Is An Indian Tech Bubble Going To Burst?
It’s been almost 20 years since the infamous “tech bubble crash” of Silicon Valley. In the late 1990s, companies were raising hundreds of millions of dollars before ever turning a profit and it seemed that every week a new tech stock was going public. In those periods of hyper growth, when capital was easy to acquire, the only focus seemed to be acquiring new users. Founders forgot that at some point they had to turn those users into revenue.
In recent years, as more and more Indian consumers adopt mobile technology, (and gain access to the internet) Indian entrepreneurship has seen exponential growth. With near-zero interest rates in the United States, a heavy inflow of available capital has been seen in the Indian startup scene. Some economist think that this is a sign that India is undergoing the same sort of tech bubble the United States went through in the early 2000s. In this post, we’ll discuss whether or not India is in a bubble situation.
Why do bubbles happen?
In simple terms, “bubbles” happen because overvalued startups focus on growth over revenue. The market eventually catches up, realizes that these companies are vastly overvalued, and stock market corrections force the value of these companies to plummet.
One major difference between the United States tech bubble of the early 2000s and the current Indian startup ecosystem is that many of the American tech companies were in the public sector while the majority of the Indian startups are private companies. This makes it harder for markets to accurately gauge the value of a company because there are no regulatory requirements to publish company financial information. That being said, we can still look at private companies, compare them to the market they serve and see very troubling signs of overvaluation.
Signs of a bubble in India
One example of a potential overvalued startup is Flipkart. Flipkart is similar to Amazon and Snapdeal in the fact that it is an e-commerce platform. As of last year Flipkart had approximately 45% market share of the e-commerce industry in India. The overall value of the entire e-commerce industry in India is approximately $15 billion… Flipkart was recently valued at $15 billion dollars. You can see the obvious problem here. Flipkart only holds a 45% market share but is valued at the same amount as the entire e-commerce industry. How is this possible? Companies like this are either overvalued or convincing investors of future value they have yet to realize. The valuation estimates could simply be wrong as well.
Fear of Missing Out
Another contributing factor to the potential overvalued startup landscape in India is something that all humans face, the fear of missing out (FOMO). FOMO is inherent in almost all human beings. We don’t want to watch someone else do something fun, exciting, and amazing, and not participate in it ourselves. The startup frenzy in the United States from the mid-1990s until now has shown the rest of the world the power behind technology and the way it will affect the entire world in coming decades.
While the United States got to experience the internet in its dial-up form, where a telephone landline was required, much of the developing world completely skipped landlines. With the emergence of strong mobile technology, consumers in all areas of the world can now have access to the internet without the expensive infrastructure that was needed 20 years ago. This transition is manifesting itself everywhere, especially in the fact that India will see more people come online in the next 10 to 15 years than any other country. As we said before, most of this growth is not coming from urban areas but rural areas, where the infrastructure simply did not exist before.
In a Youth Survey by HT and MaRS, 20.8% men and 21.2% women say indian startups are in a bubble that is going to burst. While this is not a majority, that still means that one out of five Indian consumers believe that large tech company valuations will soon be declining.
Let’s take a look at what start up company executives think themselves– Nearly 65% of startup executives and founders believe that Indian startups are in a technology bubble and 18% of them feel that the bubble is close to bursting.
Last year, ninety four percent of startups looked to raise outside funding. What does this mean for the future of startups in India? Well, for starters, this means that company founders look at internal organic growth as a non-viable option for building their company. While angel investors and venture capitalist can certainly expedite the growth of a startup, companies like Zoho prove that building successful companies does not require outside investment.
Taking on outside investments often means spending money on things that don’t really matter. While it can be nice to have company t-shirts, branded merchandise, fancy offices, free lunch, free events, and all other sorts of company perks, none of these things actually makes your product or service any better.
A tech bubble bursting in India isn’t going to send shock waves through the economy worldwide, like that of the US in the early 2000s. Many companies made it through the crash and are now global superpowers that lead technological innovation. At the Tandon Group, we believe the same thing will happen in India. Companies that are not truly worth what investors are paying will eventually come to realize their true value while great companies will grow and prosper regardless.
At the Tandon Group we’ve invested in dozens of startups we think are poised to meet with success in the coming years. That being said, we are always on the lookout for the next great, innovative company. If you think that your startup can be the next great success, reach out to us. We’d love to be your partner for the road ahead.