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Since its launch in 2016, the Unified Payments Interface (UPI) has triggered a digital payments revolution in the country, and the numbers bear out the assertion. According to the National Payments Corporation of India (NPCI), UPI transaction values have risen from Rs 3 crore in August 2016 to 4,156 crore in August 2017, to 54,212 crore in August 2018, to a whopping 9,60,586 crore in March 2022. There were no transaction fees, and no drawn-out procedures that usually precede an NEFT transaction. It seemed like the QR codes had become a part of our daily life—ubiquitous, almost inescapable.
Yet, it would come as a surprise to most people that, even with the large-scale adoption of UPI, 50 per cent of all ecommerce purchases in the country are conducted cash-on-delivery (COD). And, just over a tenth of Indians have ever shopped online, compared to 60 per cent in the US and 50 per cent in China.
India's entrepreneurial growth touched dizzying heights in 2021, and the 'Indus Valley Annual Report 2022' released by the early-stage venture fund Blume Ventures is an amalgamation of fascinating data-driven narratives (like the one mentioned above) that throw into sharp relief the self-contradictory contours of the Indian growth story. The team has used 'Indus Valley' as an annotation to sum up the the rapidly evolving startup ecosystem, ranging from Bengaluru to the National Capital Region (NCR), Mumbai, Pune, Hyderabad and Chennai—the hubs of innovation and entrepreneurship in India.
You can read the full report here.
A few interesting points from the report:
The number of mobile internet users in India jumped from 445 million in FY19 to 688 in FY22, even as the cost of 1GB of data dropped from Rs 268 in 2014 to Rs 6.6 in 2021 (courtesy the Reliance Jio disruption). However, a lot of the internet is burnt on content consumption and video calls.
Much of the heavy lifting on consumption is done by a slim class of consumers, about 10-12 per cent of the population, though still sizeable at around $100m.
The startup ecosystem is growing at a breakneck pace, with India securing the fourth largest VC funding in the world, with half of the startups hailing from the sectors of edtech, fintech, enterprise Software-As-A-Service (SAAS), Retailtech, BFSI and healthtech. From 2011 to 2020, India birthed a total of 39 unicorns. In 2021 alone, there were 44.
On a broader note, fintech is at a high point, with players like PayTM and PhonePe proving themselves more than capable of competing with legacy institutions; SAAS startups are India's flagship exports, accounting for 12 per cent funding and 10 per cent direct jobs.
Ecommerce is on a high note, accounting for six per cent retail sales in 2021, doubling from three per cent in 2019.
In the field of edtech, there was a confluence of favourable scenarios: China started heavily regulating its industry (resulting in 80 per cent drop in funding and a lot of that money moving to India), and coronavirus lockdowns had lasting impact on education. 57 per cent of the funding went to platforms like Byju's, Unacademy, Eruditus and Upgrad. Edtech is also going global—Byju's, for instance, is likely to close FY22 with $400 mn from outside India (25 per cent of total revenue).
The report predicts that, by 2030, Electric Vehicles (EVs) will rule the roads and the Open Network for Digital Commerce (ONDC)—a protocol for open digital commerce infrastructure—will have an effect not dissimilar to UPI; a wave of backend-light startups will emerge, leveraging public APIs.
In conversation with THE WEEK, Sajith Pai, who is the co-author of the report, expanded on some of the salient points and delved into important themes like EVs, edtech and ecommerce. Sajith, a long-time media executive turned VC, supports investments in EdTech, HRTech, SMB SaaS and B2B marketplaces at Blume.
Edited excerpts:
Q. How and why did the Indus Valley report come to be?
We created the Indus Valley report to contextualise the Indian startup opportunity, and make sense of the ecosystem. Now [more than ever], it is becoming a significant value creator, and a key engine of growth for the economy. The main audience will be observers of the Indian startup ecosystem, policymakers, Indian and global investors, limited partners (LPs), and anybody trying to make sense of the Indian opportunity.
Q. The report had some very interesting insights on a lot of data sets. You pointed out that even though a slim class of consumers [about 10-12 per cent of the population] do all the heavy lifting, they are still quite sizeable in absolute numbers [at around 100m]. Similarly, you had quoted statements that the top five million customers drive 60 per cent of online sales in India. So, is there a very weird scenario where the Total Addressable Market (TAM) in India is simultaneously overestimated and underestimated? As an investor, how do you look at it?
