MARCH 2005, GALLE, SRI LANKA. In the aftermath of the tsunami, doctors were struggling to provide medical care to thousands of patients. Jennifer Johns, a cardiologist from Austin Health, a medical services provider in Australia, was in Galle to help. She was frustrated at the amount of time taken to screen patients, when a colleague reminded her of Arvind Thiagarajan, an engineer from Chennai.

Johns had met Thiagarajan in Australia and knew he was developing a revolutionary product. She called him, and he immediately offered to send her prototypes of his innovative stethoscope, the FonoDoc. The device identifies abnormal sounds from the heart, called murmurs, and displays them as data on a screen. The FonoDoc has a higher sensitivity to murmurs, making it a tool faster than, and complementary to, ECG recorders that detect cardiac conditions. Using the device, Johns was able to check 200 patients in two hours, and identify 20 critical cases. The feedback she and fellow doctors sent Thiagarajan helped him finetune the device. While the medical community was receptive, Thiagarajan was unable to interest financiers in India to fund commercial production of the device.

Although India needs such bottom-of-the-pyramid products and has inventors with proven capabilities, investors are hard to find. With poor investment, intellectual property in India will be confined to process and service innovations. Product inventors tend to get a raw deal. Private equity and venture capital mostly go to startups and enterprises in services (see table below). In the IT industry alone, investments in product enterprises averaged only 20% of the total value in the past three years, according to Venture Intelligence, which tracks private equity and venture capital in India.

“Most of the product activity is in MNC development centres, or startups with main markets in the developed world,” says Kanwaljit Singh, managing director of Helion Venture Partners, a $350 million (Rs 1,556.5 crore) fund.

What deters investors is the risk. “I’ve to keep investing without being sure if the consumer will like the product,” says Sanjeev Bikhchandani, founder and executive vice chairman of Info Edge, whose flagship portal is Naukri.com. In the past two years, Info Edge has invested in services startups. Moreover, large volumes are needed to recover costs. Also, as Thiagarajan found, investors have less patience than innovators when it comes to waiting to commercialise a product.

Multinationals, with their cash muscle, attract talent. A case in point is GE Healthcare’s Healthymagination. In 2009, it announced a $3 billion spend over six years in R&D on low-cost health care products. Such initiatives make GE and its peers such as Johnson & Johnson, Philips, and Siemens magnets for enterprising minds in India.

When product businesses in India come up against conglomerates, which can use their existing network or build one to market their products, they feel the lack of an ecosystem. “Creating an ecosystem and supporting a business that has to get regulatory approvals are challenges unique to product businesses,” says Sandeep Singhal, co-founder of Nexus Venture Partners, whose Indian fund size is $320 million. “Still, the cost for these is 40 times less than what a startup in the U.S. would have to incur,” Thiagarajan says.

Meanwhile, inventors have to hunt for capital. Thiagarajan managed to get $1 million as seed investment in 2001 from inCube India, an incubation programme launched by Singapore-based Temasek Holdings. At that point, all he had developed was the algorithm to capture heart sounds. His idea was to create a portal to allow doctors in remote parts of the country to capture the signals from patients with heart problems, convert them to sound files, and transfer them to hospitals and leading cardiologists. The FonoDoc was the fruit of his attempt to convert heart murmurs to multimedia. By 2004, Thiagarajan had a prototype of the FonoDoc, but that’s when Temasek pulled the plug on inCube.

Thiagarajan, who had set up HD Medical Group to manufacture the stethoscope, needed funds, but investors in India were unwilling to take the risk. It was only by going abroad that he was able to raise $10 million in five years from investors such as Suk Jin Kim in South Korea, P.P. de Silva in Singapore, and Smarter Capital in Australia. “Thiagarajan’s technology vindicates my faith (in his venture) despite HD Medical facing hurdles in commercialising ideas,” says Kim, whose family has a 20% stake in HD Medical.

Smarter Capital has invested close to $5 million in HD Medical. He is betting on the digital stethoscope market in the U.S., where the device will have a price advantage. “The U.S. market is about $90 million, and digital stethoscopes account for around 25%. HD Medical can take a chunk of that,” says Steve Killelea, chairman, Smarter Capital.

What happens now that the FonoDoc is ready for the retail market? Product startups in India, unless promoted by big companies, find it hard to grow into large entities.Funding—be it from VCs or conglomerates—will chart the course of innovation enterprises. It will also decide if the likes of HD Medical can take on the best in the world.