India’s Consumer Internet Space – Too Crowded?

Did you hear that Google is becoming a limited partner and will be investing Gollars in two Indian venture funds – Erasmic Venture Partners and the SeedFund?

Is this the sign of an India VC bubble getting a bit bigger?

The answer to that question is yes, as long as the consumer Internet start-ups are concerned.

For last few days, in between familial commitments, I have spent some time studying the consumer Internet start-up landscape here in India, talking to a few savvy market observers, venture capitalists and entrepreneurs.

The Consensus: Too many companies chasing too few opportunities, despite the fact that PC sales are rising, albeit slowly, and despite the easy availability of an always-on (if not a real broadband) Internet connection for a few dollars a month.

There are some who believe that Internet start-ups here that are banking on advertising-as-a-business model will find the going tough for a couple of years, since the PC and broadband penetration need to increase substantially for there to be enough eyeballs for a decent ROI.

The PC usage patterns are such that people don’t spend too much time surfing, but instead focus on specific tasks and actions, like sending email, trading stocks, checking job listings or matrimonial listings. Think transaction-based, task-oriented Internet usage!

That would explain why we have seen U.S.-based venture funds pumping tens of millions into the India start-ups. Take the online travel sector. Four travel portals have raised over $45 million in VC dollars from the likes of Norwest Ventures, Kleiner Perkins and other Silicon Valley heavy weights. Overcrowded?

Sure, if you take into account the fact that unfunded start-ups in the space would bring the total to about eight. And that doesn’t include the usual suspects like the portals and U.S.-based online travel services. As one local investment professional joked, the total revenues of the industry are twice the amount of VC dollars pumped into these travel sites.

The situation is pretty similar in the DVD rental arena where there are nine Netflix clones including 70MM that had raised $7 million from Matrix Partners. Others in this space include CineSprite and CatchFlix, for example. Another one, Madhouse, recently raised $228,000 from The Band of Angels.

As one senior VC points out, the overcrowding in these two sectors indicates that “concept arbitrage” (aka copying U.S. Internet ideas and adapting them for the Indian market) is a high risk, low reward strategy in a market segment that is likely to remain fragmented.

Nevertheless, the investments continue to pour into the Indian consumer Internet companies. Some entrepreneurs fear a dot-com like backlash, especially if one or more of these companies fail. That’s something nobody wants to import.

Part two and three of this series will include a round up of Indian Web 2.0 companies and the future of Indian economy, likely to be published tomorrow.