Seed stage investment in India : Reality check
VC investment in India stands at 777mn $, and private equity closed deals worth $13.5bn in 2007. India Shining? Well, yes but the real question is where is the money going?
As per the report by Stanford University and TiE, majority of the funds go to late-stage initiative firms and NOT the early-stage ones.
- Of all the funds that go to India, only 6.9% is invested in seed and early-stage firms.
- Similar stats for China is 12.5%, Israel – 32%, UK – 39% and US – 32%
Few reasons why seed stage investment hasn’t happened:
- Mismatch between the resources and skills of risk capital providers and entrepreneurs’ needs
Early-stage entrepreneurs, though skilled at cost-control and technology, lack market awareness, product development skills, global standards of professional and ethical behavior and team building skills. - Transition into and from early stage investments is difficult
Seed and early-stage entrepreneurs’ professional networks consist primarily of a few strong personal connections and brokers. A wider network of professional associates,
- incubators and prior-stage financiers, is largely absent.
- The business environment discourages sophisticated standards of
Corporate governance : holding board seats and minority shareholdings, even when the majority of the board consists of independent directors, were inadequate for influencing startups.
Intellectual property creation and protection.
Domestic consumption in some important markets, such as for IT - Bureaucratic, regulatory, legal and tax hurdles
Over 90% of the money is invested in late-stage initiatives by mature firms. Even the remainder mostly finances new firms replicating proven business ideas. As a result, very few innovative startups are funded
Few excerpts from the report
Silicon Valley’s success has been attributed to a vibrant network of ‘weak ties’, i.e., opportunities for would-be entrepreneurs to interact with financiers, potential co-founders and fellow employees in settings such as meetings of professional associations. On the other hand, strong ties, such as close business associates and friends, have been found to be less useful for entrepreneurship than weak ties because of their overlapping domains of information.
The academic literature on social networks identifies ‘social capital’ as a key requirement for startups to innovate and grow. Such social networks offer information and risk-mitigation that is often crucial for startups. In Silicon Valley, for example, it is argued that social capital supports a tolerance for experimentation (and possible failure), provides a network of angel and other risk-tolerant investors, a network of research ideas through linkages with Stanford University and University of California, Berkeley, and opportunities to find the complementary members of a founding team.A thought well documented in this post (and comments). Though the report is one year old, nothing seems to have changed!
What do Indian entrepreneurs have to say about this? Do they feel let down by VCs (who would rather fund a desi version of FaceBook/MySpace and not something innovative?)
Download the report
About the author - Ashish Sinha is a Startup Mentor/Product Strategy Coach, and the founder/chief editor of pluGGd.in.
He has launched/managed couple of products (consumer as well as enterprise) in US and India, and now consults with startups/small businesses on their product/media strategy. He can be reached at: ashish (at) pluGGd.in [+91 98452 06443]
Hi Ashish,
Well I was waiting for this post to happen and guess what there it is. I’ve been contantly shouting from the beginning that VC’s and even Angels look for more matured/late stage companies for investments.
They hold other investors money with them and want to give them an excellent return which is absolutely correct, but why invest in only those where you get about a dozen references from other high fliers and already experienced entrepreneurs?
If investors did not believe in Apple during their Garage-startup days we wouldn’t had had Macs, iPods and iPhones. So the report states rightly that ‘Silicon Valley’s success has been attributed to a vibrant network of ‘weak ties’, i.e., opportunities for would-be entrepreneurs to interact with financiers, potential co-founders and fellow employees in settings such as meetings of professional associations’.
VC’s just rubbish 97% of those would-be entrepreneurs and go for much more matured ones. What do they say about ‘Facebook’?, What about Mark Zuckerberg? Why did they believe in them? Only because the VC’s/Angels were daring enough on the West Coast.
So this is a call to all those VC’s/Angels to please for god-sake come forward, be a bit more “Open” to entrepreneurs.
That’s all.
firms are being too cautious and not taking risks.
Professionalism, work ethics and realty check, these are the points every Startup needs to be focussed right from the day one. these points are not a Financial burden for any startup( you dont need money to be professional ) but it adds lot of value to the startup and always helps you to manage your affairs better,, both internally and externally
Well, I dont think it is fair to compare the investment culture in India with that of Valley. VC/Angel investment is quite a new phenomenon in India and it will take some time for the ecosystem to develop.
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Dear Friends,
I believe that it’s not very difficult to make an impression about the project in the mind of the angel investor or VC’s, if the project is viable enough to sustain in a long run. Even if the entrepreneur initiates for a seed funding where he/ she can show the investor about the project’s competitive differentiation and or any new ideas, then aslo it’s easier to get a funding. However, what is difficult is that the right platform to reach to the investor who can be interested to your project. There are many Seed Funding websites who guides you on how to pitch, make a business plan etc etc etc. BUT, does they all COMMUNICATE with the entrepreneurs when they get to know about a project. I’ve tried in many ways to get in touch with them. Sent my business plan and followed up then. Although their area of interest of investment was similar with my business sectors, they were unable to give me proper feedback. I believe, lack of responsibility-communication-mentoring for presenting them to some group of investors etc. makes them a “MASTER OF NONE”….. Also, last but not the least, many of the VC Funding arrangement companies doesn’t follow professional ethics. Sometimes they steal ideas of others which is an alarming factor in India specially….
Warm regards,
Mr. Supriya Dutta
Kolkata,
India.