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Alok Mittal, Managing Director of venture capital firm Canaan Partners, is optimistic about the growth of online classifieds segment in India. He believes it is an attractive area for further investment. Canaan has invested in ventures such as bharatmatrimony.com and cartrade.com. In this interview, Mittal talks about valuations, exits and trends that will change this space. Excerpts from the interview:
How is the online classifieds segment faring in India compared to those in the developed markets? What kind of valuations has it witnessed?
Online classifieds has been an attractive area for investments globally. Fundamentally, the business creates a platform for buyers and sellers to exchange information, and this marketplace effect tends to create network effects. This leads to the winners capturing a disproportionate market share, as well as defensibility and high operating leverage. All these are characteristics which make successful online classified businesses extremely valuable. Globally, this has been borne out with listed online classified businesses trading at 6-7 times revenue on an average, and commanding around 25 per cent operating profits. Within the Indian context, classified businesses such as Naukri.com and Justdial.com have demonstrated similar profitability, defensibility and valuation multiples.
What is propelling the growth, given that e-commerce is still at a nascent stage in India?
Online classifieds is a low-barrier mechanism to enable e-commerce. As against bringing goods and services online, and solving logistical and payment issues, online classifieds enable a mechanism where providers are brought online and the transactions can take place offline. It is for this reason that online classifieds has led the market, as against other models such as online retailing or service marketplaces. The growth in online classifieds remains strong, with mature listed players still growing at 20 per cent or more. At the same time, new categories are coming up and demonstrating far higher growth at lower scale. These categories include auto, property and B2B as well as horizontal consumer classifieds.
What is the revenue model?
The revenue model relies on charging the buyers or sellers for their listings. In B2C classified businesses such as naukri, justdial and cartrade, it is typically the businesses which pay for access to consumers. In consumer classified businesses such as bharatmatrimony, there is an opportunity to charge consumers on both ends of the transaction. Such revenue models have been proven to be fairly sustainable over time.
What makes you believe companies in the segment are on the right growth track? Which sector is currently profitable?
The early objective in these companies is to build a critical mass of listings and audience on the platform.
At this stage of the business, one wants to minimise the friction and costs for suppliers and buyers adopting the platform. If companies are able to create this virtuous cycle, it indicates early success. Once a degree of critical mass has been achieved, monetisation is the next key criterion. Finally, the ability to drive operating leverage and expand margins reinforces the business viability. Amongst Indian online classified sectors, jobs, local and matrimony have been demonstrated to be highly profitable, with clear leaders emerging in each segment. Other segments such as auto, property and B2B classifieds have demonstrated market fit and monetisation, but it’s relatively early to show high levels of profitability.
What part of your total investment commitments go into the classifieds segment? What is the average ticket size of the fundings?
Canaan has invested in Bharatmatrimony, Cartrade and Indiaproperty within the online classifieds space in India, and remains open to both new categories and evolving business models in classifieds. We normally invest $3-5 million in an initial round for a company, and then provide ongoing support over the lifecycle, taking our typical capital commitment to about $10-15 million over time.
Of these how many have you exited? How have been the exits in the segment so far?
Exits have been attractive both in India and globally. In fact, in India, online classifieds has been the only Internet segment to have thriving public companies in form of InfoEdge and Justdial.
What are the major challenges in this segment? How have you tackled those? What is the success rate of classifieds firms?
The major challenge is to bring buyers and sellers online, and create critical mass. In a country such as India, where Internet adoption is still nascent, this can translate into putting salespeople on the ground to acquire business customers, and mass advertising to attract consumers. This leads to initial capital intensity. Given that this is a winner-takes-all business, there are only 1-2 successful companies in each vertical – thus the failure rate can be high, especially if there are a lot of competing businesses.
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