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Start-ups in fund trouble, even as incubators hike early-stage funding

Start-ups in fund trouble, even as incubators hike early-stage funding
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First Published: Mon, Jan 25 2010. 09 50 PM IST

Updated: Mon, Jan 25 2010. 09 50 PM IST
Bangalore: It’s an act of both desperation and instinct. As downturn-hit investors turn more fussy and miserly, the country’s most prominent incubators are raising early-stage funds so their fledgling firms have the money they need to grow.
The Centre for Innovation, Incubation and Entrepreneurship (CIIE) at the Indian Institute of Management, Ahmedabad (IIM-A), is raising two early-stage funds focused on the clean technology and telecom sectors, to be launched in three months.
The incubation centre at the International Crops Research Institute for the Semi-Arid Tropics (Icrisat) is raising a $10 million fund (Rs46.2 crore), and ICICI Knowledge Park (a hub for the world’s top information technology and biotech firms) is raising up to $40 million.
That’s new ground for business incubators—designed to mentor entrepreneurs through their early stages and usually run on government grants. Firms they mentor, after a certain level of growth and maturity, typically approach larger investors such as venture capital (VC) firms to fund their next stage of growth.
And that’s where the hitch lies. VC firms, for reasons ranging from poor mentoring to a lack of quality entrepreneurs emerging from the system, seem to have lost faith in incubated companies.
Sarath Naru, a VC investor and a board member at both Icrisat and ICICI Knowledge Park, says incubators have to figure what they really want to incubate—a completely new technology, a significant enhancement on an existing system, or service providers.
“While they (incubators) are a good source of deals, the matter of the fact, however, is that they (incubated firms) are finding it difficult to find follow-on funding,” said Naru, managing partner at Ventureast Fund Advisors, an early-stage investment firm. “The quality of entrepreneurs is not as high as it should be.”
India has around 40 incubators mentoring between four and 20 start-ups each. Even if only some succeed, that’s a few hundred firms looking for VC funding every year. But the disinterest of VCs has been evident. Ojas Venture Partners, for instance, backed incubated firms such as Bangalore-based mobile start-up Mango Technologies Pvt. Ltd in 2008 and interactive mobile answer engine Ziva Software Pvt. Ltd in 2006, but none after that. Mango Technologies has developed the thinnest modular application and user interface framework, which reduces engineering effort and time spent on development and integration of handset platforms. Ziva’s flagship product is called Zook, which is based on a unique paradigm for mobile search which ensures that the users are provided with exactly what they want.
“It bothers me that early-stage funding is highly constrained in the country and what it could imply for the incubated firms,” said Kunal Upadhyay, chief executive, CIIE, which mentors around 15 start-ups every year. “That’s why we will have investment funds in CIIE. We want to ensure that our companies are not constrained due to lack of funds.”
CIIE has so far been offering Rs2-25 lakh to firms it incubates. After raising its two funds, for which it has received several commitments, it will provide up to Rs50 lakh for its companies. Upadhyay didn’t give details on the size of the funds.
Other institutes, too, are charting alternative ways to support their firms. The National Institute of Technology, Kozhikode, Kerala, which has raised its funding limit to up to Rs25 lakh from Rs10 lakh, is helping its firms get loans from State Bank of India, the country’s largest lender. The Centre for Entrepreneurship at the SP Jain Institute of Management and Research in Mumbai is working on a system to get its alumni to fund firms it incubates.
In India, incubators have been active the last three-four years but only a few of their firms have attracted VC funding—not surprising, as a start-up typically needs five-seven years to get on its feet.
Still, incubators have to make themselves attractive by choosing the right entrepreneurs, says Alok Mittal, managing director, Canaan Partners India, a technology focused, Delhi-based VC firm. “The issue is how you get an entrepreneur to run the company at incubators. If an incubator is just an office space, it adds no value.”
Some incubators agree with the VC firms and say it would be tough to attract more funds till investors see successful products emerging from the system.
It’s a slow process, says Sushanto Mitra, chief executive, Society for Innovation and Entrepreneurship (SINE) at IIT Bombay. “VCs are not charitable organizations. They invest looking at potential to make money. A majority of the incubated companies have not matured to that level,” he said. “It takes two to tango.”
RSVP
What: Proto.in
When: 30 January
Where: Indian Institute of Technology, Bombay, Powai, Mumbai
More: This edition of Proto.in is transitioning to a new format. Besides the usual Proto.in showcase, the other highlight of the event would be unique conversations where the two speakers engage in chit-chat over some very important and current topics in the start-up landscape. There is even a brunch for the alumni and those who’d like to stay back and catch up the next day.
deepti.c@livemint.com
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First Published: Mon, Jan 25 2010. 09 50 PM IST