Can foreign venture capitalists make good money from Indian tech?

IN FINANCE there are numbers people and stories people. Quants are archetypal numbers people: they only buy securities that fit statistical criteria. Venture capitalists are stories people. They have to be. They provide finance to technology startups that may have great potential but do not—or do not yet—have the numbers to back it up. Nothing speaks of potential quite like India with its vast, young, tech-savvy population. And no venture-capital story is quite as seductive as Indian tech.

A flood of foreign money is washing into India’s startup scene. Flipkart, an e-commerce site, has just raised $3.6bn in a record-breaking funding round. There has been a wave of public listings this year, as fledglings take advantage of India’s buoyant stockmarket to raise capital and provide an exit for their venture-capital backers. The recent initial public offering of Zomato, a food-delivery firm, was heavily oversubscribed. Paytm, a much-touted payments app, is due to list soon.

This burgeoning interest in India owes a lot to the diminishing appeal of China, whose tech firms are facing a regulatory backlash. To outsiders, India seems like a younger, more freewheeling China. Look closer, though, and it does not live up to the billing.

Start with what is meant by Indian tech. An ideal tech startup would give investors...