Lack of competition suppressing valuations: India Startup Report

World Startup Report, a social project aimed at understanding the startup ecosystems around the world, has just come up with an India Startup Report. Co-authored by Bowei Gai, co-founder of CardMunch (which was acquired by Linkedin) and Benjamin Joffe, an angel investor and founder of Plus 8 Star, the report aims at finding details about the growth prospects and future predictions about the whole startup ecosystem.

The report highlights a lot of issues many of which are well known, some interesting and others which are outdated. It also, at times, misses the woods for the trees and stumbles into grey areas.  Here's a sneak peek.

Fast growing market with limited competition

The report says India is a young ecosystem with a relatively small number startups at the moment. - The risk-averse culture leads to less competition than in the US and China and currently, the only real competition is in the e-commerce sector, many other fields are wide open. It adds angels/VCs rarely compete for deals, which leads to lower valuations among Indian startups than what is seen in the Silicon Valley. The endpoint being: The lack of overall competition is hurting India's startups as it leads to poorer quality, lower valuations and slower market-building.

High social risk for founders!

Startup founders might have trouble getting married! It's a bad point on the matchmaking check- list, like being a struggling artist (without the glamour). The report adds: Thus, to convince someone to join your startup, you'll likely end up needing to convince their entire family!

Risk capital vs interest rates

It pointed out the unusually high interest rate in the country, which is around 10 per cent (term deposits),  hampers development of a risk capital market: (Why risk it at a startup?). It added that real estate, gold investments and traditional cash-flow businesses are much more appealing to most investors.

Plenty of engineers, few specialised experts

The report says good engineers do not stay in engineering as they seek management for a better pay. As a result, senior developers, designers, marketers and product managers are hard to find. Experts in specific technologies (e.g. Node.js, Hadoop) are virtually non-existent, as per the report.

Advice for entrepreneurs

The report says local entrepreneurs should stay in India as there are lots of unfilled opportunities waiting to be tackled and you don't need to reinvent the wheel and focus on execution. Local startups should try to get into an incubator/accelerator to avoid a lot of the early mistakes that people make and it adds that entrepreneurs will have an easier time finding mentors and funding in the future.

Pegging it against China, the authors say many Indian startup wins will come in the next few years from returnees/foreigners but the opportunity won't last. It suggests to the foreign entrepreneurs to tackle the tackle the big opportunities that scare away most of the local entrepreneurs, but asks them to find an Indian co-founder who can navigate the complicated and often convoluted social and business pathways.

Advice for foreign angel investors

The report says it is safe to invest for exploratory purposes but investors should have realistic expectation for the investment. "IPOs are virtually non- existent in India. Most local angels aim for Series B exits or small acquisitions. Definitely co-invest with reputable organisations. Let the local investment groups complete your due diligence," it added.

Advice for foreign companies

India is an easier market to break into than China; talent is cheap and regulations are good, as per the report. "Online companies can easily win in India, Google, Facebook, Twitter and LinkedIn are doing amazingly well. On the other hand, companies relying on offline infrastructures like eBay and Amazon are getting killed by the local competitors," it says.

The report calls for patience for the international firms looking at India. "India has a ton of potential, but it is a LONG market. You will win eventually, but don't be discouraged by the initial results.

……and where the report got it all wrong:

We found parts of the report of carrying a fixated old world perception of India, which may not be what necessarily defines the new India. Besides that, we spotted some factual misfires. For instance, clubbing Fashionandyou with Birchbox as a subscription retail firm. We would guess they meant to add Vellvette instead as Fashionandyou hardly fits a subscription commerce model. It also clubbed Snapdeal as a deals site, when it pivoted more than a year ago from that model.

The report also strays into grey areas when it mentions about missing internet cafes. It says such cafes are rarely found in big cities. It probably was referring to large set ups, which are indeed few. But it skipped the fact that every large city has numerous small internet access cafes.

Find the full report here.

(Edited by Prem Udayabhanu)