Mumbai: Kartik Hosanagar, one of the youngest tenured associate professors at Wharton School of the University of Pennsylvania, dons many hats. While his teaching and research focuses on Internet media and marketing, he is a co-founder of Yodle Inc., a venture capital-backed Internet marketing firm, and has invested in a couple of start-ups in India. He has also served on the advisory board of Milo Inc., acquired by eBay Inc. in December, and has been a consultant for companies including Google Inc., Nokia Oyj and American Express Co.

Digital gap: Hosanagar says the fundamental difference between Internet connections in India and China is that the latter’s government has spent money in getting fast broadband connections at a low price

India has crossed the 100 million Internet user mark. Has the country achieved critical mass in terms of these numbers?

Yes. In a way, this is a very important number, since it provides a big enough market for large firms wanting to play in it. But it’s important to understand what these 100 million users are doing on the Internet. One is that the connections are slow (256 Kbps and above), and do not compare to international standards (1 Mbps and above). This proves a deterrent especially to media companies in bandwidth-heavy operations like downloading of music and videos. Second, it’s important to understand how many hours or minutes users are spending daily on the Internet.

The numbers in India do not compare well with that of China and the US either. (China ranks No. 1 in the world with around 485 million Internet users, followed by the US with around 245 million users, according to Internet World Stats. India comes a distant third with around 110 million users.)

Also, from a commerce standpoint, how many users will be willing to engage in e-commerce? That’s a very negligible figure, since the payment infrastructure and distribution infrastructure are lacking.

In the US, payment is a non-issue. You can deliver goods to them through UPS or FedEx. But in India, companies like Flipkart have to introduce their own payment mechanism and distribution infrastructure. China, on the other hand, has great fundamentals for e-commerce. They have crossed the 100 million mark meaningfully. In that sense, China is way ahead of India. The Chinese government has spent money in getting fast broadband connections at a low price. And that is the fundamental difference.

What’s your perspective on the fate of Internet start-ups in India?

I’m definitely concerned about the ability of Internet start-ups to scale up, which is important. In the short-term, we will see some churn taking place in the Internet industry, with some start-ups scaling up and others falling along the way. But I doubt it will resemble the earlier dot-com boom_and-bust story (around the year 2000).

However, I’m bullish about the long-term prospects of start-ups in India. We know that some really big companies will be built in this space. But we do not know which ones and in which areas. So a lot of investors will experiment with start-ups while new companies will spend money in the hope of making it big.

It’s going to be very similar to the situation in the late 1990s in the Silicon Valley. Some of these companies will survive; others will fall along the way. But they will do a major service to the Internet economy, 5-10 years down the line. They will spend a lot of money in creating awareness, making consumers comfortable with the Internet, and (with) buying and transacting online.

Do venture capitalists understand this space, given that the technology treadmill moves very fast?

Early-stage investors often do not have as much data, and expertise is often built on data. So, in many ways, they buy a long-term story and that’s why they initially spend some money without knowing whether they will get the returns. Later, they dig deeper. They will make many investments that in hindsight will look foolish. But it’s partly the game they are in. Moreover, most venture capitalists are not very familiar with the Indian market, and since they do not have an Indian context, they make many mistakes in the initial phases. Most VCs, anyway, have a 90% failure rate while looking for that one big hit to get a return on their investment. The question is whether they will (get) that one big hit like Amazon from India. We are definitely not at the point to say that we have a big market over here. So it’s currently difficult to justify the crazy amounts of money that investors are spending on start-ups. The market will eventually look up but the current valuations are suspect.

So what needs to be done?

India should have a better broadband infrastructure. We need to target a population that is literate and has discretionary income. If you put together these two parameters, the 1.3 billion population figure is rendered meaningless. In China, the one billion figure is meaningful, because it has a huge market that fulfils these two parameters. Indian start-ups need to copy models not only from the West, but also those from China.

What about your association with start-ups in India?

I have played a role in a couple of start-ups in the country, both as a seed investor and adviser. The first is AKG Technologies, whose first product is a video entertainment portal called The company was launched in the summer of last year and has seen good progress. But the bottleneck is to scale it up to a level that will interest other investors too. In the US, one million users is an important landmark, since US investors believe that these numbers can be monetized. Such is not the case in India, where revenue is the criterion. Later, $50-75 million (Rs 247-370 crore) makes you interesting enough for late-stage investors, especially from a point of making it a publicly listed company.

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