Bangalore / Mumbai: Two-year-old PhiTesla Advanced Technologies Pvt Ltd, an automotive products and accessories maker, has its work plan clearly charted out but for one aspect—money.
On the pulse: Mercatus Capital’s Rajesh Sukumaran says the entry of seed-stage funding is welcome, since that is where the action should be. Sharp Image
The Bangalore-based firm intends to develop high-end digital displays for automotives and wants to initiate the research and development (R&D) right away, so it needs to hire more people. PhiTesla needs funding of up to Rs10 lakh to start this process. Already offering display units and LED brake lights for motorcycles, the firm is breaking even.
Ahmedabad-based Rajesh Nair is another entrepreneur who is all set to launch his alternative fuel system for two-wheelers. Nair’s green and economic fuel kit can help in reducing petrol bills for scooters by as much as 50%. While his firm Lords Automotives has already applied for a patent, Nair is struggling to take his offering to the market and needs Rs15-20 lakh.
PhiTesla and Lords Automotives are two of the hundreds of start-ups in the country that are just a step away from taking a leap into the market for their financial needs. These firms’ capital requirements are comparatively small, a far cry from the usual investment needs of firms backed by venture capitalists.
While the entrepreneurial ecosystem is developing rapidly in India, with incubators, mentors, angels and venture capitalists in place, there is a huge gap between the funding from FFF (an industry acronym for “friends, family and fools”) with which most entrepreneurs start, and venture capital (VC) backing. Almost 90% of start-ups die a premature death in India due to lack of funding and direction.
“We need to spend capital to get a product out,” says Siddharth Shastri, co-founder, PhiTesla. “A funding of Rs5-10 lakh can give us wiggling room and help us in making the product faster and more efficient.”
Having sensed an opportunity, at least three organizations are now coming up with ways to meet these micro-funding needs.
Bangalore-based Morpheus Venture Partners has raised a corpus of up to Rs2 crore to invest Rs5 lakh in start-ups to whom it would also provide mentoring. Bangalore-based Headstart Network is setting up a network through which a start-up can have access to seed capital, from as little as Rs5 lakh to Rs50 lakh from angels and organized networks. Bangalore-based Upstart.in is another mentor-guide that is looking at investing Rs3-5 lakh in start-ups.
“We are what could be called ‘business accelerators’. What people do not realize is that at times entrepreneurs don’t even have Rs5 lakh. This small funding can give a start-up enough room to hire two-three bright people, do sales and marketing, develop a product enough to take it to a few customers,” says Indus Khaitan, general partner, Morpheus Venture Partners.
Funding needs of Rs2-50 lakh have mostly been met by angels in India, with even seed funding from investors such as SeedFund starting from Rs50 lakh. The financial needs of fledgling firms tend to get overlooked by VC firms as well, as their investment sweet spot lies in funding requirements of more than $1 million (around Rs4.62 crore). While developed markets have a culture that promotes start-up funding by individuals, this isn’t prevalent in India.
The seed-stage funding is where the action should be so this is a welcome change, says Rajesh Sukumaran, investment manager for Mercatus Capital’s India operations.
“This will act as a bridge between bootstrapping and angel or VC funding. But you need to know that when a firm is raising such kind of money it requires a lot of structuring and mentoring,” he says.
According to experts, while investors at every level of the entrepreneurial ecosystem are a welcome step, getting the most out of Rs10-15 lakh is a challenge in itself. The cash is only likely to last about three months or so, not enough for a start-up to break even or find another round of funding.
“It’s also risky for companies as they can’t generate revenue in a short span and then there is no one else to fund them,” says Mahesh Murthy, partner, SeedFund. “They are left high and dry.”
According to investor estimates, it takes 18-24 months and capital infusion of Rs3-5 crore for a company to break even.
While there is a clear need to back start-ups, entrepreneurs also need to realize when they should go for institutional capital, says mentor and investor Sanjay Anandaram.
“The requirement of capital should be substantial and needs be backed by a clear need to scale,” he says, adding that promoters should have the confidence that their idea has the potential of becoming a very large business and what they are offering is defensible across geographies and customers.