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Business News/ Companies / News/  A VC idea whose time has come?
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A VC idea whose time has come?

VC investors are incubating ideas for initiating new business models, generating many of these themselves

Early-stage investors decide to incubate ideas when they are interested in a space but are not able to find a deal that ticks all their checkboxes—maybe the team is weak or the valuation is too high. Photo: Ramesh Pathania/Mint (Ramesh Pathania/Mint)Premium
Early-stage investors decide to incubate ideas when they are interested in a space but are not able to find a deal that ticks all their checkboxes—maybe the team is weak or the valuation is too high. Photo: Ramesh Pathania/Mint
(Ramesh Pathania/Mint)

Mumbai: Four years ago, venture capital (VC) investors started turning stage-agnostic and striking deals above $5 million to cut investment risk typically associated with start-ups. Now they are incubating ideas for initiating new business models in India, replicating what has been successful globally.

Interestingly, many of these to-be-incubated ideas are being generated by VC investors themselves and are based on their assessment of global trends that could be transplanted to India.

Recently formed Infuse Ventures, an India-centric investment fund to support start-ups in the sustainable energy and clean technology sector, plans to incubate five to 10 ideas over the next three to four years. It will also look at backing 15 to 20 start-ups and invest in the range of 50 lakh to 6 crore. If required, it would infuse more funds.

“We shall be incubating ideas in the clean-tech space as there are not many incubators focused on the sector. It is a gap that exists in the ecosystem and we are attempting to fill it," said Kunal Upadhyay, chief executive, Infuse Ventures. “Most incubators and accelerators in the country today are focused on sectors like Internet and mobile."

Investors say they do not incubate business ideas at their whims and fancies and that these ideas are picked after in-depth research.

“We, as global investors, are continuously studying different markets and we do notice that certain ideas do well across geographies. We incubated (online retailers) HomeShop18 and Zovi.com as we had seen success of such ideas in the US and China," said Mukul Singhal, vice-president of SAIF Partners.

Experts say VC investors typically incubate niche ideas that include the likes of robotics, nanotechnology and biotech.

Experts say there is no fixed definition of incubation when it comes to such initiatives by investors. For some, incubation means offering physical infrastructure while others believe offering advisory services to a fledgling firm serves the purpose of incubation. A few also include seed capital and mentoring in defining incubation.

Why incubate

Early-stage investors decide to incubate ideas when they are interested in a space but are not able to find a deal that ticks all their checkboxes—maybe the team is weak or the valuation is too high. In another situation, an investor may have the conviction about a particular idea but doesn’t find any start-ups pursuing the opportunity. Also, with incubation, they can correct mistakes early.

“Incubation is a function of what early-stage investors get excited about," said Alok Mittal, managing director, Canaan Partners India. “There are some ideas that one may want to invest in at the first step and there are others where one would look out for a proof of concept. If an investor likes an idea before the proof of concept, that’s when they will incubate it," Mittal said.

It is also a function of competition in the market, he said, adding that investors may want to participate early in a segment than lose an interesting opportunity.

Canaan Partners had hired Sharad Sharma, former head of Yahoo India Pvt. Ltd’s research unit, as its entrepreneur-in-residence (EIR) in India to come up with a business idea related to cloud computing and launch a start-up. Sharma is now chief executive of BrandSigma Inc., which offers analytics for brand management.

Incubation, however, is not easy. Mortality is highest at the incubation stage with nearly one-third of ideas perishing because they are untested. Furthermore, the cost of learning has to be borne by the investor. What makes up for the risk are the potential returns, which can be multi-baggers. Internal rates of return for early-stage deals are expected at 25-30%, and at 40% for incubation deals.

Investors say while skill sets that are needed for incubation and investment in the early stage are not too different, incubation is time consuming. That is probably the reason why investors don’t want to incubate many companies. Also, incubation is typically directed at the same areas as the early stage investment thesis of a fund.

Incubation at VC firms has its share of advantages. The biggest advantage is the financial strength that the funds have to back a company’s efforts to scale up in future.

“A firm may today need 25 lakh but they will need 10 crore later. With funds, they can be confident that capital will be available relatively easily," said Canaan’s Mittal. “We are not competing with incubators. It is a reality that VCs can’t incubate more than 10% ideas. We can’t replace incubators."

The increasing appetite of VCs for incubation comes at a time when there are at least a dozen accelerators and incubators operating in the country, promising handholding and mentoring to start-ups.

Sameer Guglani, co-founder at the Morpheus, one of the oldest accelerators in the country, which has been associated with over 65 start-ups, says the start-up support ecosystem is still developing in India and the addition of different channels is valuable.

“One trend that I have noticed is that VCs are incubating their own ideas…this is less of support for new entrepreneurs," said Guglani.

VC firms versus incubators

In VC-backed incubation, the timelines are shorter compared with as long as two years it may take at incubators, said Anil Joshi, vice president at Mumbai Angels, a prominent angel investors group. With incubation at a VC firm, an entrepreneur gets access to larger capital, strong business and investors’ network and branding.

Professional incubators, on the other hand, offer large commitment in terms of time besides physical infrastructure, access of operational experts and direct feedback. While in VC-backed incubation, the investor may be a partner, in an incubator, an entrepreneur may have to part with a small amount of equity.

For Bangalore-based e-commerce company Zovi.com, which was incubated by SAIF Partners from scratch, the biggest help from the investment firm was in getting the start-up connected with vendors, says Manish Chopra, chief executive officer.

“They were intensely involved from day one. While we were a start-up, new door opened for us and it helped that we were backed by a global investment firm," he said.

According to Chopra, with the backing of a global investor, it was easy to convince people to join the firm. For VC-incubated firms like Zovi.com, the investment interest is very high, Chopra said, referring to the $25 million that the start-up has raised so far.

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Published: 12 Jun 2013, 11:06 PM IST
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