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India Goes Digital - The Second Coming November 2016 AVENDUS Dear Reader, Pankaj Naik [email protected] How's the market? How long will it last? How sustainable are businesses? Karan Sharma We thought of posing these questions right upfront to you, as these phrases have been the [email protected] most typical conversation starters with both entrepreneurs and investors recently. The past Radhica Kaushal six months have been very unusual for the Indian Digital industry. Most trade pundits [email protected] predicted doomsday while optimists kept waiting for the next big believer to pump in those billions, however neither of those expected situations has played out. The market remained Sanskruti Barot tense, reminding us of those long drawn test matches on sub-continent pitches. [email protected] After more than two years of hyper activity and funding, the industry faced its first round of scepticism this year. The euphoria of international investors writing big cheques had decreased, global majors had established themselves in the local markets and start-ups across the sector began facing the ever so important question on pathways to profitability. Tough markets always cause casualties and distinguish the strong from the weak. The industry had attracted over USD 13 billion of capital in the last two fiscals, the momentum from that helped sustain businesses and business models which would not have lasted under normal market conditions. Investments fell off a cliff between October and December, 2015 formally declaring that “Winter had Come”. In the absence of freely available capital, many shut shop. But the resilient use opportunities such as these to focus on the fundamentals, drop overexuberance around growth, attract quality talent and buckle up for the long haul ahead. The focus has rapidly shifted to towards unit economics, sustainable growth, rationalized valuation expectations and reducing cash burn. Strategic capital, especially from China, did ease off some bit of pain. After three consecutive quarters of funding de-growth, the markets seem to be making some recovery now, with almost USD 1 Billion of capital flowing in the quarter ending September, 2016 -almost a 2.5x jump over previous quarter. An important trend to note here is that this is sans block-buster Unicorn financings, and mid-market companies are driving a bulk of this growth. India is an open and discovered opportunity. The last two years had brought about a race for financing and valuation that has worked against driving innovation and monetization. Most companies targeted the same low-hanging consumer pool and used incentivization to build traction instead of building compelling use-cases and driving engagement and loyalty. The rules of the game have changed and local incumbents are up against hyper- competitive and deep pocketed international players. They must out-innovate competition by solving underlying industry level problems. After giving away initial market share, we are now seeing local incumbents fiercely defend and in some cases, expand their share of the consumer's wallet. Emerging ventures are introspecting on what it will take to build businesses that are solving real problems, have strong moats and can potentially make a strong economic case. With 331 million users online, estimated to more than double in the next 5 years, the Internet economy in India is not demand constrained. In fact, what most Indian start-ups must solve is the problem on the supply side. Traditional sectors of the Indian economy suffer from significant supply gaps – India lacks adequate infrastructure in retail, healthcare, transportation, education and financial services, amongst other crucial sectors. October 2016 AVENDUS This report – “The Theory of Inevitability”, explores how technology is disrupting underlying Pankaj Naik industries and bridging the demand-supply gap by unlocking capacity, adding incremental [email protected] supply, improving distribution, and facilitating discovery. We delve into how tech-enabled business models across sectors can bring about efficiencies that reduce the capital Karan Sharma investment burden that India faces to meet its burgeoning demand. As this plays out, [email protected] leapfrog across industries is imminent. Radhica Kaushal [email protected] With local start-ups leveraging technology to disrupt traditional sectors of the economy and solving for supply constraints, we believe it is inevitable that Indian Internet companies will Sanskruti Barot win big in digital services. [email protected] Acknowledgements and Disclaimer AVENDUS Acknowledgements This report is the culmination of efforts of several people who contributed their views and the team who worked diligently to compile secondary data and conduct interviews of industry practitioners. We are grateful to the entrepreneurs, investors and industry professionals who lent their insights that helped enrich the perspectives we have been able to articulate in this report. We would like to thank Shefali Raj for her significant contribution to this initiative and for guiding the team while at Avendus. We also extend our gratitude to Monica Gangoly for her work on designing the report. Disclaimer This report is not an advice/offer/solicitation for an offer to buy and/or sell any securities in any jurisdiction. We are not soliciting any action based on this material. Recipients of this report should conduct their own investigation and analysis including that of the information provided. This report is intended to provide general information on a particular subject or subjects and is not an exhaustive treatment of such subject(s). This report has been prepared on the basis of information obtained from publicly available, accessible resources. Company has not independently veried all the information given in this report. Accordingly, no representation or warranty, express, implied or statutory, is made as to accuracy, completeness or fairness of the information and opinion contained in this report. The information given in this report is as of the date of this report and there can be no assurance that future results or events will be consistent with this information. Any decision or action taken by the recipient based on this report shall be solely and entirely at the risk of the recipient. The distribution of this report in some jurisdictions may be restricted and/or prohibited by law, and persons into whose possession this report comes should inform themselves about such restriction and/or prohibition, and observe any such restrictions and/or prohibition. Company will not treat recipient/user as customer by virtue of their receiving/using this report. Neither Company nor its afliates, directors, employees, agents or representatives, shall be responsible or liable in any manner, directly or indirectly, for the contents or any errors or discrepancies herein or for any decisions or actions taken in reliance on the report. The Theory of Inevitability AVENDUS The Theory of Inevitability Technology rules today's world 2.6 billion smartphone users globally. 3.2 billion people online. 2.7 trillion hours spent online in 20151.Technology's role in the global landscape cannot be overstated. From smartphones to connected cars, from work to our homes, technology enhances our lives, making the world a smaller place while simultaneously expanding opportunities beyond geographical limitations. The rapid evolution of technology has revolutionized not just developed countries but also emerging markets as diverse as Africa and Asia. 45 years ago, global stock markets were ruled by Auto and Oil majors like General Motors and Exxon Mobil; 25 years ago technology and telecom giants like IBM and Verizon first began to make their presence felt. In the last 5 years, tech has grown to account for over a fifth of the total value of the S&P 500. As the impact of technology spreads across the global economy, it is aggressively becoming the biggest value creator. INCREASING SHARE OF TECH IN GLOBAL MARKET CAP 18,609 4,002 11,645 11,697 11,534 2,720 1,929 2,307 1,820 182 1990 2000 2005 2010 2015 SNP 500 Market Cap (USD Bn) Top 20 Tech market cap (USD Bn) A study by Accenture and Oxford Economics estimated that “digital” technologies could add close to USD 1.36 trillion to the global output by 2020, contributing close to 4% of total global GDP2. That's equivalent to the size of the entire economy of South Korea. That technology will power global value creation and claim a larger share of the global economic output is not even under question anymore. There is an air of inevitability to technology's march. 1 http://www.bbc.com/news/technology-32884867 - United Nations 1 2 http://www.businesswire.com/news/home/20150310005258/en/Increased-Digital-Technologies-Add-1.36-Trillion-World%E2%80%99s The Theory of Inevitability AVENDUS The nature of tech is changing to consumer-tech At the same time, the flavour of technology itself is changing - a change that is evident in the composition of top tech companies. In 1990, the biggest tech company by market cap was IBM. From 2010 onwards that position has been usurped by Apple. Services and hardware contributed over 65% to total tech m-cap in 1990. In 2015, Internet and consumer tech contributed 38% while the share of services was down to 3% and hardware and mobile to 16%. In the last 5 years the share of Internet and consumer tech has more than doubled. In fact, the share of Internet and consumer tech

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