Dotcom In High Space

The

party seems to be over, at least in the US. The tech-heavy Nasdaq took a heavy

beating as technology stocks plummeted. As per observations of the influential

stock market analyst Abby Joseph Cohen, chief strategist at Goldman Sachs,

technology stocks suffered a major blow because investors reallocated some of

their holdings from stock to cash. She reportedly, singled out IT stocks and

said they had little scope for further growth. Templeton’s Mark Mobius also

reportedly warned that the recent bout of volatility in internet stock prices

could herald the onset of a global crash in the high flying sector.

Incidentally, the largest to be hit were the dotcoms, which heavily depend on

cash-flow to pep up their growth.

What holds for India

The dotcom mania

sweeping across the globe is just catching up back home. The digital economy has

brought forth a plethora of opportunities, and the hype and hoopla that the US

market created with the success of dotcoms has made Indian wannabe entrepreneurs

jump onto the bandwagon. The absurd valuations that these companies received and

the huge market capitalization they commanded, made an impact on the Indian

entrepreneurial mindset. The ready availability of funds creates a ‘gold rush

mentality’ among entrepreneurs with an internet business idea. Everyone thinks

that getting Rs5-20 crore is an easy step. Thus the few good ideas get valued

exorbitantly.

There is no doubt that the

internet is a medium that cuts across geographical spaces throwing open a wide

arena for businesses. However, looking at the the Indian perspective, it is

important to recognize that infrastructure and internet penetration are vital

for any dotcom business to grow. Notwithstanding the fact that the US, which

propelled this dream of instant riches, has had a taste of its own making,

dotcom start-ups in India are still gung-ho about their businesses. What are the

reasons behind this hype with respect to the Indian environment?

Buoyant market

For starting a

net business, no prior qualification is needed. As for entry barriers, they are

limited to ideas and a very small investment in the initial stages to start the

business. "The huge inflows of capital coming in from VC funds are also

responsible for the growth of the market. Over and above that there are vulgar

valuations, many success stories and a chance to jump to the top in a short

period of time. These offer great incentives for anyone ambitious and wanting to

make it big," says Amit Zaveri, Director, Indbazaar.com. These views have

been echoed by other start-ups too. "This hype has been dramatically

enhanced by the valuations and deals being reported in this business area,"

says Kapil Sanghi, MD, equitytrade.com.Technology has proven to be a

great leveler. The New Economy propelled by the internet revolution has led to

the revamping of business models. Existing businesses are trying to reorient

themselves and fresh business models are cropping up.

Funds galore

Businesses, VCs

and even big corporate houses have been quick to realize the immense potential

of the internet and the tremendous efficiency of deploying internet technologies

in business and commerce. "The net has a big potential in India. India has

a subscriber base of about 3,50,000-4,00,000 internet connections, which provide

access to over 1.5-2 million users. This is expected to increase manifold with

the privatization of ISPs and grow to a user base of 8-10 million in the next

three years. Hence, the Indian net opportunity is quite big. Moreover, there are

a number of entrepreneurs who are evaluating ways to exploit this opportunity,

some of which are are unique to Indian conditions," says TMC Meenakshi

Sundaram, Investment Manager, Walden Nikko India.

Financial analysts are baffled by

the exorbitant valuations that the dotcoms are getting. Infrastructure is not

geared up, internet usage is far from satisfactory, PC penetration is one of the

lowest and the Indian mindset is still not geared up to shopping online. Despite

all these hindering factors, dotcoms continue to sprout in every nook and corner

of the country, commanding crazy valuations.

Sustaining business

The net is

certainly an incredible medium of business and communication. But the question

is, how long will this be sustainable? "As in any other enduring business,

the winners will have a differentiated product delivered with absolute

consistency. These are tomorrow’s winners and their businesses will be

sustainable. But loads of people whose only big idea is that of making money

quickly are going to burn their fingers. At the end of the day, there has to be

substance to back all the talk of big bucks," says Sreekant Khandekar,

Director, agencyfaqs.com, agreeing with the view that the hype will certainly

wilt away.

The need for portals in India

will definitely be driven by the consumers’ needs. "There will be a

shakeout when the market matures and in the long run those portals which have a

viable business model and are looking at creating a paradigm shift will

survive," says Kumud Goel, Co-promoter, Jaldi.com. There is no doubt that

it all depends on the infrastructure growth in India._{How long will the bubble last?}

Dotcoms: 



Indicators To Success

• Internet as a medium cuts across geographic spaces
• Huge valuations creating a ‘gold rush mentality’ among entrepreneurs
• Huge inflows of capital from venture capitalists.
• Expected exponential growth in the middle class population
• Minimal entry barriers

Though, this

trend may continue for another 12-18 months, the shakeout is going to be visible

at the end of this time period. The bubble has already burst in the US and if it

has happened in a cash-rich, investor-friendly country like the US, can the

Indian environ be anything different? And the most affected among them will be

the business-to-consumer sites. Focused sites that innovate continuously are

going to survive the rat race.

All said and done, Indian dotcom

start-ups are trying to follow the beaten track of the US companies. But one

thing is certain–the shakeout that will take place within a year or so will

leave some of these dotcoms high and dry. To quote Apple’s iCEO Steve Jobs,

who said in an interview to Fortune, "It is hard to tell with these

internet start-ups whether they are really interested in building companies or

just in the money. The problem with the internet start-up craze isn’t that too

many people are starting companies, it is that too many people aren’t sticking

with it."

RAJESH

MENON