Welcome to the inaugural blog from Filter Capital, and the first in a series of posts which will outline the types of opportunities we wish to pursue at our firm.
A Young, Urban, Connected India
It’s no secret that India provides one of the world’s most compelling macro opportunities for technology investors. The country is expected to become the world’s third largest consumer market with over 100 million middle-class households over the next decade. The number of internet users will increase from 300 million to more than 800 million, thanks to the proliferation of low-cost smartphones and the world’s cheapest data rates.
Meanwhile, India will continue to be a young country — the average age is expected to only rise from 27 to 30 in that timeframe. This young, always-on, digitally connected, increasingly wealthy and urbanizing population will transform how Indians live and how they work.
Tech Opportunities That Excite Filter Capital
India’s compelling macro story means that there is tremendous potential for technology business models that have already become popular the world over — such as consumer internet, software, e-commerce, hyperlocal, on-demand, social networking, and mobile payments to name a few. However, key to their success will be their ability to tailor products or services to address local requirements. This won’t be easy, given the fact that India is a diverse and heterogeneous market. India is also not a wealthy country, which can often result in end markets being deceptively small, even as the competition is intense. As a result, businesses and entrepreneurs will have to be patient in order to justify the investments. However, the long-term fundamentals of India’s macro story are firmly in place, and entrepreneurs willing to wait for the target market to develop will potentially benefit in very big ways.
The past few years have witnessed the emergence of many globally relevant, but India -specific technology businesses. Examples include mobile classifieds, marketplaces, and on-demand apps connecting buyers and sellers efficiently and at low cost; e-commerce companies offering Indians — especially those in Tier 2 and Tier 3 cities — price, selection, and convenience; online and electronic payments acceptance platforms connecting consumers, banks, and merchants; and India-based software-as-a-service providers that target global and regional markets. In our view, many more such compelling technology opportunities will emerge in the years to come.
Tech-Enabled Opportunities Are Also Poised For Growth
The technology opportunity in India isn’t limited to consumer internet, software or mobile payments. The impact of technology is being felt across all industries, whether in retail, financial services, logistics, education, or health, as technology is driving increased reach and efficiency in all of these sectors. In these sectors, we have observed the emergence of entrepreneurs not building pure technology businesses per se but aspiring to change the way their industries operate through a differentiated use of technology.
Examples of such tech-enabled opportunities include organized retailers which engage with customers online and nudge them to transact in the store; financial products distributors which offer online price comparison features, but leverage call centers or agents to close a sale; and logistics companies which utilize technology to improve asset utilization and monitor driver behavior.
Low Penetration of Organized Infrastructure
While technology’s convergence with traditional business models is occurring the world over, this trend is particularly relevant in India given the low penetration of organized infrastructure of any kind in a nation of 1.3 billion people. A vast amount of new infrastructure will be built in the coming decade — and much of it will be digitally enabled. We first witnessed this leapfrogging effect when mobile telephony eclipsed fixed line telephony two decades ago; new examples emerge every year.
Case in point: online retail comprises only 3% of the total retail market in India and organized retail itself comprises only 7%. The next generation of organized retailers in India simply cannot ignore the internet. Similarly, the number of smartphone users (300 million) has eclipsed the number of credit cards (36 million) and point-of-sale terminals (3 million) in circulation. The implications on consumer lending and payments business models could be substantial.
The Mandate of Filter Capital
Whether or not they are technology business is beside the point. What matters is that these “tech-enabled” businesses could create opportunities which are as compelling for growth investors as “technology” business models.
These two themes — technology and tech-enabled — form the mandate of Filter Capital. The firm will target opportunities in such technology-centric emerging sectors where companies are harnessing the special demographics spanning Indian consumers and businesses, while expanding beyond India’s borders into regional and global markets. In more established sectors such as financial services and consumer, Filter Capital aims to partner with entrepreneurs who seek outperformance through their differentiated use of technology.
Over the past decade, hundreds of foreign and domestic investors have entered the market, deploying tens of billions of dollars — from angel investors underwriting business plans to mega-funds leading financing rounds in the hundreds of millions of dollars — across a wide variety of technology and tech-enabled businesses. Too much capital chasing too few deals? Or are there still interesting strategies to explore? In future blogs, we will touch upon these and other themes. Stay tuned.