Bubble sans trouble?

Ask any Wall Street punter for a stock pick and chances are he may throw an Internet company at you. The stock of a Google or Amazon is today more valued than that of Hewlett Packard or AT&T. The young search engine major, in fact, has a market capitalisation of about $154 billion — double that of old heavyweight HP.

If the markets are giving the thumbs-up to listed Internet firms, the valuations of unlisted dotcom firms in the US are even more mind-boggling. Facebook valuations seem to be defying gravity at $85 billion, while the market is abuzz with reports of near $8 billion valuation for Twitter. Ditto for Zynga, the social gaming sensation famous for its FarmVille game. Groupon, which spurned offers from Google and Yahoo, is said to be considering an IPO with a potential valuation of $15 billion! The dotcom frenzy can be seen in China too where there is a sudden craze for Internet stocks — Youku, the Chinese online video company — is trading around 54 times its 2010 revenue.

It is the same story in India. The scrip of Info Edge, the parent firm of Naukri.com, is more expensive than even an Infosys. At a PE of 66 times, it is huge premium to IT companies.

The online travel company Yatra.com — into which Intel Capital recently pumped in ‘follow on' investments — is widely reportedly to be eyeing an IPO. The year started off with Jasper, parent company of e-commerce web site SnapDeal.com, raising $12 million from venture capital investors Nexus Venture Partners and Indo US Venture Partners. FlipKart, India's own Amazon, has seen its valuations rising steadily and recently raised over $20 million in fresh funding.

Clearly, the day in the sun has finally come for Internet companies. But then, the question is — like the dotcom frenzy of 1999, is the Internet cauldron once again full of giant bubbles waiting to pop? Or is the euphoria backed by a hard set of numbers, sound business model and solid customer engagements?

eWorld caught up with Internet investors, start-ups, angels and dotcom veterans to find out what is driving the recent investor exuberance in the Internet space.

Why the buzz

“The growth opportunity is a compelling proposition for investors,” says Ambarish Raghuvanshi, CFO of Info Edge. The company, which owns portals such as Naukri, 99 acres, jeevansathi and shiksha, is also now actively scouting for more investments in the Internet space — it has stakes in six companies, including zomato.com, mydala.com and meritnation.com.

Rajesh Magow, Co-Founder and CFO of travel site MakeMyTrip, lists several factors at play. “Globally, it is the inherent scalability of the Internet-based business model. On the other hand, in the case of emerging markets such as India, it is the high growth potential and under-penetration in the Internet space, coupled with visible signs of improvement in broadband and 3G rollout,” says Magow.

Incidentally, MakeMyTrip's stellar debut on Nasdaq last year marked a happy milestone for the then rocky US IPO market. One of India's largest online travel companies, MakeMyTrip's debut trade in the US market in August last year saw its shares jumping almost 89 per cent over the IPO price of $14 a piece. It is currently hovering around the $23 mark.

In fact, MakeMyTrip's showing itself — as well as the sky-high valuations of Facebook and Twitter — seemed to have turbo-charged the pace of investments in local ventures.

Acording to Prashanth Prakash, Partner, Accel India, “There is a scarcity, and hence, a premium for Internet-related companies out of India that can list on Nasdaq.”

“Besides, in India, the runway for growth is very long and interesting as penetration rates are currently very low at 80 million. But since it is slated to speed up to 150 million, India will soon figure amongst the top two-three Internet markets,” says Raghuvanshi of Info Edge.

Equally encouraging is the “marked improvement” in the quality of entrepreneurs pursuing these opportunities, says Accel's Prakash.

Overseas, talking up the street, the social networking sites have provided a new frontier for customer engagements. “The social media is occupying timeshare with customers and translating into huge audience engagements,” says Manu Agarwal, Founder & CEO of Naaptol.com, a virtual-commerce home shopping platform.

Monetisation, clearly, is waiting to happen. And it may happen sooner than later.

The Internet hot spots

But while the Internet cacophony in the US is largely dominated by social media companies and their soaring valuations, in India, the trend seems to be somewhat different. Even as the huge user base that sites such as Facebook, Twitter and LinkedIn command out of India directs investor attention to Internet companies, it's not really the Facebook wannabes that they are looking at. As one investor points out, “It may be difficult to replicate a desi Facebook.”

Rather, right now, the investor fascination in India appears to be more around e-commerce, Internet services such as online travel, online trading, as well as online classifieds. “Investors are looking for businesses that are opening up new landscapes,” says Rehan yar Khan, member, Indian Angel Network, and founder, Flora2000.com.

What do investors look at?

Unlike last time around when a lot of dud companies got funded, this time around, investors are taking a long hard look at fundamentals, before reaching out for their wallets. Smooth talking and fancy claims by techie-turned-entrepreneur do not seem to be working anymore. Investors are walking that extra mile for due diligence to ascertain the category of the start-up, the idea, the execution and the pedigree of the team behind the firm. “Detailed research and understanding about the online space, market, product and consumer behaviour is important,” says MakeMyTrip's Magow.

Agrees Raghuvanshi of Info Edge. “There is a method in the madness, people are looking at real ideas and real people,” he adds.

Then and Now

So what is different between the investor frenzy in dotcoms in 1999-2001 and now? Why are investors once bitten, not twice shy?

Almost all the investors and players we spoke with said that this time around the dotcom play is for real. And the valuation metrics are better defined, they say. “Earlier in 1999-2001, people were looking at traffic and eyeballs and so on. They looked at how much money the businesses were losing rather than how much they hoped to make,” says InfoEdge's Raghuvanshi. “Now, people are looking to make real money over real businesses,” he says.

Rahul Sethi, President of the e-commerce division at Tradus.in, says that, given the sizable user time spent on sites such as Facebook, revenue streams have opened up. That includes ad revenues.

A recent report from FICCI-KPMG predicts Internet advertising in India will grow at a compounded annual rate of over 29 per cent over the next four years to Rs 2,850 crore.

“Currently the revenue streams are recognised. The question is, at what multiples,” says Sethi.

Of course, the reach of the Internet itself and improved perceptions surrounding online transactions have lent credence to the dotcom story. Remember, a decade ago, even the most ardent shopper would be distrustful of online transactions.

“Few believed in dotcoms then…There was no Facebook, no LinkedIn. Now people understand the concept, having experienced it themselves, either in the form of social networking, or booking movie tickets or railway tickets online. They realise it is a medium that saves time and reduces hassle,” says Yogesh Bansal, Founder of Apnacircle.

That said, nothing is being left to chance. Sanjay Nadkarni, founder of baby products-focussed e-commerce venture Baby Oye — a company that received $2.5 million funding from Accel Partners and Tiger Global — says that investors are keeping a hawk eye on actual transactions, even drilling down to the level of repeat transactions. “One-off transactions have no value, it's all about repeat transactions, life-time value of the transaction.”

Angel investor Rehan yar Khan says that this time there are more consumers online and devices are also more modern, allowing better and smoother access to the Internet.

Will the bubble blow out?

There are extreme opinions on the future outlook of frothy Internet valuations. Prophets of doomsday say that there could be a bloodbath in the market. The audience stickiness and scale is fine, they say, but the bigger question is around profitability.

Some see a shake-up as early as end 2011, as fledgling companies start to burn money and funding dries up.

Other voices are less pessimistic. Even if the dotcom bubble bursts, it won't be as hard a crash as last time, they opine.

“It may not burst, but it will settle down in a realistic band with correction,” believes Sethi of Tradus.in. Few others see consolidation on the cards.

And then there are the eternal optimists. Like the Wall Street punter.

moumita@thehindu.co.in

COMMENT NOW