Musings #16: The Growing Internet Economy

I had written about the evolving Indian Internet landscape in 2017 in this blog, "What's online India - 2017." Since then, a lot has happened around the world, including COVID-19. Today, I wanted to share some observations on what has changed and how it relates to founders in the Indian startup ecosystem, particularly in the new COVID-19 world

Before diving deep into India, let us take a quick look at the global markets (table below). Seven out of the ten most valuable global companies are technology-driven and heavily influenced by the growing internet economy. In the last five years, these seven technology companies, on average, have grown more than 220% and have a combined market cap of close to $7.9 Trillion (58% of the top 30 companies' total market capitalization). In contrast, the rest of the top 30 companies have added only 35% in the same period and makeup only $5.8T. It shows the extent of the internet economy's dominance globally.

You might wonder how India compares against the US and China. As per this study done by the consulting firm Bain, India trails China by around seven years in internet users and eight years for online shoppers. As you can imagine, internet usage has to go up first in terms of consumption, and then online shopping follows that.

Another study by Goldman Sachs, published recently, titled "India Internet - A Closer Look Into the future" dives deeper into this topic. I have picked a few selected charts from this high-quality 100+ page report to understand better the Indian Internet economy's current state and its projected evolution. This report lays out that Internet Access is no longer an issue in India. With costs being cheapest across the world (at $0.2 per GB), Indian users consume $14GB per month and spend an average of 3.5 hours on the internet every day. The chart below clearly maps out the overall internet user base in India across various categories.

Goldman Sachs projects the overall Indian Internet industry to grow at a 24% annually to reach an overall market size of $177B by 2025. The main sectors driving this growth are E-commerce, Travel, Food & Ride-hailing, Gaming/Video, Advertisements, Education, and Fintech. Though a little complicated, the chart below nicely summarizes how these various sectors will evolve over the next five years

Let us take a closer look at e-commerce, which is projected to be more than $112B (currently at $32B) of the overall $177B market. At this time, e-commerce is less than 5% of India's overall retail market and is projected to grow to 12% by 2025. The following chart shows the various sub-sectors within e-commerce, and the biggest projected drivers are grocery ($35B) and fashion ($16B).

From an ecosystem point of view, in addition to the growing internet access that we already discussed, India now has a very stable digital payment infrastructure, thanks to the Unified Payment Infrastructure (UPI), which is best in class across the globe. Also, we have a good logistics network that can deliver e-commerce across most corners of India. These are the key enablers to make the projected growth feasible. The following two charts show the results of these infrastructure changes.

Now, let us switch gears and look at how COVID-19 has impacted the Internet economy. If you look at China and the US, COVID-19 has pushed the internet economy up (after initial supply glitches). If you look at China, internet penetration in e-retail has jumped up by 7% this year, and in the US, it has pushed it up by 4% (that is the same growth that the US had seen in the prior four years - and these numbers in absolute terms is already very large given the size of these economies).

In India, the effect has been more nuanced. The two-month lock-down affected anything that had a physical delivery component (especially in non-essential categories). There are industries like Gaming and EdTech that saw some excellent tail-winds since their delivery models were purely online and have structurally benefitted during this period. And the same is true for essential categories like grocery. But, if you look at most of the other industries that involved a physical component, they took a massive dip during COVID-19 lock-down and are at various recovery stages as outlined in the charts below.

But, if you net out everything, India is well-set for the spurt of Internet economy companies to grow in the new COVID-19 world (currently and post the pandemic). I want to close with this slide that we recently published at work, where we captured Accel's journey.

When we started, the overall Indian GDP was about $1.4T, and India had only 60M internet users. At present, India is a $3.2T economy with 600M internet users and is projected to grow to >$5T in the next decade. As we saw, just the consumer side of the internet economy is projected to grow to $177B in the next five years. And, across every sector of the Indian economy, be it consumer, Business-to-Business, Finance, or Healthcare, we see internet touching lives ubiquitously. And we see technology-driven startups disrupting incumbents in every one of these massive sectors.

Questions to Ponder

As you digest this information, think about the industries and sectors that most fascinate you and the opportunities you have observed to improve those sectors using technology. Is that something you are passionate about? If so, is it worth starting up to solve this problem over the next decade?

Spotlight

As you ponder on the above question, please listen to this fantastic podcast that got me started on this whole Musing. John Collison is co-founder of Stripe, which, in his words, is on a mission to increase the GDP of the Internet. He covers many topics, including the growth of the internet economy, Aadhaar and UPI in India, growing startups outside Silicon Valley, speed as an advantage for a startup, and the importance of capital allocation as a CEO.

Work Corner

Talking about the growing Internet economy, if you are working on a startup in the Indian Consumer technology space, here is an excellent chance for you to learn from outstanding coaches who are experts in this space.

That's it for this week. Look forward to hearing your comments

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