On a hot afternoon in a two-story house here, as dogs barked and auto-rickshaws sputtered outside, a venture capitalist grilled three entrepreneurs.
Their startup, DriveU, provides on-demand drivers for people with cars, differing from Uber or Olacabs, an Indian variant, which offer on-demand taxi services. The three parried questions about the business in a cramped conference room with doors and shutters painted in DriveU’s company colors — shamrock green.
“What will it take for someone to come in and replicate this?” asked Srikrishna Ramamoorthy, a partner for Unitus Seed, a venture capital fund started out of Seattle that invests in Indian companies. “Couldn’t the Ola guys come in and do this?”
Photo: AFP
“Essentially they could,” said Ashok Shastry, 25, a co-founder of DriveU. “But it would be taking away from their focus.” The models for Uber and Ola, he said, are built on the premise that customers do not use their own cars.
The venture capitalist persisted. If Uber and Ola were to enter the market, “What would your response be?” he asked.
Amulmeet Chadha, another founder of DriveU, said, “It’s about being a cockroach and surviving.”
That kind of tenacity is what attracted Ramamoorthy to the DriveU team. And it illustrates that until now the Indian startup market has been more about great execution than cutting-edge technology.
“In Silicon Valley, the general investment thesis for a technology investor tends to be around how strong a company’s underlying technology is and how defensible it will be over time,” Will Poole, Unitus Seed’s co-founder, explained later. “Very rarely does a venture capital investor invest in an operating business that does not have an intellectual property moat.”
In emerging markets like India, however, “you can build very large and profitable businesses on an operating basis without having a fundamental or long-term technological advantage because you are building in greenfield areas with little or no competition,” he said.
INVESTOR BOOM
Last year was a heady one for venture investing in India; investments rose 61 percent, to US$1.9 billion, from US$1.2 billion in 2014, according to Venture Intelligence, a Chennai-based company that tracks Indian venture activity. About US$95 million of the total represented investments and co-investments in the social impact space by traditional VCs and specialist firms like Unitus Seed.
Most of the capital flowing into India comes from offshoots of US venture firms. This has led to a generation of homegrown versions of US companies like Flipkart, the Amazon of India, getting funded.
But that may be changing. Speaking in Bangalore last summer, Chamath Palihapitiya, the founder of the Palo Alto, California-based venture fund now known as Social Capital, said he would like “to put a billion dollars to work in the next 10 years here, plus or minus.”
Yet he told the crowd of entrepreneurs that the kinds of startups he would be investing in were companies that were “so unique and unexplainable in a Harvard Business case to a bunch of Americans.”
For its part, Unitus Seed has found that the plethora of have-nots in India means there are lucrative opportunities to put money into Indian companies that offer a much-needed service at a low price point.
Among venture capital investors in India, Unitus Seed, with US$23 million in capital, is a speck. It is eclipsed by far larger players like Sequoia Capital, SAIF Partners, Accel Partners, SoftBank of Japan, Alibaba of China and Lee Fixel of the investment firm Tiger Global.
But what Unitus Seed lacks in firepower, it makes up for in star power.
Its investors include Bill Gates; the billionaire investor Vinod Khosla; the ex-Infosys manager Mohandas Pai; and Diego Piacentini, a top Amazon executive. The drugmaker Pfizer and the Michael & Susan Dell Foundation are also investors in Unitus Seed.
DIVERSE PORTFOLIO
Broadly speaking, Unitus Seed’s portfolio companies fall into two categories. One is composed of companies that offer affordable products and services in areas like health care, education and financial services to India’s masses, giving them access to services that are otherwise too costly or simply unavailable.
Examples in this category are investments in UE LifeSciences, which offers breast scanning for a couple of dollars through its portable iBreastExam device; Welcare Health Systems, which delivers low-cost eye screening; and Hippocampus Learning Centers, which provide affordable kindergarten and after-school facilities.
A second category of companies includes those that offer “labor as a service,” thus moving labor from chaotic, more disorganized sectors to more formal employment, and increasing financial and other benefits to low-income workers.
DriveU fits into that category, giving its best full-time chauffeurs health insurance, something that is nearly unheard-of in India.
For months, Unitus Seed’s investment team had been wrestling with the threat that Uber and Ola presented to DriveU. Ultimately, it was something Shastry’s father Ramprasad, who goes by Rahm, said that convinced Unitus Seed’s Poole and the team that the threat was manageable.
Rahm Shastry, who is the company’s chief executive, explained that Uber and Ola drivers have high fixed costs (their cars) and the possibility of earning a higher hourly wage. If Ola and Uber offered on-demand chauffeurs, the drivers would still have high fixed costs but would then earn a lower wage. DriveU chauffeurs earn less than Ola and Uber drivers.
DriveU was “going to operate in a place that is painful for its competition to copy its business model,” Poole said. “That is the fundamental argument of why Ola and Uber are not going to do this right away.”
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