A new class of technology companies is emerging in India that is very different from the traditional information technology (IT) outsourcing companies. These companies are born into an era that is being redefined by the Internet, mobile Internet, social media, e-commerce and gaming.
In India, the deployment of next-generation telecommunications networks will lead to an increase in the number of these new companies as Internet penetration, and hence, usage increases. According to PricewaterhouseCoopers, India will have more than 100 million mobile broadband users by 2015, and this growth in consumption is a key driver behind the development of these new and interactive technologies.
Venture capital investors are showing keen interest in these new Indian companies. Similar companies in the US have proved the viability of the business models used by this new breed of companies that focuses on social media and mobile Internet. In some cases, such as Zynga (social gaming), investors stand to gain incredible financial returns if public listings of these companies are successful.
While there is strong investor interest in these companies, it is unclear at this time how similar companies in India will provide an exit to investors. Technology mergers and acquisitions are virtually non-existent in India because of the lack of a strong technology acquirer base.
Given the lack of valuation benchmarks for these new companies in India, it is not clear how public markets will value these companies. They may be compared to traditional businesses or, worse, fail to list due to a lack of investor appetite. This emerging class of Indian technology companies would do well to start positioning itself for a potential listing in the US to maximize shareholder value.
At present, the American market seems to have an enormous appetite for public listing of such companies, as demonstrated by the successful initial public offerings of social networking company LinkedIn and Internet radio provider Pandora.
Investor frenzy around the anticipated future listing of other Internet category leaders, such as Groupon (deal-of-the-day site) and Facebook (social media), is at a level not seen since 2000. While some debate that this is a sign of a tech bubble, the fact remains that many of these business models have generated unprecedented revenue growth.
It seems US investors understand the dynamics of investing for growth versus profitability, to claim and retain a leadership position in any given category. The primary reason for considering a US listing for Indian Internet and social media companies is that US investors understand the risk-return profile of these deals and can price them better than Indian investors.
The US listings of Chinese Internet companies Dangdang (an online retailer), Renren (a social networking site) and Youku (a video site) have vastly exceeded expectations, and this data can now be used as a proxy benchmark for Indian companies.
The biggest obstacles to a listing in the US are the legal and tax implications of changes to the shareholding structure of a company. Particular care has to be taken with respect to tax implications for company founders and Indian investors as the combination of restructuring and a share sale can trigger taxable events.
Another big obstacle for an Indian company is understanding the accounting and compliance requirements of a public company in the US. Both these issues take significant management bandwidth, and are best addressed early in the process, with appropriate professional guidance.
Chinese Internet companies understand the appetite of US investors and have over the past few years started listing on the US exchanges. Thirty-nine Chinese companies listed on US exchanges in 2010, and that number may very well be surpassed in 2011. Most of these listings saw prices soar to a significant premium, and it’s only recently that some of these stocks have begun to correct.
Only one Indian Internet company, MakeMyTrip, has listed in the US. This is partly due to an issue of critical mass: Indian Internet companies are under-represented because English-speaking consumers generally use equivalent services provided by US companies. For instance, an online travel booking site such as Expedia is more familiar to an American consumer than MakeMyTrip, which mostly caters to an Indian audience.
This will change over the next few years as social media and mobile Internet companies develop local usage models such as social commerce and location-based services. As the Internet ecosystem in India improves over the next few years, I look forward to more Indian technology companies listing in the US.
Sudheer Kuppam is managing director at Intel Capital Asia-Pacific. The views expressed are his own and not that of the company.
Respond to this column at email@example.com