Photo: Pradeep Gaur/Mint
Photo: Pradeep Gaur/Mint

Can India’s venture capitalists break from the herd?

The industry's herd approach to investing in the past has led to capital being concentrated in a few segments and created valuation bubbles

Infosys co-founder Nandan Nilekani has joined venture capital firms Helion Venture Partners, Omidyar Network and Blume Ventures to invest an undisclosed sum in RailYatri, a mobile app designed to deliver services to train travellers. The funding comes within 10 months of the start-up raising an undisclosed sum in a seed round led by Helion. In all, it has raised about $3 million, say media reports.

Anybody who uses Indian Railways to travel between and within cities—and most of us have at some time or the other—will appreciate the unique value proposition that this five-year-old start-up brings to the table. The app seeks to empower travellers with comprehensive information such as PNR status, live train tracking, seat availability, a platform locator and ticket confirmation. In addition, it enables travellers to book meals on-the-go and even reserve cabs at their destination.

RailYatri isn’t the kind of start-up one comes across in India often enough. One that harnesses new-age technology, as Nilekani puts it, to solve a quintessentially local problem. It also isn’t the kind of start-up that attracts mainstream venture capital often. But, in the shadow of a funding correction in the country’s start-up market, fed largely on a diet of copycat business models mostly from the US, that will hopefully change.

The first quarter of 2016, according to data compiled by London-based research firm Preqin, has seen venture capital investors participate in 291 deals worth $1.6 billion, up 47% in value terms from the concluding quarter of 2015. Of that, about $172 million was invested across 33 deals in early-stage companies (Series A through C), which marks a 57.5% decline from the October-December 2015 quarter in value terms.

A tightening funding environment is not all bad. Most active venture capital firms in the country are well capitalized but are using the correction to evaluate deals more carefully and spend time understanding businesses. While that doesn’t imply that me-too ideas won’t get funded—the consumer Internet sector remains a top draw with investors—more India-appropriate businesses, as one venture capitalist in Mumbai puts it, are beginning to attract investor attention.

This week, ready-to-drink dairy beverages maker DropKaffe scored nearly $500,000 in a bridge funding round led by former Helion managing partner Kanwaljit Singh. Specialist retail start-ups such as DropKaffe lost favour with venture capitalists about 18 months ago because of their perceived inability to scale fast enough. That perception appears to be changing. In February, Saama Capital and DSG Consumer Partners joined existing investor Sequoia Capital to inject $4.5 million in cold-pressed juices retailer RAW Pressery. Neither DropKaffe nor RAW Pressery qualify as need-to-know businesses, but their bid to break into the multinationals dominated fast-moving consumer goods market is interesting all the same.

In March, Unitus Seed Fund (USF) invested an undisclosed sum in DriveU, an app-based platform that aggregates and connects chauffeurs on-demand with private car owners. USF is an impact fund and its primary goal is to help improve the livelihoods of chauffeurs through the investment. DriveU is yet to attract mainstream venture capital. However, Cue Learn, another portfolio company which provides after-school tutoring services for middle- and low-income homes, is close to raising a Series A round from a mainstream venture capital firm.

Such investments, which largely address India-specific market opportunities, are still few and far between. More and more venture capitalists, however, are beginning to understand the need to decouple their investment strategies from the US and other developed markets. This is important because the industry’s herd approach to investing in the past has led to capital being concentrated in a few segments and created valuation bubbles.

The e-commerce, and online food ordering and delivery segments are prime examples. Already, new segments for capital concentration are starting to form. Lately, for instance, there has been a flurry of investments in start-ups that offer on-demand, online pharmacy services, which is somewhat of a grey area in regulatory terms.

Then there are a bunch of start-ups that are building out marketplaces for logistics services, which have attracted more than a fair bit of venture capital. The latest to jump on to the logistics bandwagon is Sequoia Capital-backed PepperTap, after shutting down its on-demand grocery delivery business earlier this week.

It isn’t easy to break from the herd mentality. RailYatri is a start. We need many more and sooner than later.

Snigdha Sengupta is the founder of StartupCentral, a digital news and analytics platform focused on venture capital. She also periodically contributes stories on venture capital and private equity to Mint

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