VC investments in non-tech firms surge in 2015

Early stage consumer companies get the most traction for VC investments, besides financial services, health-care and education

There is nothing new about venture capital (VC) funds globally investing outside technology businesses. But, this is now getting traction in India. When Sequoia invested in craft-beer company Bira91 this month, it only accentuated the trend that saw record investments of $1.9 billion in 2015 across 176 deals in businesses outside e-commerce and technology, according to Ernst & Young.

The investments in non-tech businesses in the year saw a four-fold jump from $522 million investments across 146 deals done by VC funds in 2014 and $525 million across 94 deal in 2013.

“The whole entrepreneurial ecosystem is getting better in India as supply of VC money increases,” says Mayank Rastogi, partner, transactions and private equity at EY. Year 2015 saw a record $4.8 billion investment by VC funds in India including $2.9 billion in e-commerce and technology businesses. In the past three years, VC investments have been doubling every year with $2.4 billion investments in 2014 and $1.2 billion in 2013. Unlike private equity funds, which have been active in India for two decades, VC funds have been around for about a decade now.

“Private equity funds would generally invest in a business in growth and late-stage and, as a corollary, not invest in a business with an unproven business model. On the contrary, VCs generally take very early stage calls on such businesses,” says Rastogi.

Since risks involved with these businesses are higher, the rewards are also better. It is this kind of VC money that boosts entrepreneurial eco-system with people willing to try new business models that can improve efficiency in an existing business or develop market for a new product or service. While a large portion of this non-tech investment includes financial services, logistics and health care companies, there is emerging trend for investments in consumer and retail business targeting urban affluence.

Last year, VC fund Tiger Global invested in Chaayos, a chain of tea bars, and Sequoia pumped money into Hector Beverages, which owns Paper Boat brand of Indian drinks.

“A lot of VC funds are betting on the consumption prowess of urban India, and they have been investing in early-stage firms that are either providing convenience to urban consumers, presenting a new concept or aiming to solve a challenge they face in their day to day lives,” says Sanjeev Krishan, transaction service and private equity leader at PwC India. Rapid urbanisation has led to a rising number of double-income nuclear families that are ready to splurge for a new concept or experience. Also, the VC investments in e-commerce firms have heated up with the valuation going far ahead than traction for business on the ground. This has led to VCs chasing return for large funds in their hand, exploring more tangible options beyond technology.

“Of late, there has been a surge in investment in consumer space in listed and late stage companies. That is now circulating down to early-stage companies,” says Ankur Jain, founder, Bira 91.

“What happened in technology and e-commerce 10 years ago is getting replicated in the consumer space now with realisation that there are a lot of early-stage companies, which have the ability to challenge the incumbent or create a new market,” says Jain.