Homegrown internet companies face stiff competition from global giants
Indian entrepreneurs find it more and more difficult to keep up with deep-pocketed foreign competitors.
His life sparks up after 9 pm, when Arokiaraj gets together with four or five friends and unwinds on platform 4 of the station. Using the free WiFi on offer, the youth use their smartphones to surf the web and check out videos on YouTube, Facebook and WhatsApp, between chat sessions. The latest forwards are exchanged and jokes are sniggered.
However, over the past three to four months, another app has caught their fancy: TikTok, the short-video sharing app owned by Bytedance, the world’s most valuable startup that was valued at $75 billion in late 2018. For 20-30 minutes daily, Arokiaraj and his friends watch slapstick comedy, cheer strangers mimicking Tamil and Bollywood movie stars and ogle at women dancing to slow music from far away Madhya Pradesh and Mumbai — all on the app.
In the last 12 months that TikTok has been operational in India — including six months when it survived a ban — the upstart has rapidly racked up some 200 million users as of June, according to its own data. The app has been downloaded over a billion times across the world. “We are enabling people from every corner of the country with a global platform that gives them unlimited opportunity to capture and share their creativity,” says Sachin Sharma, director-sales and partnerships, Bytedance India. “TikTok is popular pan-India because we recognise that creativity is not just limited to audience belonging to certain towns or users speaking a particular language.”
The gaiety of the group on platform 4 shows Sharma is on the mark. Arokiaraj says TikTok has become the new musthave app among his peer group. Videos on the online platform dominate latenight conversations, held between loud train whistles.
But not everyone is thrilled by TikTok’s explosive growth. The app’s detractors say it was built in China in a walled garden — with virtually no threat from foreign rivals — funded by local investors and first launched in a familiar market. Cash-rich developers launched the app here later. Chinese companies such as vernacular content provider Helo, beauty and lifestyle app Club Factory and UC Browser have profited from this strategy. The financial muscle of American companies such as Amazon and Walmart — which acquired Flipkart — have also queered the pitch for homegrown players, who get overshadowed, they say.
This, say observers, has led to a growing disquiet in the market, which has been cleaved into two — homespun entrepreneurs worrying about being muscled out by foreign investors and multinationals who claim success is determined by market forces and not financial heft. It has also forced entrepreneurs to take hard decisions. Craftsvilla, for example, had to rapidly shrink its operations over the past 12 months, says Manoj Gupta, CEO of the platform that sells ethnic apparel and fashion accessories. “It has become impossible to defend your business model with this kind of competition and the money they have. Local entrepreneurs need to be protected.”
Vinay Bagri, CEO and founder of fintech startup NiYo, says: “The looming Chinese and American threat is something we consider daily when we fret over the viability of our venture.”
Industry watchers say shifting market dynamics have worsened the odds of success for some of these entrepreneurs. Over the past five years, even as starting up has gone mainstream, the number of early backers for these fledgling businesses have become fewer. Later-stage investors have also started hedging their bets, preferring to invest only in the top few players in each segment. “In many cases, this is a tough, winner-takes-all market,” says Anand Lunia, founder of India Quotient, an early stage investor in startups. “The flush of foreign capital and ideas has only exacerbated a rough market.”
Foreign capital accounts for 80-90% of all investments in India’s startups, according to industry estimates. Even as some companies build up their desi flavour — Vijay Shekhar Sharma of Paytm, for example, has consistently claimed his company is as local as Maruti and SBI even though Softbank and Alibaba Group are his biggest investors — the influence of overseas investors is evident. Large investors such as Softbank, which has invested $2 billion in India and plans to add $2-3 billion more, provide key (and rarely available) later stage capital to the ecosystem. After Independence, India had a protectionist economy to help domestic industries. But the economy was opened up in the 1990s and global collaborations became almost a given, especially in the tech space. The voices of protectionism seem to be returning now with local entrepreneurs starting to vocalise their pain. “American startups have market depth and Chinese startups have wallet depth. They are infiltrating the country. What do Indian startups have?” says a technology startup founder on the condition of anonymity. “We need protection the way China had. Look at how big their tech industry has grown.”
