Bangalore: The economic slowdown has thrown a spanner in the rise of venture capital, or VC, investments in India post the dot-com boom and bust cycle. Technology entrepreneurs today in the country are a new lot having arrived on the scene after 2003.
Unlike dot-com entrepreneurs who pioneered the use of the Internet to deliver services such as recruitment and travel in India, the current lot of technology entrepreneurs are working on products that can make global impact and have created intellectual property. Technologies, cost structures, customer focus and capital intensity of new product ventures, too, have undergone a huge change.
There is a common perception that technology start-ups require substantial funding, which is a wrong assumption. HeadStart Foundation, a Bangalore-based not-for-profit network of technology entrepreneurs, conducted a survey to track the status of start-ups in the country and what they need to run businesses.
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The survey interviewed 105 start-ups on email across Indian cities in the last week of February. Some 60% of respondents were pre-revenue or seed-stage companies that underscore the venture capital demand-supply gap in the country.
While most venture capitalists in India invest in revenue-making companies, there is an acute dearth of organized seed-stage and angel funds.
The survey found that at least 80% start-ups interviewed required less than Rs2 crore to reach the next stage of growth. That is, if they are a seed stage venture, they need Rs2 crore to start generating revenues and if they are already making money, they need that much more to break even.
This puts a question mark over deals observed in India, where venture capitalists have made investments that are equal to or larger in size when they are at a similar stage compared with their US counterparts. Good examples are first round investments in Facebook Inc. (social networking), Twitter (micro-blogging) and AdMob Inc. (mobile advertising), which turned out to be very popular.
The third finding is that there is a lot more than just venture capital that start-ups require. Assistance with access to early adopters and customers (37.1%) compared with requirement of venture capital (40%). Some 63% wanted angel funding and almost half the survey respondents said they wanted support of incubators that provide infrastructure, expertise and intellectual property support.
This apart, the start-up ecosystem may want to take note of broad trends that have emerged in the past four years. One, the cost of starting up has dramatically fallen. Broadband, computing and storage costs are falling year-on-year and the current crop of entrepreneurs is building new products on platforms that are free or almost are.
Consider Facebook, Twitter, Google Inc. and Yahoo Inc. as platforms where product engineers are creating new applications for free. Technology stacks, such as Linux-Apache-PHP-Mysql used for Web servers, are also open source.
New technology products, especially those that target end consumers, resemble music titles in the sense that entrepreneurs need to create them faster and in larger numbers to score a hit among the user base and capture most market share by working on the long tail of consumers. The falling cost of developing new products is making this possible.
Two, unlike consumer facing products and services, platform products and enterprise applications are having a hard time raising investments in India and across the world. VC investors in India, who are limited by experience in technology segments, consider these platform investments risky and often require proof of repeatable revenues and an established business model. There is, however, an untapped opportunity here.
Three, VC firms in India are not meeting the demand for early-stage seed funding. Instead of adapting to the new economics of start-ups and the new models of consumer behaviour, venture capital firms in India have gone into over-capitalizing start-ups, a lot of which are driven by models in Western markets. Indian venture capitalists have raised money abroad and they perhaps need to have similar deal sizes as per the expectations of their limited partners but large amounts of undeployed money means lower returns.
Graphics by Ahmed Raza Khan / Mint
Kallol Borah is founder of the HeadStart Foundation, engaged in the promotion of entrepreneurship and innovation in India.