Non-Tech: A New Zing For Angels
There are no signs of non-tech businesses getting off the investors’ radar. Investors’ interest to back non-tech businesses in India in 2013 and 2014, which seemed subdued, saw an impressive upswing in 2015. These early-stage investors are continuing to tread beyond their traditional turf of tech businesses and back not-so-exciting yet equally promising non-tech businesses.
Letting the numbers speak for themselves, as per professional services firm Ernst & Young, 94 deals worth $525 million and 108 deals worth $522 million in earlystage funding were struck in 2013 and 2014 respectively. This shot up tremendously to 176 deals of a whopping $1.9 billion in total deal size in businesses beyond technology and e-commerce. The investments in non-tech businesses were largely made in sectors such as healthcare, financial services, logistics and consumer businesses.
“Technology businesses with high valuations usually hog all limelight but great businesses can be built on the non-digital side too. There is more glamor to tech businesses because they are easy to scale. You cannot scale a non-tech business to $15 billion valuation in just eight years like Flipkart,” says Deepak Shahdadpuri, Founder and MD, DSG Consumer Partners (DSGCP).
Shahdadpuri has invested in close to 50 tech and non-tech businesses since 2000 but he admits that there is too much capital chasing technology leaving the non-tech businesses without required funding.
He further says, “There is enough capital to meet the requirements of entrepreneurs in India but the issue is that most of the capital tends to focus on technology leaving others areas like agro-processing, food, restaurants and brick-and mortar businesses deprive of the early-stage capital, which is stifling the growth of these fields.”
Adding to the non-tech businesses’ strength are angel groups like Indian Angel Network (IAN), Mumbai Angels, Chennai Angels, and established VCs like Sequoia India and Saama Capital. The investors have been gunning on growing consumerism and businesses that are offering innovative solutions to improve user experience and convenience.
More so, since investors have been pulling the plug on capital going into technology businesses and looking for returns, non-tech businesses are seem to be a more substantive bets as the risk of failure is much lower than tech businesses. The longer runway to growth for non-tech businesses however doesn’t bother investors.
“Most of the investors who have invested in technology e-commerce solutions are waking up to the fact that their investments might get stuck there as profitability and exit still remain at a distance. They are now looking to back
businesses that might not have deep technology inclusion into their models but since they are serving huge traditional markets with large consumption appetite, they can build strong businesses out of it,” says an investor with one of India’s top early-stage funds based in Bengaluru requesting anonymity.
On the businesses side, entrepreneurs believe this shift is being led by new investors entering the ecosystem through these angel networks and early-stage funds and looking for untapped opportunities in offline space. “The number of angel investors with diverse backgrounds is increasing, and they are now covering non-tech areas too. So start-ups in non-tech areas are benefiting through their investments and mentorship,” says Pavan Ponnaganti, Founder & CEO, Skyfi Labs. The Bengaluru-based start-up is into education products and services for engineering students. The firm had raised funding from Chennai Angels and US-based VC firm Spark Capital.
IAN has invested in over 65 ventures so far and out of which around 15 are in non-tech ventures such as Mukunda Foods, Consure and Box8. “IAN has invested in many non-tech companies, and the investors are hopeful that they will generate handsome returns just as the IAN’s technology portfolio companies have done. Valuable companies are not driven by sector like tech or non-tech, but by well-differentiated propositions, large growing markets and with a very well executed promoter team,” says Padmaja Ruparel, President, IAN.
“There is nothing evolutionary left in e-commerce and app development. You are expected to grow to a certain level to attract an investor unlike sectors including education, food and SME manufacturing where investors are tapping on smart businesses to revolutionize the space,” says Eshwar K Vikas, Founder, Mukunda Foods.
Sivaram Pillai, Co-founder and CEO, ProKlean Technologies, a cleantech venture, in 2015 raised Rs 3.5 crore from Infuse Ventures, a cleantech fund by IIM Ahmedabad’s Centre for Innovation, Incubation and Entrepreneurship. Before that it had raised Rs 2.5 crore from Chennai Angels in 2012.
“We see a lot of interestf rom potential investors in businesses like ours. They are realizing that business portfolio like ours offer less risky investment opportunities,” says Pillai. However, non-tech start-ups would take more time to offer exits and probably not as much returns as tech businesses offer though the assurance of timely returns would remain there.
(This article first appeared in the Indian edition of Entrepreneur magazine (March 2016 Issue).