In January 2016, Satyen Kothari spun off Cube Wealth from Citrus Pay, a payment gateway startup where he was one of the founders. Cube Wealth was meant to be a mobile banking company for the masses but that didn’t work out. Eventually last January Kothari pivoted Cube Wealth into a wealth management startup. It manages the savings of people with more than 10 lakh in annual income, an ultra-small group of a few million people in a country of more than one billion.

Then consider Kunal Shah’s case. Even before he had decided what to do, Shah had secured more than $20 million in funding. The co-founder of mobile payments startup Freecharge—which counts as the second-biggest exit in the startup ecosystem—had investors queuing up offering their money. He could have raised whatever amount he wanted. Yet, after months of research, with the growing consumer internet market beckoning and an apparently unlimited supply of capital at his disposal, Shah chose to start a business only for people with credit cards. Even within that group only for those with high credit scores, a group that comprises less than 10 million people.

India’s missing middle—as The Economist phrased it, referring to the meagre spending power of the country’s vast middle-class population—has an influential set of believers: many of India’s most successful internet entrepreneurs.

Internet usage in India has gone mainstream. By all accounts more than 500 million Indians will have smartphones by 2022 or 2023. The economy is expected to continue to be one of the fastest-growing ones in the world, yet so many of its most successful internet entrepreneurs are just not interested in the mass market.

Apart from Kothari and Shah, the new startups by Myntra founder Mukesh Bansal and Ibibo Group founder Ashish Kashyap cater to high-income earners in urban India. These businesses, Bansal’s CureFit, and Kashyap’s IndWealth, as well as Cube Wealth and Cred are ventures that can only serve a few million people no matter how fast the economy expands over the next few years. There’s not much scope for any of these businesses to expand their user base. Essentially they are betting that they can attract a few million users and keep generating higher revenues from these customers over the years.

The decision by these entrepreneurs to enter niche businesses and ignore the mass market reveals a lot about their view on India’s consumer internet market. More so given that all of their previous businesses were aimed at a far wider market; and their previous startups account for four of the six biggest exits in the startup ecosystem. For instance Shah’s Freecharge, which started out as a mobile recharge company, could potentially sell to every single Indian with a smartphone. But now all of these entrepreneurs have narrowed their sights on high-income and wealthy people who don’t require much persuasion to spend money.

This is at odds with the investor interest in startups and the internet space that is based on the assumption that the consumer market will continue to expand rapidly with increasing sales of smartphones and the accompanying growth of internet usage. Most internet businesses—transaction-based, subscription-based and advertising-based—that are being funded heavily are, to some extent, dependent on new ‘transacting’ users. Transacting users differ from registered users in that they actually buy things on a given platform.

“You may want to build mass market businesses but pretty soon you realize that the unit economics become prohibitive. India doesn’t have the spending power or infrastructure or ecosystem yet to support profitable businesses on the internet for the masses. This is something you understand deeply as a second-time entrepreneur," Kothari said.

“If you look at discretionary income, where people are able to spend beyond basic needs, that is only with 50-100 million customers. The per capita income of the rest of the country is too low to support discretionary spends. If one wants to build a business in India that makes sense and has hopes of being profitable you need to have customers who pay for convenience. And people who are likely to pay for convenience are people who have sufficient income that can compensate money for saving time. For instance the number of people Unified Payments Interface (UPI) has activated is still only 50 million, not counting people who are just using apps because there are cashbacks," Shah said.

The bigger picture

India’s consumer internet market has proved to be impossible to predict over the past decade. Unlike the far bigger internet markets such as US and China, which saw unabated expansion in their early years, the consumer internet market here has grown in spurts with periods of steep slowdown in between. From 2013 to 2015, there was a sudden boom in e-commerce and other sectors. Analysts published reports that characterized the internet space here as a gold mine. Those reports turned out to be wildly inaccurate very quickly. In 2016, the e-commerce market nearly ground to a halt before improving slightly in 2017. Last year online retail grew by 35% to $24 billion, its fastest expansion in three years, according to RedSeer Management, a consultancy.

Executives at Amazon and Flipkart, the two biggest online retailers, said growth in transacting users, which is a leading indicator of the health of the wider consumer internet market, was strong last year.

