April 2007
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Venture capitalists line up for online biz

Indian start-ups that use the Internet and mobile phones to sell their products and services are attracting large funds from venture capitalists, raising the spectre of a bubble similar to the one that destroyed the budding Internet commerce industry at the turn of the millennium.

In 2006, venture capitalists (VCs) struck 30 deals worth a total of $200 million; money they believe would multiply as Internet and mobile phones proliferate in the world's second fastest growing major economy.

In comparison, VCs invested a total of only $36 million in 7 deals in 2005. The trend has continued into 2007 with five deals worth $13 million already sealed in the first four months in the mobile and Internet sector alone, according to Venture Intelligence, a Chennai-based research service focussed on private equity and venture capital activity.

India adds five million new mobile phone users every month. Internet usage grew the fastest in the world at 33% in the year to 2007, way ahead of Russia's 21% and China's 20% growth, according to global Internet information provider comScore Networks.

More Indians now look up the Net for bargain deals on vehicles, air tickets, hotel rooms, holiday packages and visit Internet matrimony sites to find partners. As valuations rise, some see glimpses of the Internet bubble of seven years ago.

“There is no denying that there are bubbles forming in certain sectors. Take travel for example. Four travel portals have raised over $45 million in VC funding from the likes of Norwest Ventures, Kleiner Perkins and other (Silicon) Valley biggies,” says Arun Natarajan, founder and CEO of Venture Intelligence.

“VCs who missed the bus in China don't want to lose out on the opportunity in India,” says Rahul Khanna, director of Clearstone Ventures that has invested about $5 million each in three ventures.

Khanna says the investors are looking for firms that disrupted existing business models in US to script online success stories. For instance, Web sites that offered travel deals were a huge hit in the West. “Therefore, they are pouring money into similar ventures (in India) which are viewed as relatively 'safe',” he says.

Many of them are simply following the herd. “These just inflate valuation and trigger a wave where no one can really make money. No doubt they will get burnt in India too,” says Venture Intelligence's Natarajan.

So, is circa 2000 repeating? May be not. Natarajan is willing to put his money on those who have their ears to the ground and are carefully evaluating the market and its possibilities.

The pie has grown. There are a little over 150 million mobile phone users in India and it is expected to rise to 348 million by the end of 2010. Internet users have multiplied from just 2.5 million in 2000 to 37 million now.

Against GDP growth of 6.5% in 2000, the economy is growing over 9%, bringing more jobs and income to a population that is getting increasingly accustomed to spending money.

Source : Times of India

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