Will the E-Commerce Bubble Burst in 2012?

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Internet-oriented companies are very much here to stay. There are north of 50-60 million users in India, even by the most conservative counts, which was not the case the last time when people got excited about the Web. Several billion dollars worth of transactions have already happened on the Web on travel sites. That, again, has never been the case earlier. There is no difference in the advantage of using the Net in India compared with anywhere else in the world — whether it is access or cost of the medium. There is a whole lot of data that backs up the fact that we are actually past the inflection point from the perspective of the adoption of the Net. So, in my mind, there is not an iota of doubt that the Internet, its usage and several business models on top of it are here to stay.

In India, a lot of things have changed. People have started spending real money online. If you look at the travel companies today, they are selling several billion dollars worth of products online. Three or four years ago, the number used to be practically one-fifth or one-sixth of what it is today. If you consider e-commerce companies, two years ago, there were hardly any. Today, I personally know of seven or eight companies that together sell more than $1 billion on an annualised run rate basis.

Now, is that as big as the US? Not by a long stretch. That will take a lot of time. But if you compare two years ago to now, it’s a completely different ball game. Two years ago, I don’t think anybody was buying televisions online. Today, between Letsbuy, Flipkart, Infibeam and Naaptol, they must be selling at least $100 million worth of TV sets on an annualised basis. And this number is growing very quickly. In two years, the e-commerce number has moved from nothing to a billion dollars per annum. This is pretty compelling growth. You are seeing real money now.

There is precedence to such growth. In the US, the process of buying on the Net is 17-18 years old. In Europe and Latin America, there is a lot of e-commerce that is already happening. India is not unique at all along the dimension of people buying stuff on the Net. But when you get to the details, India is different. India has a bad supply-chain. The logistics is just coming of age concurrently with e-commerce coming of age. Credit card penetration is low. Cash on delivery doesn’t even exist in the US. However, the convenience of buying on the Net is no more unique to India than it is globally, not to mention choice and then, over time, even pricing.

As for valuation, I think a lot of companies are being valued reasonably. Some companies have gotten valued fairly high, but it is more the exception than the norm.

One of the things that you’ll see in 2012 is the separation of the men from the boys as some of them mature and others die. All the companies will feel the heat. Several of them will have to start scaling. The skills they need to scale are different from the skills they needed to enter the fray. It’s the difference between Yasser Arafat being a revolutionary and running a government. They are two different things.

To get to the point where one has got credibility, companies have to go through a lot of heartache. For smaller companies, that is going to be even harder.

Still, I am pretty bullish on the sector. I think there is a lot of opportunity and a lot of promising companies are there that will do well.

Ashish Gupta is senior managing director and co-founder of Helion Ventures. He serves on the boards of several companies, including Naukri.com.

(As told to N.S. Ramnath)