India’s most successful entrepreneurs and venture capital investors are currently responding to a broad range of new opportunities. At the Wharton India Economic Forum that took place earlier this year, panelists discussed the current environment for venture capital in India and how it’s likely to change in the future.

Apu Gupta, CEO of Curalate, a leading visual marketing and content monetization platform, set the ball rolling by sharing his personal experience as an entrepreneur. Gupta recalled that some years ago he launched a pharmacy chain in India on the premise that with growing disposal income and increasing mobility, “the need for a branded chain in India was finally taking hold.” Gupta’s team built what became the second-largest pharmacy chain in India, known as MedPlus. Within just three years they put up 650 physical stores and raised about $32 million. Although the business did well, Gupta left India in 2009 and returned to the U.S. In 2011, he started a business-to-business (B2B) company for parking and storage services. Today, at the helm of Curalate, Gupta is working with about 830 of the world’s largest retailers to “help them drive traffic and revenue from the content that they already own.”

However, not everything has gone according to plan, even at MedPlus, where Gupta learned about the challenges of localizing a foreign business model to the needs of the Indian market. “When we were building MedPlus, we quickly realized that you can’t import business models, but you can import best practices. We were seeing that folks who were trying to come into India and build pharmacy chains — who were trying to mimic [popular U.S. pharmaceutical chains such as] Walgreens or Duane Reade or CVS — fell on their face.”

He went on to explain the reason for this: Given the enormous congestion that characterizes Indian cities, not many people would trade the convenience of shopping around the corner for visiting a modern drug store that provides a much wider range of products. “In India, you have 800,000 pharmacies; one on every corner in every single neighborhood. You never have to go far to buy your medicine. So if you told a consumer that you now have to go a kilometer to get your medicines, who would be willing to do that?”

A Change in Focus

“I’ve seen the focus of the India team morph from technical services that targeted the old economy to what we’re doing now — much more early stage IT and IT-enabled services in a broad range of business-to-business areas,” said Krishna “Kittu” Kolluri.

A partner at the venture capital firm NEA, focusing on investments in information technology and energy technology, Kolluri told the panel that over the past seven years, NEA has invested close to $300 million in India. Pointing out that there is “currently a lot of hype around the consumer internet” in India, Kolluri added: “What is interesting is that you can have a phenomenal business model, great technology, a great team and all of that but probably the number-one factor that contributes to the success of a startup is [the existence of] a trend.” According to Kolluri, in order to succeed “you have to have some kind of a macro-trend that helps you achieve that escape velocity. If you catch the consumer in ‘that space’ there is a much greater chance of success.”

Fortunately for entrepreneurs, technology makes it easier to take advantage of new trends by identifying and targeting people who are most likely to buy into the latest craze. Kolluri added that in India, as elsewhere around the world, the explosion in mobile internet has enabled and democratized access; it has helped not only small businesses, but also consumers to reach one another. “What we are seeing [in India] in the consumer space is more vertical solutions — whether it be in food or furniture or various other verticals.” Kolluri also noted that some of the latest trends in India mirror developments in the early days of the emergence of dot coms in the U.S. “We were investors in and are [now] investors in a company that makes diapers for the Indian market.”

Eager to keep abreast of latest developments in India, Kolluri has been visiting the country about two to three times a year. “I don’t lead projects there, but I help our team do [due] diligence. I have seen the [movie] play out,” he said. For a long period of time, he noted, the “me-too thing” was not bad, especially as entrepreneurs tried to take an idea that had worked in the U.S. and localized it to a particular geography. However, “there are certain things about India that are very unique. For example, it is [primarily] a cash economy; and there are [few] credit cards. Those kinds of things call for a differentiated solution. But what I am encouraged by is that over the past couple of years, the quality of projects that I’ve seen has been very encouraging. The kinds of technology solutions [that have emerged] have been very good; they are applying data science to all sorts of fields.”

 “When we were building MedPlus, we quickly realized that you can’t import business models but you can import best practices.”  –Apu Gupta

Probably as a result of strong data analysis, many venture funds are changing their approach to investing in India, Kolluri said. “Most of the big venture funds, when they first moved into India, were afraid to go in very early. And when they did go in early, they got burned. And so they were gun shy [about making subsequent investments in early-stage venture projects.] But now, early stage investment is back in fashion again. More and more capital is going into early stage, which is fantastic.”

Funding Challenges

Suresh Shanmugham, co-founder and managing partner of Saama Capital India Advisors, noted that the volume of activity and the capital that has been raised for Series A (a company’s first significant round of venture capital financing) have made the Series B funding process much tougher. “The challenges that people hear about the funding market are mostly focused on later-stage high-value consumer internet mobile companies. There is a trickle-down effect that has softened the market, at least from an entrepreneur’s perspective for raising capital. The Series B rounds are certainly more at risk.”

Shanmugham added that there has now been a period of rationalization where the entrepreneurs’ expectations have come closer to where the investors are. A lot of this, he said, stems from the slowdown that happened in China, starting last August. “You can identify that as the period when the equation between the entrepreneurs and the investors started to change. There was a time when the investors said that the market had changed and their expectations were reset whereas the optimistic entrepreneur said: ‘No, no, it’s a minor blip.’ We went [through] a period of three to four months, during which we couldn’t get bids and asks to match because of the expectation among entrepreneurs that things were going to come back to pretty much where they were.”

“Many venture funds are changing their approach to investing in India.” –Krishna “Kittu” Kolluri

This year, Shanmugham’s firm has made several B2B investments in India that benefited from the fact that his firm had invested in the U.S. during the dot com boom. He noted: “We had kind of seen the same playbook before, 15 years ago, and it didn’t end well.” More optimistically, he added: “I don’t think it will end the same way in India. But the same dynamics about the funding environment clearly are at play.”

According to Shanmugham, investors last year had little interest in the B2B space. But now perceptions have changed and investors appreciate the fact that B2B customers are sticky customers and that they actually have money to pay with. “It’s a shift in mindset.” He adds that venture fund investors in India are concerned about the fact that B2C (business to consumer) investments involve branding, which involves huge spends and subsidizing purchases. “Investors are saying that B2C is not exactly a great business model.”