In part one of this three-part series, we talked about how the power law in venture capital remains unvalidated in its first decade in India. No venture-funded company founded since 2001 in India has delivered an exit worth over half a billion dollars.

In part two, we talked about three flavours of tech entrepreneurship in India—traditional, classic and unicorn—as it relates to the venture investment thesis. Traditional entrepreneurship did not fit the power law model, classic entrepreneurship failed to deliver it and replica-based unicorn entrepreneurship delivered in spurts but turned out to be a false start.

In this third and final part, I share my perspective on how we might see the mysterious power law play out in Indian venture capital over the next few years.

If the US economy is driven by consumption and the Chinese economy is driven by production, the Indian economy is driven by trade and services. As traders and service providers, our strength lies in our aspirational workforce that is hungry to learn new skills, assimilate new cultures and go beyond national boundaries. This characteristic is both a strength and a weakness when it comes to risking our time and money to create new markets or products.

Entrepreneurs and investors in tech start-ups are no exceptions to this rule. Their natural inclination is to import technologies and export products, import funds and export companies and to become service providers for big foreign firms.

In my view, this theme cuts through all three flavours of entrepreneurship. Whether this is good or bad, the trick is to probably understand that it is who we are.

Limited by my experience with Indian start-ups looking to get on the venture capital (VC) treadmill, a large proportion of them come across as traditional entrepreneurs. These are traders and service providers using generally available technology as an enabler to streamline their business processes to accelerate growth and reduce cost. These are profitable companies that can grow faster with more working capital. Their growth can be steeper, but will remain a straight line. For better or for worse, this is at odds with the VC investment model. After a certain size, they have the option to raise equity investments from private equity firms or growth funds of venture capitalists. At early stages, they must rely on bootstrapping, debt investments or the emerging space of venture debt. Investment returns in these start-ups are likely to be much better than putting money in the bank and will come through dividends or divestment to strategic buyers.

A growing proportion of start-ups I have met in the last couple of years comes across as unicorn aspirants with US or Chinese equivalents. They are inspired by the success of the current Indian unicorns and believe that they can replicate that model for their chosen market space. They have naturally aligned their trader and service provider gene to tap this opportunity. They are competing to build-to-spec faster than the next guy, customizing it for Indian conditions and trading a better deal to the investors. Investment returns in Indian unicorns and unicorn aspirants have been sparse but have managed to deliver the power law for early investors due to partial stake sale to late-stage global investors. However, this formula is unraveling as a short-term bubble.

On the one hand, there is a gap between late-stage investors’ expectation to get returns through initial public offerings or acquisitions in US public markets and the Indian unicorns’ readiness to deliver that within this decade. On the other hand, there is a gap between the scalability of these businesses in the US or China versus India.

Market spaces with equivalents in the US, China and other regions might be valid in India. However, it is reckless to jump to the conclusion that they would provide equivalent returns in equivalent time frames (except for opportunistic flips to new money eager to fulfil its own prophecy). Those following the US and Chinese equivalents will find that India will be more fragmented, returns will remain flatter and investments will remain illiquid longer. While this conclusion demands its own essay or a book, its headline would hint at the homogeneity of China due to a closed economic system, homogeneity of the US due to economics that favour technology systems, and the heterogeneity of India due to economics that favour human systems. The diversity of language, identities, social-economic objectives and democratic ways of the human network make this heterogeneity unique.

A large number of Indian consumers have connected to the Internet over the last few years, yet the supply chain and operations servicing the digital demand remain more human-powered than technology-powered. Start-ups that bring participants in the supply chain to digital platforms with high barriers to exit are likely to ride the technology adoption curve, regardless of where consumers flock that season. In order to reap the benefits of technology scale, the race for digital supply is far more attractive than the race for digital demand. Due to the land grab contaminating behaviour in the race for demand, the consumer Internet companies are at a disadvantage to lead the race for digitization of supply, leaving room for pure plays to patiently focus on it.

In the deep chasm between traditional and unicorn start-ups lives the forgotten tribe of classic tech start-ups. It always brightens up my day when I run into this rare breed of entrepreneurs in India. The kind who invent products that get users hooked through unique value rather than perverse incentives. Their products get adopted while they are asleep with no humans required to sell nor support in order for the virus to spread. Then one day usage reaches tipping point and the adoption curve looks like a hockey stick. Thankfully, this tribe is not extinct. They have survived and thrived in their modest offices, built cool products, grown in numbers and attracted venture funding while staying under the radar.

While most entrepreneurs and investors obsessed about how the mobile changed the world for consumers, many start-ups noticed how the cloud changed the world for companies in equally profound ways. These are start-ups that provide software products and services that can be bought by companies across the globe with small teams swiping their cards online. The Indian trader and service provider gene still kicks in with the urge to offer a good enough product that is cheaper than the market leader in the developed world. However, the level playing field on which they are competing for the same customer holds them accountable to differentiation beyond pricing.

I am going to go out on a limb and predict that the first dozen venture-funded companies to deliver a real exit of over half a billion dollars will constitute more cloud-based software-as-a-service (SaaS) companies than consumer Internet companies. Consumer Internet companies will struggle to list in global public markets before the end of the decade. Their odds of getting bought by a large US or Chinese public company are higher than going public themselves, yet not high enough to compete with the global corporations directly investing their billions in setting up their own Indian operations. While it may seem an apples to oranges comparison between B2B (business-to-business) and B2C (business-to-consumer) market spaces, the specific question about which generally available fruit will deliver a particular success metric grants me the ticket to compare them.

In part one, we talked about the lack of validation of the power law in the first decade of the Indian venture ecosystem. In part two, we talked about the tail wagging the dog to create mythical unicorns who reversed the side for multiples between investments and returns. In part three, we have talked about global SaaS and local supply-side technology platforms having a better shot at delivering the power law this decade than popular consumer Internet market spaces, while traditional businesses get IT-enabled and return higher percentages than multiples.

Kashyap Deorah is the author of The Golden Tap: The Inside Story of Hyper-Funded Indian Startups. He is an entrepreneur and investor who shuttles between India and Silicon Valley.

His Twitter handle is @righthalf

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