Sarah has a good roundup of lack of angel investing activity in India. Lets get to the more interesting part – how to solve it?
I ran into Vishal Gondal on a flight few weeks back and he had a model that is pretty interesting. And may be there are some other thoughts in the community. So let me try and frame the problem.
How do we get 1000 angel funded startups every year with average initial investment of $100K? That’s collective $100M in angel capital – enough to get started. Some key issues/ constraints/ leeway:
- Any sector
- The amount may be available through formalized groups or otherwise
- Mostly to concept stage businesses, sometimes prototype – definitely no revenue threshold
- No express requirement for mentor, or active investors (yes, this was a tough one for me to let go)
- Doesn’t include advisory capital, sweat capital, incubation resources, etc – talking cash here
- Equity investment with profit motive – no debt, no collateral, no grants
The unstated one of course is sustainability and good choice of ventures – which is a decision that markets can make. Again, I have no included ownership thresholds – markets can decide that.
Smart ideas out there?
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Alok, Krish,
Interesting note. Debt is useful for valuation differences only, not as secured debt from banks. If you want to put in 50L but have a problem determining a percentage of the company with the founders, keeping it on as convertible debt with conversion at a discount to future valuation is useful (but like you said, the downside is like equity, company goes down and the money’s gone)
Having said that, I know a startup that has worked its way up a relationship with a public sector bank and built 50L as working capital loans over two years, totally unsecured and relationship based;so institutional debt can’t totally be written off. But that digresses from the context of funding, so i’ll stop on that note.
Now how does one get startups together? First, to provide a good investing experience the startups themselves need to understand the importance of quality and timely reporting. From cash flow statements to periodic disclosures, startup founders need to work towards keeping the angel informed. To facilitate that, it may be useful to share accounting/CS resources among startups, and some education sessions on how/why/when this kind of thing will occur. But the main point – it’s not just funding, founders need to understand funding comes with necessary baggage, and you have to respond professionally.
Second, infrastructure is a pain. look at real estate. There’s no need to create another incubator space – it’s better to just share the cost/features of hirable offices, meeting rooms etc. so a new startup can know where to go. (Btw, personal motive: I’m back on my own, I need a single such seat in Gurgaon, if anyone can help – deepakshenoy at gmail)
Computers, internet – all that can easily be leased individually if need be (get a wireless router per startup etc.) Not very expensive.
Third, Encourage some kind of deal flow. Startups are loathe to be acquired or to acquire; angels need to work on that internal deal flow to scale companies. Startup founders too need to open their minds to the idea. And if rivers part, VCs might come in and participate in the deal flow as well – eventually, that is critical, to provide some level of early or partial exit to angels.
Fourth, throw darts 🙂 At the Angel stage visibility is low anyway. Angels aren’t folks to throw money at totally dumb strategies but it’s one of those gut-instinct, like-the-feel-of-this kind of decision, especially when it can scale and the initial money just tests the waters.
And finally, for startups, explore the government or find grant funding. It’s crazy how much funding is available out there that no one seems to want – from SME support, to women entrepreneur soft loans to green energy concept funding there’s a good amount of money that needs little more than pen and paper.
I think the biggest piece in this is the deal flow and mega exits. We haven’t had many of those!
A very relevant issue, and here’s my take on it.
Most of us know about the Kiva model.I think a ‘similar’ model can be applied for solving seed/growth capital issues for Indian startups as well.
I have worked out how the model can be implemented, but I guess the very idea of using social networking to create small, but focused teams of micro venture/seed investors itself qualifies as a startup idea 🙂
So, Alok, if this makes sense, please let me know and I will send you the slide deck.
very interesting thoughts so far. We already have a few seed stage funds and angel networks in India and I believe they are doing a good job. If we look at the top 5 seed funds and angel networks, I would imagine that they fund close to 20-30 companies in an year. And then there are 10s of incubators such as SINE, FIIT etc to support startups at idea stage. I am a believer in supply-demand equation and I do not feel that a whole lot of good startups are left unfunded. If they were really good, I am sure more seed stage funds and angel networks will come into existence on their own. You can only do a little bit to encourage the ecosystem going. The basics have to be strong to support sustained growth.
If some of that money is channelized to all the higher educational institutes and raise the stipend for Graduate/PhD candidates to make it comparable to today’s living standards, it would attract new generation to genuinely pursue higher education and produce some IP assets with possible commercialization value.
If there is a KRA to produce a startup instead of a disssertation, I’m sure we’d have some innovation coming out from our students.
In other words, make incubation centers cash rich with enterpreneurship as a career option on the equal footage. The barriers to entry and selection of candidates would be taken care by exams/institutes rather than Angels/VCs.
And someone should make business model a commodity like outsourcing model (cost arbitrage) instead of every wannabe enterpreneur being asked the stock questions like what’s ur revenue model/what’s ur business model etc. Let the experienced hands take care of them while the young kids do what they are best at rather than putting the whole burden on enterpreneur.
Alok,
For startup founders to secure (external, institutional) debt is hard, if they are straight out of college and no legacy assets to provide as collateral.
When we talk `sound teams’, I reckon a bunch of former senior operations executives (preferably with a market leader) plumbing the depths of a known domain, to bring out a cost efficient, feature rich innovation. Such people can certainly raise debt on their own standing and coupled with the financial stake of the Angel and their own deep seated knowledge of the market, the venture becomes all the more bettable even by the most diligent institutions. (Today, even IFCI has its own seed stage financing division 😉