In India, for everything you say, the opposite is also true. We have a very large population. So, 10 per cent of that population is 100 million, and we have 100 million high-end consumers. Again, of that 100 million, a very narrow sliver drives the engine of consumption. So, it is always a challenge for Indian investors. Investors are attracted to India primarily because India is a country where leapfrogging happens incredibly fast. So, it is a country with only 18 million WiFi/fixed line broadband connections, but close to 600-700 million internet connections. In India, we adopt things really fast. UPI is a testimony to that. So, the prospect of growth attracts a lot of investors, despite the seemingly low size of the market. Whether it is fintech or ecommerce, the gains and opportunities are huge.
Q. In the 2030 possibilities, you wrote about ONDC sparking a UPI-like change in the field of ecommerce. What is your outlook for the sector in the short-to-midterm, and do you see them going vertical?
Ecommerce is a particularly interesting study. India is a $2.6 trillion economy. We are about $800-900 billion in the retail market, and ecommerce is about $50 billion. So, it is just about 2 per cent of the overall GDP, and 3-3.5 per cent of the retail market. It is very early days for ecommerce. There are some interesting facets to the sector in India. In a lot of countries with comparable markets, there are many players [in the fray]. Take the case of Brazil. The top player in Brazil has barely 20-25 per cent of the market share. In India, two big winners have emerged in horizontal ecommerce—Amazon and Flipkart. This means that, of the entire $50 billion ecommerce market, two-thirds (nearly 75 per cent) is sequestered between the two players. There are really no good opportunities in horizontal ecommerce. This means the opportunity is largely in the vertical space. That is why we are seeing a lot of promising and flourishing vertical ecommerce startups in India, be it Nykaa, Lenskart or FirstCry.
So, India has many flavours of ecommerce. Right now, the flavour is quick commerce. Before that, it was scheduled deliveries. Before that, we had group buying [companies like DealShare], and social commerce [Meesho being an example]. India is a country where there is a lot of innovation in ecommerce. This is primarily because it is a fast-growing market, and there are already two winners well-entrenched in horizontal ecommerce.
Our belief is that, in India, the real consuming class is about 110 million. This 110 million [India 1] is looking for a lot of new, interesting ways of buying. On the other hand, the emerging 100 million from India 2 [the vernacular, aspiring, socially mobile classes] want new UIs [like DealShare, which started by offering shopping through WhatsApp]. So, in India, two different types of ecommerce tracks are emerging—one for India 1 and one for India 2.
Q. You mentioned this very interesting insight in the report that more than 50 per cent online shoppers use COD even at this time of UPI-driven digital payments boom. Can we minimise that to a question of lack of trust, more than anything else?
I would agree that one of the key reasons for COD is not really the desire to use cash, but more really a worry as to whether the product you purchased is the one you got. People want to touch and feel it, especially in fashion. You want to know whether the right item has come. So, India has historically been a little lower on the trust case.
Q. You mention EVs as a big theme for the 2030s. How do you view the future of the sector?
We, at Blume, are big believers in EVs’ ability to disrupt and leapfrog the internal combustion (IC) engine. We are actually beginning to see data points showing that two-three per cent of new registrations of two-wheelers are EVs. The registrations are also on the higher side for auto-rickshaws. Our view is that there are powerful drivers, government subsidy being one, for the industry. Our general view is that the total cost of ownership [combining all expenditure in purchase, operation and maintenance during the asset lifetime] has become positive in favour of EVs over the last two-three years. Our colleagues discovered that, as early as 2018, two-wheelers became TCO positive. That is one of the reasons why, when it comes to two-wheelers, we will end up with just under a million units of EVs sold this year. The numbers are increasing. [Adoption of] Electric cars will be much slower. But, we will likely see considerable action for two-wheelers as well as three-wheelers. Blume is betting heavily on this space. We have four investments—Euler Motors, Yulu, Battery Smart and ElectricPe—and we are going to see real growth in all these sectors.
Q. As you mentioned in the report, edtech in India is trying to go the SAAS way, trying to build for a global market, with companies like Byju's making some tangible moves in that regard. How do you see this playing out?
I am a big believer in the edtech story in India. We are investors in Unacademy, Classplus, Leverage Edu. We believe that when it comes to education in India, whatever data you look at, there are significant underserved communities across all income streams. For the rich, there is a desire to get better quality of learning. For the poor, just access to learning matters. And, we believe that, with edtech, Indian startups have very nimbly and agilely tried to offer very relevant solutions. It started with test prep and tuition, and now they are slowly expanding. There are relevant solutions. Skilling is one area. Whether it is Scaler Academy, Upgrad, or Great Learning, companies have kind of tried to offer very smart solutions, specific solutions, to help overcome issues. In terms of the excitement surrounding it, edtech was in 2019-2020 what EV is now. In the early days of COVID, they delivered brilliantly. We continue to be big believers.