Raja Jasti’s Blog - Renaissance Thinking

India, for all the talk of its technology power, is way behind in internet usage. Internet penetration in India is a mere 3%. It is an order of magnitude less than that of China which has 20% penetration. There are just two web companies that have gone public in the history. Imagine, just 2! Both with miniscule market caps. China boasts several much bigger successes that immediately come to my mind: Baidu, Tom Online, Alibaba, Tencent, Sina, Sohu. It is safe to say India’s internet potential is just that. Unrealized potential.

But there are examples of a few companies that show how the successful web companies inIndia may look like.  One of the few successful categories in e-commerce is the online ticketing. One of the most popular e-commerce sites is the one run by Indian Railways, a government organization (go figure that!), that sells train tickets online. I have been a fan a small web company in India called RedBus which is expedia for bus tickets. Many people travel by bus in India and this startup solves a real problem. Sarah Lacy wrote a nice post on this company at Techcrunch.

Silicon Valley and India have a cozy relationship, but a big question has resulted in friction, failed companies and millions in losses: When will the Internet catch on in India in a big way?

A few companies have done well and a few more are coming up, slowly but surely. But there are hardly any true breakout hits.

RedBus is pretty close. It’s essentially an Expedia for bus tickets in India. It sells about 3,500 bus seats per day, is the fourth most-trafficked Web site in India and has at least tripled its revenues year-over-year. The company sells seats for roughly half the bus operators in India, and that’s saying something: This is an insanely fragmented market that had next to zero centralization just a few years ago.  All of this has been built in three years on about $1 million in venture funding. (The company raised another $1.3 million in 2008, but it’s still in the bank. Investors include Helion, Inventus and Seedfund.)

Background for Americans: There are two kinds of buses in India—those that make stops and have ticket-takers on board and that go to one destination only and sell pre-paid tickets only. There are some 3,000 operators of the latter category and, before RedBus, there was no way to contact them directly. To get a bus ticket, you went to an agent. That agent only had inventory from a few bus lines. To book the ticket, he or she would call one person who was in charge of booking every seat on that particular route. There was a long wait time, and frequently the routes the agents knew about were sold out – meaning you had to change your travel plans, or find another agent who had different sources. Meanwhile there was no standardization on pricing and commissions. The agent simply wrote the cost on a piece of paper and if you wanted to ride, you paid it.

Now, RedBus has a central database that gets seats from half of India’s bus operators. It has done so well that it powers the bus ticket applications for most of India’s more general travel sites like MakeMyTrip.com. It also sells an OpenTable-like software-as-a-service product to help bus companies manage their own inventory and better integrate their inventory with RedBus. In terms of seats, it sells less than 1% of the 750,000 rides taken daily, but with several channels and few other easy options, there’s a ton of room to grow a big company.

Sama didn’t set out to build a company. I know that’s a cliché with startups these days, but it’s a rarity in Bangalore where the glamor of being a Web entrepreneur runs high and plenty of TechCrunch-reading kids save up money, quit for a year, try to start a company, and go back to a multinational if it doesn’t hit quickly. When RedBus’s mentor first suggested the company raise $1 million, Sama gasped. He hadn’t even thought in those amounts. His only immediate thought was: “If I had $1 million, I’d put it in the bank and make interest.”

It is a really an interesting read if you want to get an idea of enterpreneurship in India.

Here is a detailed story on the company which traces its beginnings, their struggles and how they solved those challenges.

Says Phani, “I knew there was a need and thought there was a solution, but I wasn’t sure how to make money out of it.” He continues, “At the time we were selected by TiE, there still were a lot of mixed opinions about what our identity should be. Some people thought we should operate a GDS (Global Distribution System) for bus operators, offering a transaction platform and making money by charging for each online transaction. Others said that if we did that, it would take a long time to recoup our investment because the operators weren’t yet technologically savvy enough for a GDS.”

TiE’s veteran advisors spurred the young engineers to resolve the problem by acting instead of relying too much on hypothetical analyses. Phani recounts, “Our mentors were of the opinion that we could start off if we could just solve the first obvious problem we saw, which was on the consumer side. We could launch a Web site and mimic the whole back end, even if it wasn’t automated at all. The first step was to get traction by adding value where that would be easiest. They told us just to go do that, gain recognition, and stand on our own as a business. Then we could move on to other things and worry about automating our operations. The TiE members really helped us take one option and pursue it relentlessly with more confidence.” 

Because the bus operators were not computerized, redBus could not simply tap into their existing systems in order to put seats online. To get around this problem, Phani and his partners adopted an old practice that had long pre-dated computers: block booking. They asked bus operators to reserve some of their inventory until an hour before departure time, just as off-line travel agencies reserve a fraction of a hotel’s rooms in advance. That allowed redBus to offer seats from multiple operators without knowing in real time how full any given bus would be. It also insulated the bus operators from worrying about scaling up IT systems and servers to handle holiday peaks in online traffic.

However, this decision created a classic problem: which came first, the chicken or the egg? Phani and his partners were among the first to ask private operators to allocate seats to them in advance. Once redBus was established as a volume seller of tickets, more operators would be willing to set aside inventory for them. But unless operators could be persuaded to do that, how could the venture build volume?

The only way to overcome this hurdle was through sheer effort and determination. redBus launched its service August 18, 2006 with just one operator on board. Recalls Phani, “I told the operator that we were a group of well-educated entrepreneurs who were experimenting in order to improve the ticketing experience for customers. I said I knew it would work, and asked if he would help us. He said that he would give me one week to show progress or forget it. I knew that during that one week we couldn’t sell tickets on the Internet, since that was too short a time period for a new medium. So I went to bus boarding points in Bangalore, told everyone our story, gave people my card, and said ‘Call me and I’ll get you a seat.’ That’s how we did marketing for the first two months: going to bus stops, giving out cards, and telling people one at a time who we were. Most of the customers pitied us; they figured that a founder was telling them this story, so why not give it a try? A lot of people in the IT sector were able to relate to us.”