Madhav Oza entered the travel business well before the onslaught of internet, lived through the dotcom transformation of the sector and continues to enjoy a significant market share today. But he has been unable to attract venture capital investment for his company Bluestar, while wannabe travel portals, with nothing more than a website, have successfully drawn such funding. VCs have willingly fallen prey to the technology hype in what is a sound brick-and-mortar business. “They only want to make a fast buck,” Oza says ruefully. “But they fail to do so as only 10-15% make a profitable exit.” Excessive VC attention to some sectors and virtual neglect of other opportunities has led to a wide array of over-invested and under-invested segments in India, industry watchers say. Not that the fancied sectors are pouring money or the less attractive ones are devoid of profit opportunity. But the VCs’ tendency to embrace sectors, where others have succeeded, is creating a distorted scenario in entrepreneurship support across the country, they say. “It’s like a herd behaviour,” Oza complains. Even businesses considered VC friendly are hurt by this over-investment. For instance, fledgling travel businesses fashion themselves more as web portals with a predominant online model, rather than go through the pain of creating physical infrastructure and network. The logic is that the online presence helps build valuations and get VC funding easily. Oza recalls cases, where VCs funded fare discounts on travel sites out of their own pockets, and other cases where the companies folded up after the financial investors made their exit. The major victims of this beaten-track financial culture are the inventors of new products or technologies. Most of them are not business executives and lack entrepreneurship experience. All they have is the technical knowledge of their invention. Ideally, this should offer the maximum profit potential for venture capital houses, since there is value to be built from the ground up. But still, investors shy away from such ventures preferring to invest in the umpteenth search engine or yet another online exchange. VCs fail to invest in early stage start-ups, with high levels of innovation, as they are busy making late-stage investments, says Anil Gupta, a professor at the Indian Institute of Management, Ahmedabad. Even with all the buzz around innovation in many sectors, information technology and services form the VCs’ first priority. Even within services, business around outsourced contracts still get VC money, while new services are ignored, he says.
For instance, there aren’t many VC investors who understand or are interested in the farm sector, but bountiful opportunities lie there. With contract farming, farmer-corporate cooperation and newer market systems evolving, agriculture is increasingly becoming an entrepreneurial activity. Supply of seeds, herbal pesticides and nutrients are going to find robust demand in the coming years. Water purification, food processing products and no-chemical pest-control offer immense innovation possibilities.
Many entrepreneurs feel that the internet’s grip on VCs has not loosened even seven years after the dotcom meltdown. Within this segment, it is the oft-repeated themes like jobs and matrimony that get too much investment. Internet firms that deal with education, training, retail and financial services remain under-invested. Defending VCs, Rishi Navani of fund house Matrix Partners says funds prefer certain sectors considering a combination of market opportunities, management strength and return potential. The business needs to be highly scaleable for early stage funding. A great idea may really not be scaleable. But he also agrees that both VCs and start-ups are victims of herd mentality. Many VCs go by a shopping checklist to satisfy their limited partners or investment committee, taking care to do what other top VCs have also done. This is done to ensure that if something goes wrong, they wouldn’t be singled out for blame. They look for start-ups, which can expand quickly and can attract further investments in terms of next round funding or initial public offering. VCs love scale so that they can exit at the right time. Otherwise, they are not interested. The so-called “India Strategy” also plays a part in the business mix that venture funds go in for. These days, if you are doing business in India, it is mandatory to have certain sectors in your portfolio. The sectors that have caught the stock market’s fancy rank high on priority list, because companies in these businesses can be quickly packaged for an IPO. So, a real estate firm, where a big paper valuation can be built quickly and shares sold at a handsome premium, will attract VC devotion. Let innovation take a walk. On the other hand, a sector like power has no place on a VC’s mind because of its long gestation period, huge capital needs and the low potential for fancy valuations. VCs shrink away from business whose day of reckoning is far away. New Enterprise Associates, India vice-president, Ben Mathias says VCs generally look at sectors that they are comfortable with. “Most VCs with a US background have come from the tech industry and they focus on IT and ITeS. This is not because they don’t believe in the potential in other sectors such as agriculture, but because they don’t understand them sufficiently to evaluate the opportunities,” he says. Some like business mentor Sridar Iyengar feels that there is no area that is overexposed to funding. “We are growing at a good rate. We need investment in all areas. The amount of investment currently being made, which has been growing in the past few years, is still short of what is required and lags behind other countries,” he says. He says VCs would invest in a sector if they see earlier traction or opportunities. “One validation of that earlier opportunity may be one of them backing a project or company in that area. But to say the others are followers, implying that it is blindly done, is false,” he says.
Also, experience has shown that there are different paths to achieve a goal and that different teams will do it differently. “It is only natural that many teams are funded in the same space. In the end, most ideas are not wholly original. They are a better mousetrap. The game is all about execution. May the best team win,” he says. But, things may not remain the same for long and other sectors would attract interest as and when success stories start appearing, experts say. “We may be able to see some changes. Newer services for rural sector may start getting investments and also social enterprises, for which funding is almost zero, may start attracting some angels,” says Mr Gupta. A lot can be done if VCs can become a bit more imaginative and start looking at opportunities in nutraceuticals, herbals, water treatment, low-cost drugs, support for physically-challenged people, one rupee sanitary napkin for women (NIF has the technology from a Madurai-based innovator), a 15,000 wind mill by Mehtar Hussain from Assam being tested successfully in Gujarat for pumping brine solution, says Mr Gupta. There is no dearth of ideas, what is lacking is a robust mentoring, linkage with entrepreneurs and investment window. IIM-A has set up a forum for industrial interactions and an entrepreneurship club. Proposals from innovators as well as VCs are studied to help make the marriage or help both sides to reduce their transaction costs. And things are improving. Radix, a US-based company with an Indian subsidiary, has come up to take on 10 technologies with no upfront cost. It wants to explore their business development globally and then recover its costs from eventual successes. “We need many more Radixes, which provide a whole range of solutions to innovators and inventors and without any upfront costs, but exclusivity agreement for at least 120 days, which they may need to do complete evaluation,” says Mr Gupta. “If only angels and VCs were to invest in one percent of the 5 lakh technology student projects, we would have triggered 5,000 start-ups at very low cost,” he says.