The Hindu Business Line : Web 2.0 is not for India

When Matrix Partners, a global venture capital company with a $150-million India fund, invested in the Yo! China fast food chain, it came as a surprise to many tracking the industry. Much of it was due to the fact that VCs are generally seen as backers of tech startups and not something as far removed from tech as food. So, what triggered the decision? Avnish Bajaj, co-founder and Managing Director of Matrix India, attributes the decision to the fact that there is a lot of "low-hanging fruit of basic consumer services that is missing. There are many underserved markets that need only basic innovation to be addressed."

In the US, all the "low-hanging fruit" that Bajaj talks about are taken, thanks to the maturity of the US economy. As a result, VC funding is directed at tech-related innovation. In Bajaj's, and Matrix's, overall investment thesis, India holds the promise of an opportunity that is far broader than in the Silicon Valley or in the US.

Another factor that helped in zeroing in on Yo! China was the universal popularity of Chinese cuisine in the country. "We see them (Yo! China) as innovative since they are targeting a popular food segment in a highly efficient and process-driven manner. There is a clear gap in the market with a lack of quality fast service food outlets. There is no single national player in the business. Yo! China intends to become that. Also, we invest in businesses with some IP. There is innovation in the supply chain, the ambience, the customer delight, etc. The mantra is process." Trust a VC to bring words like process to a topic like food!

Bajaj adds: "Our view is that if you are innovative, your costs will be low. We invest in low-to-medium capital-intensive businesses."

What else is on Matrix's radar? "I think consumer services opportunities across sectors are hot," says Bajaj. "They are also exciting in that each one of us is a consumer, so we can relate to the businesses far easier than deep tech-driven ones. I believe that Internet and mobile opportunities suffer from a quality deficit; I expect higher quality opportunities in these sectors to start showing up on the radar in the next couple of years."

While on this point, Bajaj minces no words in debunking the promise of Web 2.0. "I think people are wasting their time on Web 2.0 in India." He goes on to explain why he holds such a radical point of view when the whole world is crowing about Web 2.0 being the next revolution.

"People talk about the Internet being convenient, but it is not so in India. You need to go to a cyber café or you have to dial up a telephone line or use a slow broadband connection. Whereas in the US, 150 million households have broadband access all around the clock, sitting at home. When you have such a situation you can do social networking, but where is that happening in India? Do you think a person will go to a cyber café or any public environment to discuss everything about their life?"

Does he, then, see a cultural barrier in the way of such phenomena succeeding in the Indian context? "Yes, there is a cultural barrier, as not many individuals will express themselves as in Myspace.com. Also, there are infrastructural barriers. Fundamentally it is not about social networking but about community building. In India one needs to first create a product according to people's needs and subsequently a community will form around it. An example would be Seventymm, which solves a need. We are building a community product around it."

Seventymm is an online DVD rental company that received $7 million from Matrix; it was Matrix's debut investment in India. After online travel, online DVD rentals have been attracting more VC attention and funding than any other single niche, leading to the usual charge that VCs tend to display `herd mentality.' Is there a grain of truth in these accusations?

Says Bajaj: "While VCs are often reviled for the herd mentality, I would argue that the situation is more of "collective wisdom." The problem arises when irrational exuberance gets in the way of rational thinking - which is when money gets lost. When VCs spot a potentially large market opportunity, they realise that there is a lot of money to be made and so end up funding the same opportunity with different players in the hope that their horse will win the race!"

Elaborating on the online DVD rental opportunity, Bajaj reels out numbers to rationalise the decision. "Three years down the line there will be 40-50 million DVD players and 40 million VCD players. If you assume 80 million households, on an average a household rents a couple of movies a month, each costing Rs 50 (slightly more than a dollar). At the very least it is an opportunity worth $160 million of revenue per month, or $2 billion per year!"

On the competition, he asks: "Is there any national chain in this business? No, but there is a local seller. Yet, whenever I want a movie he may not always have it.

Also, there is no way of knowing whether it is good or not. Contrast that with something like a Seventymm, which has 10,000 titles, where anyone can go to the site and actually add movies to their request lists.

They can also see what ratings people are giving to a particular movie. It solves the pain point and provides value at the same price point as your neighbourhood vendor. This is the reason why this opportunity has attracted funding."

Though dismissive of Web 2.0 in India, Bajaj thinks that Mobile 2.0 will happen, but it will take time. "Of the 150 million mobile phone users, only two million are GPRS-enabled. The urban penetration is 52 per cent, while in rural areas it is 7-8 per cent. In reality there will be mobile Internet applications but the market size will not be 500 million but 25-30 million. Sometimes I meet individuals who talk about a 500-million mobile Internet market, which will not exist even when I retire! Overall you have to deliver alternatives not only via mobile Internet but through other mediums because India is at a nascent stage of growth."

Before his current avatar, Bajaj was co-founder, Chairman and CEO of Baazee.com, which was acquired by eBay. Prior to Baazee, he was an investment banker at Goldman Sachs in New York and San Francisco. He was also a management consultant at McKinsey and began his career with Apple Computer in the Bay Area. A Baker Scholar from Harvard Business School, he is a top ranker in computer science from IIT, Kanpur.

dmurali@thehindu.co.in

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