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.



Nice post Om..There are just so many startups that are hoping to become the next big thing just supported by ads despite the fact that the total ad market.

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It has been learnt that significant financial irregularities have been recently uncovered at GVFL involving senior executive Bharat Kanani’s role in company divestments and dissolutions. Kanani was rumoured to be the successesor of GVFL head honcho Vishnu Varshney, whose resignation is being demanded by senior govt of Gujrat officials.

Libran Lover

I am not familiar enough with the Indian Internet startups to comment on the bubble there. But what I do know is that the Indian Internet connections (the so-called ‘cheap broadband’ connections) are sub-par. Equally sub-par are the physical facilities and real-world services.

What is the use of having a jazzy Indian hotel booking website, if the connection is not good enough for most of the general public to access from their homes? If there are not many good hotels, with dependendable and consistent quality service, within reach of most of the middle-class?

Even Bangalore, the ‘Silicon Valley of India’, has only a paltry 66 hotels with 4700 rooms! (Source:

Santosh Dasu

Nice post Om. Concept arbitrage is not always a bad thing. Some good indian sites pop up this way- cleartrip, arzoo, bechna, mouthshut and others.



  1. I’d like to differ with your statement about excess money going into Indian Internet startups. While VCs can pump over $5 mil in a round, it can take Indian companies to profitability and growth, far different from the US where $5 mil is part of an initial “prove something” round. A strong team of 20 engineers and business execs cost a lot less there. Also, getting visibility is much easier. The Indian entrepreneurial market is still nascent compared to the US. Bangalore is not even close to the Valley yet as it is still more prestigious to join a Fortune 500 operation even if the work is dreadful. The VCs are just beginning to fill in a key element of the entrepreneurial infrastructure.

  2. My company, Position2, is an Erasmic funded startup. I can tell you firsthand that they are not typical of most VCs. They typically invest a modest amount of capital and then spend a lot of time with the start-ups. For us, they helped us identify and acquire what became our Indian operations. They’ve also worked on-site with our management team on operational processes. Google’s investment in the fund is a great and relatively inexpensive way to see really early stage stuff in a highly disciplined manner.


I agree with your views on the Indian startups struggling if they depend solely on advertising. Since most of the work done by Indians on the web is transaction based, if a company can come up with a simple application for this sort of work and for which the Indian user will be prepared to pay Rs.50-100 a month then it will be the killer. Assuming that this application can target around 5 million users and even if 10% are ready to subscribe then it would rake in money.


No question that a bubble is building. At least the travel portals and online rentals companies have transactional revenues. What amazes me is the number of advertiser-supported social networking companies getting institutional funding. These companies are fighting for an ever decreasing slice of a pretty small online ad market in India. Add in a low barrier to entry, and I don’t understand what the investment thesis could be.

Hari Swaminathan

Jon Beattie –

Your information on the cost of DSL is inaccurate. it is not $300 (USD) per month, but 300 Indian rupees per month, and from some providers upto about 1000 Rupees per month. In dollar terms, this works to between $6 and $15 per month, which arguably is a very good rate (cheaper than what we pay in the US I may add). The concept of what a broadband connection should deliver in terms of speed remains unclear in India. Most basic broadband connections in India are worse than dial-up connections in the US. Although $6 to $15 per month seems like a “steal” in the US, the average Indian consumer does think a lot before dishing out this money. It may need to come to the $3 mark to reach inflection points (and of course PC penetration).

A rich broadband user experience will no doubt enhance the net surfing patterns in the US because I agree with Om. Todya’s net users are very transactional – they do their job and get out. Amazingly enough, I find myself doing exactly that when I’m in India and leave all the surfing for when I get back. Better and faster user experience will go a long way in changing some of this.

Jon Beattie

Another key problem India faces now is the high cost of home broadband. They are paying about US$300 per month for a DSL connection. Ouch! This is indicative of usage patterns in other more mature markets. When you have to dial-up on a slow modem connection, you use the Internet less. Everyone’s usage patterns change when you’ve got a cheap broadband connection at home. That said, it is only a matter of time in my opinion, but these start-ups will need to plan for a few tough years yet before they start to get the momentum they require. I went to China and India last month, and for a western foreigner, I would choose India over China any day of the week. I personally think India will eclipse China as a market for foreign investors in the short-medium term, although maybe not long term. Key reason, no one in China speaks English, their regulatory environment is alarmingly erratic, and the cultural differences are vast. India has English as the main language, and so the majority of media is already in English, and more importantly they have much more cultural affinity with the west. India is also a democracy, by no means perfect, but this has to be less risky than China. For example, the Chinese government is considering a law that would require all bloggers to register with their ID card number on the website!

