Are brick-and-mortar start-ups no longer pariahs for venture capital firms?

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Even about 18 months ago, Maverix Platforms Pvt. Ltd, a Mumbai-based start-up that retails ready-to-cook food under the Fingerlix brand, would not have been on the radars of most venture capital firms in the country. Last month, it scored $7 million in a new round of funding led by Accel Partners, the venture capital firm better known for its bets on consumer internet and technology businesses.

The break in pattern isn’t limited to Accel. A smattering of deals over the last 18-odd months suggests that brick-and-mortar start-ups, or non-technology start-ups in venture capitalist lingo, are no longer the pariahs that they were, not long ago.

Late last month, Mumbai-based Rakyan Beverages Pvt. Ltd, which retails cold-pressed juices under the Raw Pressery brand, snagged $6 million in fresh funding from existing investors DSG Consumer Partners, Sequoia Capital and Saama Capital.

In September, The Moms Co., a baby care products brand retailed by Gurgaon-based Amishi Consumer Technologies Pvt. Ltd, raised a $1 million Series A round of funds from DSG and Saama. The same month, OncoStem Diagnostics, a Bengaluru-based life sciences start-up developing affordable tests to predict cancer recurrence in patients, raised $6 million from Sequoia and existing investor Artiman Ventures.

In August, Delhi-based craft beer retailer B9 Beverages Pvt. Ltd raised $8 million in a new round of funding from existing investor Sequoia. Also in August, Bombay Shaving Co., a men’s grooming products brand from Delhi-based Visage Lines Personal Care Pvt. Ltd, raised $2.5 million in seed funding from Fireside Ventures and a group of high net worth individuals.

Sequoia, the country’s largest venture capital firm by funds under management, has been particularly prolific since last year, with investments in brick-and-mortar start-ups. The firm has always balanced technology bets with so-called non-technology ones, but slowed down on the latter for a few years to turn its attention to the consumer internet wave that dominated the market till late 2015.

Sequoia’s increased focus on brick-and-mortar start-ups isn’t difficult to understand. It has a rather large $920 million fund, raised in February last year, to deploy within a limited investment cycle. India’s technology market, despite the consumer internet wave, still isn’t deep enough to absorb that much capital. Further, the consumer internet and technology sectors haven’t done so well for venture capitalists, making it somewhat necessary to diversify into businesses that fetch lower but more predictable returns. Since early last year, Sequoia has diversified its interests into sectors such as FMCG, healthcare and life sciences, financial services, education and other consumer products (see graphic).

As the largest investor in the market, Sequoia’s moves are bound to influence other venture capital firms to follow suit in varying degrees sooner than later. A venture capitalist in Bengaluru, known for backing consumer brands of the FMCG kind among other brick-and-mortar start-ups, says his small portfolio of companies has lately been receiving more than the usual attention from peers in the fraternity. Venture capital firms that had sworn off brick-and-mortar start-ups just a few years ago, are keen to revisit the strategy, he says.

Like Sequoia, many of them also have large funds to deploy and not enough opportunities in the technology sector to absorb that capital. But, the shift isn’t restricted to large funds. In September, when KAE Capital, a Mumbai-based technology-focused venture capital firm, raised a $53 million second fund, it said at least 20% of the corpus would be set aside for brick-and-mortar start-ups. It has already invested in Timla Foods Pvt. Ltd, a Hyderabad-based start-up that retails ready-to-eat popcorn under the brand Popicorn, and has a second deal in the making. Sasha Mirchandani, who founded KAE about seven years ago, thinks that “a technology-only investment strategy is risky” in India’s venture capital market.

While the attention is welcome, what brick-and-mortar startups need to remember is that this isn’t the first time venture capital firms in India have flirted with such investments. When early stage investing started back in 2007-08, the technology market wasn’t deep enough to support specialist technology venture capital firms. So, nearly every firm out there decided to throw a few brick-and-mortar start-ups into the mix to diversify their risks.

Helion Venture Partners invested in service apartments chain Hummingbird Suites, quick service restaurant chain Mast Kalandar and salon chain YLG. Matrix Partners’ portfolio included Cloudnine, a chain of maternity hospitals, test preparation company FIIT JEE and service apartments chain Siesta Hospitality. Nexus Venture Partners and Helion teamed up to back Eye-Q Vision, which runs a number of eye care hospitals. Nexus was also an early investor in solar lighting products company D.Light Design, in which Draper Fisher Jurvetson (DFJ) was a co-investor, and contract farming company Suminter India Organics. Attero Recycling, an electronic waste management company, had DFJ and Kalaari Capital (then IndoUS Venture Partners) on board as investors. Kalaari also invested in quick service restaurant chain Ovenfresh.

When the consumer internet market, especially e-commerce, exploded a few years later, most of those investors switched almost overnight to only technology investments. With the billions of dollars that started flowing into India’s consumer internet sector from hedge funds and other non-traditional start-up investors, the potential returns from those investments started to look far superior to brick-and-mortar investments. Funding soon dried up for brick-and-mortar start-ups and even existing investors turned their backs on them.

In turning their attention back to brick-and-mortar start-ups, venture capital firms stand to play an important role in seeding a category of businesses that has so far stayed on the sidelines of the most important entrepreneurship wave this market has seen in decades. Unlike Silicon Valley, India’s venture capital market has never been and, will probably never be driven only by technology. Given the huge unsolved problems in sectors such as healthcare, education, clean energy, consumer products and financial services, start-ups that address those sectors have the potential to be equally disruptive if not more than consumer internet start-ups. Venture capital firms such as DSG and Fireside, which specialize in such investments, recognize that potential. What we need now, as the venture capitalist in Bengaluru says, is more believers.