Why Indian Internet startups fail to meet VCs expectations?

Internet Services companies in India are one of the largest venture capital [VC] funded companies in India. However, these firms have not delivered as per the expectations of the VCs. "With broadband penetration and PC affordability still an issue, internet companies have not met the expectations we had set two years back," said Sachin Maheshwari, Principal at Draper Fisher Jurvetson [DFJ] India. DFJ has funded many Internet startups like naseeb.com and seventymm.com. VCs had earlier expected the number of internet users in country to grow to 80 million by 2012. But so far it has just reached 40 million and therefore the traffic is too low to generate good revenue.

Many internet companies rely on online advertisement for revenue. They might find it difficult to survive due to low internet users. The internet advertisement revenue in country is $200 million, but majority of it is generated by Google. Few VCs feel that internet companies have not found the correct business model. "The business models that work abroad do not necessarily work in India," says Ritesh Banglani, Senior Investment Advisor, IDG Ventures India.

According to Alok Mittal, General Partner, Canaan Partners, the most successful internet companies in India are subscription based or lead generating like Naukri.com. But despite not meeting expected results, internet companies are still amongst the most favored by VCs. "We expect these companies to do better as when the internet penetration picks up and monetization models are clearer," said DFJ's Maheshwari.

According to Venture Intelligence, 21 percent of the VC deals struck between July 2008 and June 2009 were in internet services. The value of these deals was around $120 million.

Despite downturn VCs pour into India

The global economic downturn notwithstanding, venture capital investments have continued to flow into India and China, with both countries witnessing a significant surge in the third quarter this year.

According to a study by research firm Venture Intelligence, venture capital investment in India grew 36 per cent at 290 million dollars for the third quarter ended September 30.

Meanwhile in Mainland China, VC investments grew 22 per cent to 964 million dollars at the end of the third quarter, as per the data by Dow Jones VentureSource.

"It's clear that venture capital investors are still eager to put money into the emerging marketplace and, in many areas, they're actually accelerating the pace of their investments," Dow Jones VentureSource Global Research Director Jessica Canning said.

The increased investment by existing players and the entry of new funds contributed to the growth this quarter, the Venture Intelligence study stated.

"The pace of VC investments in India seems to be accelerating despite the turmoil in global financial markets," Venture Intelligence Founder and CEO Arun Natarajan said.

Meanwhile, as the number of VC deals nearly doubled in India to 49, China witnessed a saw the number dipping to 59 from 73 in the same period last fiscal.

"Larger deals drove investment in the third quarter as the median size of a venture deal in China remained at USD 10 million, which is the highest on record and the most out of any region we track, including the US," Canning said.

However, the venture capitalists shied away from investing in the Information Technology and IT-enabled Services (IT & ITeS) industry in China, the sector remained favourite among the VC firms invested in India.

Source: PTI