Vaibhav Domkundwar - BetterLabs


You definitely touched on some of the most critical aspects. If you look at the last IMAI report, you will realize that the Internet usage in the metros – which is really the target demographic for most consumer startups – is paltry. The focus on “necessary actions” like jobs, matrimonials etc. is definitely the way to go. There is, however, an evolving market for small business applications catered to the needs of the specific Indian customer segments which seems to be ignored to a large extent.

As another commenter asked above, I am also very curious to understand how the travel startups are doing, because none of the family/friends I know in India (who are IT savvy and in the metros) use these sites. Are their margins or commissions any greater than that of a travel agent/consolidator?


As an enterpreneur seeking mentor investment ( and a little bit of money) have come across a few investors. I always start by saying I am looking for some adventure fund and not venture fund but a few experiences of mine suggest that most of the investors are looking for a comfort zone and thats why they choose to invest in “proven” idea/business models from the west.

Madhur Khandelwal

John, the four big travel portals are Makemytrip, Yatra, Travelguru and Cleartrip.

Om, agree with you on the consumer Internet space seeing a bubble. There are just so many startups that are hoping to become the next big thing just supported by ads despite the fact that the total ad market in India just about $50 million and the total number of real Internet users (who access net at least once a week) is hardly around 10 million!

Having said that, India story still sells, which is why investors with the fear of not missing the boat, are pouring in money into relatively “safe” transaction-oriented plays like travel and dvd rental etc. We have been doing quite a bit of research and talking to a lot of players in the industry at iLeher. You can check some of our findings at

Especially, check out the “Most popular posts” section.


Om Malik

Hey Manish,

thanks for the email and your kind words. I am sorry, I have not done more work, but this trip was to deal with a family situation and spending time with the family instead of working.

I am actually on my way back tomorrow, but clearly this is a market i going to be watching carefully.

I am still struggling to think of what ideas might work here – clearly, mobile is where the action is and i think a lot of start-ups could benefit by their local knowledge and channeling it for the local markets.

Om Malik

JOhn Pasmore,

the four travel portals are,,, and

hope this helps.


I am wondering what will cause a temporary pause/stop to the sgnificant asset flows to India. Will it be the election in 2009?

Going off subject:-
Indian public companie “cookie/bookie” – private companies too. Having done business in India since 1994 – I do not see the benifits of using India as an “offshore” center

sunil is an original idea and a solution to the most common problems faced by most IT & call centre guys.


its too crowded with US concepts… nothing original seems to be coming. Ofcourse the big problem in India is the 20M userbase (yes that is official, see my blog)…and that isn’t growing in a hurry.

But I maintain, that due to mainly copycat products floating around, the real potential, albeit small, is still untapped.

Also don’t forget the 100M+ mobiles…waiting for an original idea.


It is very sad that VC’s are investing in herd like fashion especially the reputable ones that you mentioned.

The only investments that one gets to see these days are in DVD Rental, Online Travel, Mobile Payments, VAS space.The next IMO would be social networking with too many players already in the market yaari, humsabka, minglebox, hi5 etc etc.

Now with an overall 30-40 million internet users (majority cybercafe users) and little over 1 million broadband customers the market size does not seem to huge for kind of investments these internet startups are recieving. Last year the actual growth rate of internet & broadband users was less than half what TRAI had projected. So these clearly do not add up to explain the attention the internet startup are recieving.

As you previously pointed in another post the private equity space in India is already overheated and bubble signs are showing up there. Now the last thing an entreprenuer like me would want to see is a bubble in the early stage as well. This would lead to a very difficult situation for the overall industry and thus hurt the real innovative companies that are coming out of India like DimDim, TutorVista, Slideshare, Zoho which are examples of companies that have products with global market.

Btw you can use this list as well to do your India startup research.


manish jain


welcome back to india.

It’s a breath of fresh air to hear another side to the overhyped stories that are run daily in the Times of India and the indian media in general.

I find the amount of VC money going into travel websites out of control, and just wait till expedia and travelocity get into the game. Most of the sites are worthless at best. i did a quick review of them at

and most people i talk to india don’t use traval portals, so where are they getting all this revenue they are talking about?



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