Low entry barriers behind high mortality in consumer tech: FideliMent's Bharat Banka

Service-enabling tech startups ruled the roost in 2016 with fin-tech, health-tech and ed-tech companies garnering the highest share of investments, despite a significant slowdown in deal making activity. The total number of startups that got funding this year fell more than a fourth (27.5%) from last year, while the total disclosed value of funding deals dropped almost 42%, according to a report from VCCEdge, the data research platform of News Corp VCCircle.

In an interview with TechCircle.in, eminent investor Bharat Banka, founder of FideliMent Ventures, an investment firm, says the growth of consumer Internet startups will continue in 2017 too. But the proliferation of me-too products/services, which can be attributed to low entry barriers in the space, will mean the mortality rate of ventures will remain high. The ones that will scale are the early-movers, which can differentiate themselves from the competition and offer services at reasonable rates. Edited excerpts:

What do you think is the future of service-enabling tech startups? Will they continue to dominate in 2017 as well?

The service-enabled or consumer Internet startups will continue to emerge in quantity as it is relatively easy to start a venture in this space, with an initial limited capital [put in by a] founder. In that context, quantity (may not necessarily mean quality) in consumer Internet will be large.

Is it just convenience that is leading to the adoption of technology in the consumer Internet space? Can these tech-enabled service providers turn into large businesses?

The issue with consumer Internet is the relative low entry barriers. Colloquially, someone with coding experience, a laptop and a few thousand dollars can start such a business. This is exactly the reason why the mortality rate of consumer Internet ventures is extremely high and the ones taking pole positions are usually a fraction of the total players. The ones that are early-movers with the ability to compete on differentiation and who reasonably charge a consumer for services definitely have the potential to turn into large businesses. In India, BookMyShow is one such example.

Entrepreneurship is not going much beyond metros or so it seems. Will metros continue to overshadow non-metros when it comes to numbers of fast-scaling, heavily-funded companies?

Call it laziness of capital providers, an urban-club syndrome or an Ivy club bias, the fact is that being in the metros does improve a consumer Internet startup's chances of finding capital, mentoring, co-founders and early customers. It might be a different story for enterprise software, business-to-business (B2B) or software-as-a-service (SaaS) ventures, where the need to be in metros is less.

At least 32 startups reported shutting down their operations in the first 11 months of 2016 compared with 17 in all of 2015, according to a TechCircle.in analysis. What according to you is the predominant factor for the startups to die out in 2016, beyond funding crunch?

India is witnessing a phase where the various players in the startup ecosystem are pausing after the frenetic activity of the last three to four years with billions dollars worth of capital moving into hundreds of ideas originating in India. Every geography and industry goes through this cycle and startups are no exception. Such a phase separates the wheat from the chaff and capital gets reallocated to the ventures that exhibit survival tenacity. In this phase, the blind copies of western ideas without indigenisation and lack of differentiation are the largest factors [for start-ups shutting down], besides some startup founders lose steam to stay put and go through the grind.

How is digitisation redefining the startup ecosystem?

Since the invention of mobile phones and the Internet, digitisation has been one of the largest factors impacting the way businesses are carried out across the globe, especially those which interface on a daily basis with end-customers. It will play out even more vigorously in times to come, whether relating to government services or private sector services.

The year 2016 has been a reality check for startups after the frenzied investments in 2015. What do you feel VCs are looking at while investing in startups?

The basic premise of an early-stage investment doesn't change very much in any investment cycle i.e. quality of founders, existence of a market, quality of business proposition, readiness of market, and level of preparedness of a team for execution. The last few years of aggressive VC investing in India surely has given them a decent estimation on the size of the real market and fast speed of adoption but price-sensitive nature cuts across offerings. These insights are likely to get built into their future investment strategies.

2016 saw macroeconomic indicators – high inflation rates, market acceleration due to Diwali and sudden demonetisation. What, according to you, will be the impact of demonetisation on businesses in the next few quarters?

I personally believe that the foundation of the India story on consumption, investment and infrastructure continues to remain as strong as it was before demonetisation. As the measure was unprecedented (qualifies for a black or white swan event, depending upon individual views. I feel it's a white swan one), its impact on the economy for at least four to six quarters is inevitable. What we might be missing is the fast pace at which Indians across urban or rural areas have adopted technology (be it mobile wallets, ATM operation, credit / debit cards, etc.) and speaks volumes about the underlying strong faith in the change. The positive impact is also likely to reflect in high one-time tax collections due to unreported wealth / income plus sustainable high tax collection due to the structural change associated with demonetisation. This headroom with the fiscal budget is likely to translate into more public expenditure, in turn giving a push to the economy over three to four quarters.