In India, you can't have 10 big horizontal e-com players; consolidation is imminent: Alok Mittal of Canaan Partners

Canaan Partners is an early-stage VC fund which started investing in India back in 2006. Till date, it has 13 portfolio companies across sectors like e-commerce, enterprise technology, analytics and more. caught up with Canaan's managing director Alok Mittal at the TiE India Internet Day event, recently held in Delhi, to talk about its investment strategy for the current year, his view on popular sectors, exits from previous investments and more. Here are the edited excerpts.

What's Canaan's strategy for this year? What about the sectors you would be investing in and in which stage?

Our sweet spot is $2-5 million investment, typically into companies that have some degree of proof of concept available, but they may or may not generate revenues. Our broad area of investment is tech-enabled services and it will continue to be so. Within that space, we have so far invested in consumer internet, offshore services, mobility and payments. Among these, we might have focused a bit more on payments and mobility.

What sectors, or rather sub-sectors, within tech-enabled services will be hot this year? What looks interesting to you? I don't feel something similar will happen to any particular sector like what happened to e-commerce last year. The market seems to be a mixed one as far as investment goes. It's not a pessimistic market and deals are happening. But then, it's not a hyped-up market either. There doesn't seem to be any specific sector that will suddenly rise to prominence. It looks like there is a strong deal flow in multiple areas. Consumer internet continues to do well and the classifieds space looks interesting.

What are the various whitespaces you see in the currently popular sectors?

Classifieds, mobile payments, mobile app ecosystem are some of the sectors which I find interesting and which have the market opportunity. We see both gaps and whitespaces in these segments.

What's your view on the so-called e-commerce bubble? Has it burst now? Have the VCs started looking at different metrics for e-commerce companies?

It hasn't burst yet. But the market is already too crowded. If we count even now, we will find 10 horizontal, well-capitalised, serious e-commerce players in the market today. Out of these, quite a few may survive but only 2-3 will create value. Going by the Indian market size, you can't have 10 big horizontal players. So in this scenario, consolidation is imminent.

As for VC investments, the metrics are well-known – unit economics, lifetime profitability, potential to scale and differentiation. There is nothing new in the metrics; even two years ago, things were the same. E-commerce companies should begin with the differentiation metric – that's the starting point.

Going forward, are you going to review your investment strategy – be it quantum or industry segment or number of investments or stage of investment?

Yes, we do that on a regular basis. We constantly review the space where we are investing or the stage when we are putting money in companies. So far, we have always concluded that we are happy with the progress we are making. We will continue to focus on early-stage technology companies and we will continue with the deal pace that we have set for ourselves – around 2-3 deals a year.

Finally, what is the VC sentiment now? Have you become more cautious?

Yes, we are cautious. Although it depends on whom you ask, most of us are much more cautious, compared to 2011. That was the time when the market really took off. The year 2012 was a bit flat and as of now, it is hard to predict how this year (2013) will be. But we have certainly become very careful.

(Edited by Sanghamitra Mandal)

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