Web 2.0 world: This bubble is not about to burst

Last year, venture capital (VC) firms are estimated to have invested more than $32 billion globally. What's significant about that number, apart from its absolute size, which is more than 3 per cent of India's GDP, is the fact that it represents the highest VC investment in the last five years. In fact, some sceptics fear that the investment figures are rising to the bubble levels 10 years ago. But it is unlikely that things will turn out as bad as they did the last time around. VCs have become much more cautious, and no one has money anymore for ideas that only exist on PowerPoint slides.

In India, too, dotcoms made a strong comeback in 2006. Compared to just two investments in 2005 worth $17 million, there were 27 investments worth $166 million. What were the dotcoms that got funded? First of all, none of these was really early stage. More often than not, these were dotcoms that had managed to get to a certain scale and demonstrate a clear path to profitability. Therefore, you had Sequoia Capital and Battery Ventures investing $15 million in travel portal, Travelguru.com; Lightspeed Ventures and Sequoia putting in nearly $11 million in TutorVista, an online tutoring firm, focussed on the US market; and Norwest Ventures picking up a stake in Sulekha.com, a member-driven community portal.

An important aspect of the dotcom boom this time around in India, as much as the US, is the emergence of so-called Web 2.0 companies. These are websites that are built around surfer communities, and often depend on user-generated content to survive. YouTube, bought by Google late last year for $1.65 billion, is a classic example. According to data from Ernst & Young and Dow Jones VentureOne, $844.4 million was invested in 167 Web 2.0 companies in 2006-that's twice the money and deals in 2005. The median size of a Web 2.0 deal on a global basis was $5 million, compared to $3.3 million the year before.

Although no one knows how such ventures will make money, everyone agrees that Web 2.0 features are crucial to enhancing the stickiness of a website. Even old media companies in India are talking of Web 2.0 strategies to attract and build a loyal base of users. No one doubts that internet is the new medium, and that India-despite its 45 million internet users and Rs 240-crore online advertising market-will be a key market in the years to come.

Get Real

Governance is oftentimes an accident, rather an act founded in strategy. The happenings over the last few months-the rising rupee has left the exporters traumatised; inflation is turning out to be quite stubborn-could well set the stage for a healthy accident. Here's why.

Rather than calming the rupee to its earlier levels, the government should aggressively convert this opportunity to push through reforms in several sectors that are impeding the competitiveness of Indian industry-infrastructure bottlenecks, labour reforms, government-related transaction costs, to name a few key ones.

Given that exchange rate controls provide a critical competitive advantage for the exporters, letting the rupee firm up, without easing the other economic constraints, will undeniably hurt exporters. That said, the constraints must be worked upon in a time-bound manner. For, currency-led strengths come at a cost to the economy. When the rupee hardens, the Reserve Bank of India buys dollars. However, to avert oversupply of rupees in the market (which causes inflation), it 'sterilises' the rupees using government bonds.

Attending to real sector needs alone will not be enough. To enable the exporters to swim in the choppy high seas of global currency markets, the government needs to hasten the pace of ensuring full convertibility of the currency.

This way, the small exporter can avail of financial instruments at competitive prices to ride the currency volatilities in the market. For instance, let alone the rising rupee, which has appreciated 10 per cent in the last year, the currency has been fluctuating by an unprecedented 5 per cent in the recent months. At present, the cost of hedging is determined by a very small market comprising a handful of banks, rather than an exchange of the kind that trades stocks.

For this to happen, RBI, the foreign currency market regulator, needs to shift gears on two counts. First, ensure predictability in its actions-the decision to lay off the dollar came as a bolt from the blue, especially, since traditionally it has ensured a weak rupee. Secondly, it must accelerate the pace of introducing full convertibility of the currency, and not be weighed down by the possibility of a replay of the balance of payments crisis in 1990-91.

RBI must remember that it was the crisis that triggered reforms in the subsequent years on an unprecedented scale. De-control of government licensing in industrial activity was undertaken swiftly; import tariffs were scaled down.

Now again, we are faced with discomfort, albeit of a far lower intensity. Accelerating reforms in the financial as well as the real sector in quick time holds the key.

Lessons from UP

Winning formula: Mayawati gets her caste equations right

Politics, the old saying goes, is the art of the possible. Bahujan Samaj Party supremo Mayawati proved it yet again by storming to power in Uttar Pradesh. Since then, newspapers and television channels have carried lengthy articles and discussions on the whys and the wherefores of this development, so this edit will avoid adding to the already voluminous, and growing, body of literature on the subject.

Of greater import is the impact of her victory on national politics. If the old adage of Indian politics, that the road to Delhi starts in Lucknow, is true, then the up election results spell bad news for the two national parties, the Bharatiya Janata Party (BJP) and the Congress. The two parties have a combined strength of less than a fifth of up's 403-member Legislative Assembly. This does not augur well for either of them in the run-up to the 2009 general elections.

Mayawati's victory has important lessons for both. It shows yet again that fractious and single-point agendas don't work. Behenji, as Mayawati is called by her supporters, reached out to various special interest constituencies, like the Brahmins, the Muslims and a middle class worried about increasing lawlessness, while at the same time consolidating the Dalit votebank that forms the bedrock of her party's support base. In the process, she pulled the rug from under the feet of the BJP, which had taken upper caste support for granted, and the Congress, which fell back on its "First Family" for votes.

But BSP's new, and highly successful, social engineering experiment, which has been christened sarvavarna by sections of the media, is not really new. It replicates the umbrella coalition of special interest groups that was the basis of the Congress party's almost unchallenged sway over the state and, indeed, the country, in the first four decades of Independence. The only difference is that the coalition is now led by a Dalit-in sharp contrast to the earlier ones, which were inevitably led by Brahmins or Thakurs. It is only fair that a coalition of historically antagonistic castes should be led by a member of the most dominant faction and not the most privileged ones. In that sense, the up results also mark the mainstreaming of yesterday's subaltern.

Just as nature abhors a vacuum, so does politics. And Mayawati's victory has shown that given the right conditions, there's still space in Indian politics for a party that tries to accommodate every-or at least large parts of-society in its scheme of things. Unfortunately, the Congress and the BJP seem too tired and too myopic to claim this space.