“Our new user growth is at 55-60%. Right now, it’s not a problem—new user growth is not a problem at all. The bigger growth is coming from tier-II and tier-III cities," Flipkart chief executive Kalyan Krishnamurthy said in an interview on 12 December. The number of Flipkart’s monthly active users was “less than 10 million in 2017, while it has jumped at least 60%" over the past 12 months, he said.

However, while the growth in new users on e-commerce platforms appears to be strong it is still very low on an absolute basis. Overall, there are only about 15-20 million users who buy from e-commerce sites on a monthly basis, according to e-commerce executives. That’s a paltry number in a country where more than 500 million have access to the internet. “The fact is that in India per capita income of most of the country is just not picking up (very quickly)," Cred’s Shah said.

The views of Shah and many of the second-time entrepreneurs are shaped by their first startups. A majority of entrepreneurs and investors who scored big exits during funding booms privately admit that their feeling is that of relief. There was simply no other way out for most of these startups. Becoming profitable and listing their shares publicly didn’t amount to more than wishful thinking. Raising capital continuously was their only mode of survival. In their second stints, entrepreneurs seem to be more wary of playing the high stakes game of large equity rounds. Though CureFit, IndWealth and Cred have raised disproportionately large rounds than their peers, their founders say this time they aren’t spending capital wantonly. “As a second-time entrepreneur you tend to want to build a business more sensibly. You want to build a profitable business, and not chase growth at all costs. Sure you want to raise capital to fuel growth but you don’t want to have to keep raising capital just to get by," Kothari said.

The mass market

To be sure, many new consumer internet startups like social commerce platforms Meesho and Shop101 and content companies like Byju’s, Sharechat and NewsDog are aimed at the mass market. These companies have together received hundreds of millions of dollars from investors. Additionally there are a few second-time entrepreneurs who are creating products for the masses. “There are opportunities to build mass businesses. For instance in spaces like mass transportation, mass shopping, credit, insurance. There’s large scope in such areas where the problems are deep enough and you can’t win just by offering discounts or heavy marketing," Kothari said.

One of Myntra’s other founders, Ashutosh Lawania, has started a doctor consultation firm called mfine that attracts users from smaller cities and towns. These users are deprived of reliable healthcare and have shown willingness to pay for such services. Two returning entrepreneurs, Aprameya Radhakrishna and Mayank Bidawakta launched a voice-based content platform Vokal late last year. Vokal is trying to create a community of users who share answers to specific questions based on their area of expertise. The product is aimed at the mass market. The company allows people to bypass keyboards and post stuff by speaking into the app.

“Now that smartphone and data usage has become mainstream there’s a massive opportunity to shape the internet in such a way that we create products for people in their languages and in the manner they are comfortable rather than waiting for them to learn English, type on a keyboard, etc. That means creating messaging apps, interesting content, newer ways to communicate in mediums like voice and in vernacular languages," said Radhakrishna, whose first company TaxiForSure was acquired by Ola for $200 million in 2015. He admits that the revenue per user will be very low compared with bigger markets like China given the relatively lower per capita incomes here.

“Yes the revenue per user will be very low because the spending power is much lower but if you get many millions of people to pay then you can build a big profitable business. For example, you will find that a lot of people who have low discretionary income still spend on caller tunes. That’s something most people with high spending power do not. So there is evidence that the masses are willing to spend if you provide something of value or even for emotional reasons. Businesses will try a variety of things like ads, transactions or a mix and see what’s the best combination. The model is not proven yet but you can do it," Radhakrishna said.

Investors said startups will need to find newer ways to attract users outside of the first 50 million who use consumer internet platforms several times a year. “Building for the next 200 million users is a massive work-in-progress," said Vinod Murali, managing partner at venture debt fund Alteria Capital. “There is consuming capacity but what works is still being figured out because of issues like language, payments and reach. You may need an omni-channel strategy and a different organization structure to reach this set of users to build trust. It’s not going to be enough to have good quality products and a good tech platform. You will need feet-on-the-street in businesses like ed-tech to reach these users and then of course a margin structure that justifies the sales force. You will definitely see more businesses cater to these users even though the issues of reaching them are still being addressed."

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