Companies like TikTok have raised the bar. Its largest homespun rivals, ShareChat, started with a bang in 2015 and racked up some 50 million users by June 2019. But today, potential investors ask ShareChat tough questions about how it can tackle deep-pocketed foreign competitors.
Executives at companies such as Amazon bristle at the suggestion that their growth has hobbled the odds of success of homespun entrepreneurs. A spokesperson for the firm tells ET Magazine the protectionist narrative is dated and untrue and the $200 billion behemoth is a value generator in India. “Amazon. in is a thriving marketplace with the primary role of enabling Indian small businesses for online commerce. With its continued investment in technology and infrastructure, it has enabled more than 450,000 small and medium business to scale into successful national online retailers,” says a company statement. As a result, Amazon has facilitated over $1 billion in exports from sellers to the US, the UK, Japan and Persian Gulf countries. “Amazon continues to work closely with the local small business ecosystem with multiple programmes such as Launchpad, Amazon Easy, I Have Space. Amazon remains completely compliant to the laws of the land.”
Sharma of Bytedance says TikTok’s combination of great product experience and localised and personalised content recommendations has been a hit with users. “We will continue to focus on enhancing the product experience. We recently started monetising the platform and are working closely with brands to further build our ad solutions to understand what works for their audiences, and if TikTok can collaborate to help reach their consumers across the country,” he says.
Protectionist voices in India’s startup ecosystem worry about some sort of colonisation of India’s internet economy by foreign companies. “I think we have an opportunity to build great internet companies from India,” Sachin Bansal, then the executive chairman of Flipkart, told the audience at a business conference in February this year. “At the same time we should do that by not creating an unfair playing field for some companies and instead create a level playing field across for everyone. I believe that if you create a level playing field, Indian companies will be at a great advantage and we will be able to build companies which will go global overtime.”
In 2018, Bansal sold his stake in the ecommerce company he cofounded from a flat in Bengaluru to Walmart. He has since become a key early investor in startups. In 2019, he invested $100 million in Ola. The CEO and cofounder of the ride-sharing giant, Bhavish Aggarwal, has recast shareholders’ voting rights to keep predatory investors at bay. Japanese conglomerate SoftBank, which holds a substantial chunk of Ola, had recently wanted to invest $1 billion in the cab aggregator. But Aggarwal had reportedly turned down the offer as it would have meant diluting his shareholding rights.
Regulators have reacted to some of the concerns of homegrown entrepreneurs. A notable move was the order on data localisation, which aims to protect private citizens’ data. This diktat — supported by fintech firms such as Paytm and Phone Pe and opposed by multinational firms — seeks to compel companies to house the data they generate within India’s geographical boundaries.
However, opponents of this move say such a seismic shift is unrealistic, with technological and operational issues likely to slow down implementation. “There are many issues to consider when you localise data,” says Anirudh Rastogi, CEO of Ikigai Law, a legal outfit in Delhi that works on tech and policy law. “Where do you find enough space to build these server farms to house this mass of data? Does housing all the data in one country mitigate risk?”
The boom in mobile users in India is expected to generate 2.3 million petabytes of data by 2023, from 40,000 petabytes in 2010. One petabyte is equal to 1,000 terabytes or 1,000,000 gigabytes. Parminder Jeet Singh, executive director of IT for Change, says company data generated in India should be treated as a national asset. “There is no reason to sign away our lives so easily. Let the government devise a policy that makes these companies pay to tap these resources.”
It isn’t the content segment alone that is attracting protectionist attention. From fintech to fashion, lobbies are hard at work trying to put homegrown entrepreneurs’ interests first. For example, India Tech, a lobby that counts MakeMyTrip, Ola, and Quikr as members, wants to ensure a level playing field for the ecommerce industry, says the unit’s CEO Rameesh Kailsasam. “There is a fear that foreign companies may be bending the law with regards to regulatory issues. We want to ensure Indian companies aren’t at a disadvantage when it comes to critical regulatory issues.”
In early June, a bunch of startup investors, with around $800 million in capital, banded together under the Funders Forum Collective to take on foreign investors and to act as an advocacy platform.
With India’s ecommerce market expected to top $1 trillion by 2021 — according a February report from the Retailers Association of India and Deloitte — the battle is only expected to intensify. No matter who wins, the customer shouldn’t lose.