Online presence helps build valuations and get VC funding easily- Starting Up-Today's Features-Opinion-The Economic Times

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.

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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.