VCs: Net services companies not lived up to expectations

Televisionpoint.com Correspondent | Mumbai
Internet services companies, which have been among the most targeted sectors by venture capital (VC) funds in the country, have not quite lived up to the expectations set two years ago, rue VCs.

"With broadband penetration and PC affordability still an issue, internet companies have not met the expectations we had set two years back," said Sachin Maheshwari, principal at Draper Fisher Jurvetson (DFJ) India, which has funded many internet startups including naseeb.com and seventymm.com.

According to Venture Intelligence, about 21 per cent of the VC deals struck between July 2008 and June 2009 were in internet services. The value of these deals was to the tune of $ 120 million.

Some VCs said they earlier expected the number of internet users in the country to touch 80 million by mid 2010. However, with the number of users hovering around just 40 million, the traffic is too low to generate meaningful revenues.

"Companies relying on online advertisements for revenues will find it difficult to sustain business on account of low internet user base," said Samir Kumar, managing director, Inventus Capital Partners.

The internet advertisement revenue size in the country is $ 200 million, a majority of which is generated by Google. Ritesh Banglani, senior investment advisor, IDG Ventures India, said, many internet-based companies have not yet found the right business models.

"Overall as a market, the internet space has been sub par. The business models that work abroad do not necessarily work in India and those who have adapted them to India have been successful," Ritesh said.

For instance, e-commerce websites have low gross margins of around 10 per cent, which do not cover the huge logistical expenses the companies have to incur in India. Startups in the emerging media space like Meravideo and Apnatube have failed as they did not localise enough and bring in sufficient ad revenues.

According to Alok Mittal, general partner, Canaan Partners, the most successful internet companies in the country are those that are subscription-based or lead generating like naukri.com.

However, even these models have not evolved over a period of time with only job, matrimony and travel portals doing well. VCs said that other portals such as education and real estate do not offer the right value proposition to users and hence have not gained any traction.

Another vacuum is in the back-end operations where companies act as technology enablers as opposed to being involved in customer acquisition. Here, startups such as advertising network company Ozone Media get a piece of the advertising revenues, but save on huge customer acquisition expenses.

However, VCs complain that not many companies exist in the space. Despite not showing great traction at this point of time, internet companies are still among the favoured as they are positive about its prospects.