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For Indian Start-Ups, Tenacity Beats High Tech

A DriveU chauffeur. DriveU, which provides on-demand drivers for people with cars, gives its best full-time chauffeurs health insurance, something that is nearly unheard-of in India.Credit...CJ Clarke for The New York Times

BANGALORE, India — 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 start-up, 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?”

“Essentially they could,” said Ashok Shastry, 25, a co-founder of DriveU, who with his long shorts and spiky hair looked as if he would be more at home in Palo Alto, Calif., than Bangalore. “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 Mr. Ramamoorthy to the DriveU team. And it illustrates that until now the Indian start-up 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.

Last year was a heady one for venture investing in India; investments rose 61 percent, to $1.9 billion, from $1.2 billion in 2014, according to Venture Intelligence, a Chennai-based company that tracks Indian venture activity. About $95 million of the total represented investments and co-investments in the social impact space by traditional V.C.s and specialist firms like Unitus Seed.

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Srikrishna Ramamoorthy, a partner for Unitus Seed, a venture capital fund started out of Seattle that invests in Indian companies.Credit...CJ Clarke for The New York Times

Most of the capital flowing into India comes from offshoots of American venture firms. This has led to a generation of homegrown versions of United States 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-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 start-ups 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 $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 drug maker Pfizer and the Michael & Susan Dell Foundation are also investors in Unitus Seed.

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.

In assessing start-ups like DriveU, Unitus Seed first asks if the management team has “what it takes to persevere in the world’s most competitive market,” Mr. Poole said.

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DriveU’s founders, from left, Ashok Shastry, Amulmeet Singh Chadha and Rahm Shastry at the main DriveU office in Bangalore, India.Credit...CJ Clarke for The New York Times

“If you have a great idea, you have to be able to run really hard and fast,” he added, in order to compete with someone who is as good at the same thing.

The approach could pay off soon.

The fund has “closed one transaction for a partial exit — a very profitable exit for us — and we have another transaction which is in the final negotiations for a complete exit,” said Mr. Poole, who declined to name the companies.

For months, Unitus Seed’s investment team had been wrestling with the threat that Uber and Ola presented to DriveU. Ultimately, it was something Mr. Shastry’s father Ramprasad, who goes by Rahm, said that convinced Unitus Seed’s Mr. 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,” Mr. Poole said. “That is the fundamental argument of why Ola and Uber are not going to do this right away.”

When DriveU started in July 2015, it met with some of the bigger venture capital firms like Sequoia and Matrix Partners.

Rahm Shastry had become well known after selling a company he had invested in, TaxiForSure, to Olacabs for about $200 million last year.

He was also an experienced operator. Until recently, he worked in Silicon Valley, rotating in and out of a succession of technology companies as their chief executive. His specialty was start-ups and turning around companies. (Most entrepreneurs that venture funds encounter in India are starting companies for the first time.)

In 2015, after more than three decades in America, Mr. Shastry and his wife, Glenda, a Midwesterner, moved to India at the prodding of Ashok, who had an idea for a start-up: Parking on Demand.

One path to fast growth is to drop prices, but Rahm Shastry is adamant about keeping the cost of the ride at 99 rupees an hour (less than $1.50), rather than dropping it to 49 rupees, which was suggested by potential investors. “The extra 10,000 rupees a month our driver earns he can send his daughter to a better school,” he said, defending his decision.

Last month, Unitus Seed announced that it was investing in DriveU.

Though it did not disclose the amount, people with knowledge of the matter say DriveU has received $1 million from Unitus Seed and other Silicon Valley angel investors.

A version of this article appears in print on  , Section B, Page 1 of the New York edition with the headline: A Bright Idea, Driven Hard. Order Reprints | Today’s Paper | Subscribe

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