse. In this race, tech horses are certainly not favorites.

It’s another matter whether the Alibaba model will work in India. Though China and India have similar demographics, they differ widely in other economic parameters. China is a closed market and protected by local laws whereas the Indian scene is more open. Consider the fact that Amazon India has quickly gained a foothold in the Indian eCommerce market, which would not have been as possible in China.

Considering all the above factors, the success or failure of Indian ventures is likely to depend on sheer luck and the hope that the Indian economy does exceedingly well. This will leave more money in the pocket of consumers to buy online, leading to a boom in eCommerce sales. Now only time will tell if India will see the doors of fortune open when we say open sesame.

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Sankarambadi Srinivasan

Sankarambadi Srinivasan, ‘Srini’, is a maverick writer, technopreneur and a geek. He writes on transformational social processes and technology trends which influence our daily lives.

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