The fatal error internet companies are making

By Sreeraman Thiagarajan

The recent growth in India’s internet users is by any yardstick, astronomical. Nearly 400 million people are now online, and the growth rate is exponential. India ranks second after China and higher than the USA, which has 285 million internet users out of a population of 320 million people.

Investors and tech giants from both end of the Pacific are pouring in billions of dollars to tap India’s digital opportunity. For startups trying to cash in on some part of the opportunity, however, it’s easy to get carried away by the sheer size and make erroneous assumptions. Unfortunately, we see startups folding because they could neither monetise adequately nor raise further rounds of capital. The allure of serving a market with nearly half billion online people often fails for these startups. Here’s why.


Maybe because the biggest search engine, the largest e-commerce website, or the most used social networking site couldn’t make it big in China, or maybe because many analysts in Wall Street and Silicon Valley can’t tell the two countries apart on a map, or maybe just because India and China are in the same distant continent, they are commonly expected to behave homogeneously. This is an unreasonable expectation, based on unsubstantiated projections and a disregard for hard realities.

The constant comparison and extrapolated trends has caused one of the biggest distortions in how the tech industry forecasts and invests in India’s much hyped digital opportunity. The number of users in isolation is not a measure to be excited about. We must factor the large gaps in per capita income (PCI). Indians make less than $2,000 a year on average, whereas Chinese earn $9,000 and an American earns 30 times that of an Indian, at $60,000.

India is Not US
Bulk of products sold online, including subscriptions to video or software as a service, warrant discretionary spending affordable to people with PCI of $6,000 and above. There’s only a small fraction of Indians — called India 1 in investing circles — who fall in that bracket. The rest are called India 2 & 3 or the next billion users (NBU). This segment is now the darling of the VC-funded startups and tech giants from the Valley. The prevailing belief is that these NBU customers will drive the elusive J-curve growth. I’m cynical about the business prospects in this segment.

America has a DIY (do-it-yourself ) culture; people pay if a service provider is willing to help them save time. Examples include paying for apps that help you take notes, file tax, etc. Our cultural nuances play a major role in how we shop and spend. We are an offline-first country with a DIFM (do-it-forme) attitude. We have abundant human capital. There’s a “chottu” everywhere to get things done, delivery grocery, chai and run errands. And a higher level “Raju” to keep books, file taxes, get documents notarised, apply for our passport and more.

The cost of this errand boy services is borne by the business owner, say a pharmacist or a travel agent. But when an e-commerce or SaaS company tries to replicate this neighbourhood model at scale, they set high expectations with customers but can’t match the price. These startups survive as long as they have capital but eventually burn out. There were more than 50 grocery delivery startups in India in 2017. Only a few still have lights on.

A handful of startups are generating revenue by charging customers for delivery or convenience, but those are targeted at India 1, who have money but not time. Once this segment is saturated, the need to appeal to India 2 and India 3 arises, and thus starts the vicious circle to keep the J curve up.

Monetising from ads is tougher than it seems: Businesses that monetise through displaying ads to their customers have been doing so for centuries. Even Google and Facebook’s bread and butter comes from advertisers. But there are two parameters to be kept in mind for a startup seeking to monetise with digital ads. First, the entire advertising industry including TV and print in India is about $10 billion, out of which digital is $1.2 billion, according to estimates by Dentsu Aegis Network. In comparison, USA’s digital advertising alone is $88 billion, according to Interactive Advertising Bureau’s 2018 estimates. So an Indian startup can’t copy-paste a business model from an American model where the strategy hinges on displaying ads to its users. The size of digital ad spends as well as the ad yields are hugely different in India and the US. Costs are different, too, but mostly don’t make up adequately for the difference on the revenue side.

Secondly, for ads to generate higher dollar value for the startup, advertisers must be willing to pay or bid higher dollars. They will do so if your product can get eyeballs and engagement from customers who are India 1 or above. And the opposite holds true when your user base is NBU, whose discretionary income is relatively small. Advertisers either reach them through other channels such as mass media, or will offer to pay very small sums for ad impressions.

Finally, assuming the NBUs from India will behave like any other known cohort in the world, is myopic. A cab driver or a peon living in urban India manages to speak and understand reasonable English and has an internet-enabled smartphone. Yet they don’t behave the same way online as anyone reading this. That’s because of the difference in income and cultural gradations. Having access to Internet doesn’t mean it is used in the same ways, or that they could be similarly monetised.

(The writer is a cofounder of Agrahyah Technologies, which builds applications in Indic languages)