I liked this question... it's very "chicken or egg" in nature. I don't think there is a simple answer. So rather than try to answer it directly (we VCs never answer anything directly :-)), I thought I would share some of the elements that I think about as we look at businesses. and then see if that might lead to an answer (or at least a perspective that might be helpful).
In venture investing we consider a variety of risks when looking at a business... many of these are risks that an entrepreneur also grapples with. The main risks can be broken into, Team Risk (do we have the right people), Market Risk (is there a ready market for our offering), Business Model Risk (can this make enough money over time) and Technology Risk (does the mouse trap work / is it in fact a better mouse trap than what exists). Very rarely do you get a fully baked solution that is strong on all parameters. As a startup with limited resources you are usually trading off developing strength in one area for speed, or in many cases the ability to "experiment, fail, learn and repeat." We are comfortable with this idea that all is not figured out, but still spend a lot of time trying to know what is known and what is unknown... knowing what you don't know is a big part of ensuring that you are focusing energy in the right place.
Another thought that often enters our analysis is the question of whether or not the solution that is being built has a differentiated value proposition that can be sustained. Sometimes ideas are really cool and interesting (and may even have the potential to generate revenue), but are not based on fundamentals that can drive sustained differentiation. The differentiation can come in many forms... in some businesses, the capacity to raise capital can be thought of as differentiating... I tend to see that as short lived. Over time there is always someone else who has more money and a willingness to spend in a crazier manner than you ever thought possible. So we look for real differentiation that comes from removing cost from the value chain, creating a better customer experience that can create lower churn or leveraging a product feature that can drive lower customer acquisition cost... basically can you leverage technology to make the product cheaper, faster or better? Can you leverage the social elements of your product to create an advantage in customer acquisition costs? There needs to be some "magic" that is not easy for someone else to replicate or spend their way into.
In some rare occurrences that magic is so powerful that the business model is irrelevant... those cases are almost always evidenced with metrics of amazing organic growth. It's hard to know this until you've built it, so as an entrepreneur the question is do you really know something that no one else knows and do you really feel like you can translate that into a product that people will crave? Those are tall asks, but I am continuously inspired by the passion of the entrepreneurs we meet and I am confident that one day soon we will see that very bravado translate into an amazing product whose business model will evolve over time.
While we search for the needle in the haystack, we have taken comfort in the idea that India is a massive market that needs organization and can benefit from technology enabled solutions... there are massive opportunities to leverage technology to build the new age version of traditional businesses (i.e. fast food, furniture, education, etc), with well understood business models. While these opportunities may not have the "no business model" risk, they have a whole different set of challenges and risks, but that's for another post.
We are actively building exciting, innovative businesses that are leveraging technology with well defined business models. However, we continue to dream about the ideas that may lack a defined business model but have a powerful product / technology / customer insight.
Thank Devleena for this post and for sparking this introspection.