Bangalore: It was one of the start-ups that was spotted early. In May 2006, its founders Kartik Jain and Manish Agrawal were chosen the first TiE Entrepreneur awardees under an Entrepreneurship Acceleration Programme run by The Indus Entrepreneurs, or TiE-EAP, and received angel funding (angel investors invest their own capital in a business start-up). As recent as late-2008, the Bangalore company was on a shortlist at the Tata NEN Hottest Startups competition.
Strategic ties: Picsquare.com co-founder Kartik Jain (left) and Infibeam.com founder and chief executive Vishal Mehta.
Today, photo printing portal Picsquare.com Jain and Agrawal’s start-up is part of Ahmedabad-based online retailer Infibeam.com, run by NSI Infinium Global Pvt. Ltd, after being acquired late last year. Being associated with a firm that is in a related business was not the plan but Picsquare says it didn’t have much choice given that venture capital, or VC, funding was hard to come by.
“Raising capital from investors is a huge task. It takes away a lot of bandwidth… If we wanted to raise VC funding either I or Manish (Agrawal) would have had to get into it completely,” says Jain, adding that the founders’ immediate priority was to focus on business execution.
Across town, another start-up, an energy-saving electrical appliances maker, was looking at raising capital from investors to fund its market expansion plans. After around six months of unwavering persuasion, when it was nowhere close to raising capital, it decided to offer a minority stake to a corporate house and generated working capital.
“Not many VCs came forward to fund us,” said this start-up’s chief executive, requesting anonymity for himself, his firm and the company that had picked up a stake in his firm. Investors were reluctant to fund firms working in the green tech space after the financial meltdown.
Start-ups, which generally face the issue of raising capital in multiple rounds, are now turning to funding from companies that are strategic in nature (they may be in the same or related businesses) as VC firms turn shy of making commitments.
To be sure, the likes of Intel Corp. or Cisco Systems Inc. have for years actively played the role of so-called corporate VCs, leveraging the parent’s balance sheet or running separate funding arms.
What can be of interest for a bigger firm in partially or fully acquiring a smaller company, especially if it is doing so for the first time? A stake provides the investor with the upper hand with the investee company as it can demand exclusive relationship over the investee company’s products or services—in effect, warding off competition. “Also, they can set the strategic direction of the investee company, say, in terms of which markets to enter,” says Mohanjit Jolly, executive director, Draper Fisher Jurvetson, India.
Also, different investors—corporate houses, VC and private equity funds, corporate VCs—have different parameters of investments. A firm that makes localized language-based mobile or Internet applications, for instance, can be of high interest to an Internet or mobile value-added services (VAS) biggie than to a VC as revenue streams and scalability of such firms are not easy to project.
Earlier this year, Rediff.com India Ltd increased its stake in Tachyon Technologies Pvt. Ltd, a Chennai language software start-up, to 26% from 19%. Tachyon’s founder and chief executive Ram Prakash H. said it was a deliberate move to generate funds from Rediff as VCs would not have been convinced about their research-based strategy.
Smaller outfits, often with no experience in funding, are looking at the slowdown as an opportunity to find synergy fits in buyouts. “This is our first acquisition. We will be opportunistic and continue to look for strategic fits in future also,” says Vishal Mehta, founder and chief executive of Infibeam.com.
Mehta said Picsquare offers customized products, something that Infibeam had been thinking about. Also, the products line of Picsquare would allow Infibeam’s customers to order products they otherwise wouldn’t have found. “By taking them over, we could accelerate our plans…hasten up our entry into that market,” he adds.
On the issue of losing control of their start-ups, promoters say what is paramount is growing the company as fast as possible. “As an entrepreneur, I really see my job is to solve problems—be it on my own or as being part of a bigger player,” says Picsquare’s Jain, adding that he feels they are better equipped now.
Also, start-ups are not only looking at bigger players for joining hands. Online portal of gadgets and gizmos Cafegadgets.in, then run by AXAAN Systems Pvt. Ltd, went a step further. It decided to join hands with Crazypricing Online Services Pvt. Ltd, another start-up, to form a bigger entity, in a share swap deal.
Crazypricing had plans to be an online and retail venture and was looking for an online partner. “We gave them the online platform,” says Hitesh Dhingra, chief executive and founder of Cafegadgets.in.
Still, such firms say they are not shunning the VC route and will go down that path later on. Tachyon Technologies, which has sold a stake to Rediff, says its funders will likely be different in the next round. “When we need investments for marketing, our partners would be different. A strategic alignment has to be there depending on your stage,” says Ram Prakash.