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Going nowhere for lack of funding

Going nowhere for lack of funding
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First Published: Fri, Apr 22 2011. 12 58 AM IST

Updated: Fri, Apr 22 2011. 12 58 AM IST
Bangalore: Unnat Agarwal, 26, and three of his friends did everything right by their start-up venture.
For starters, they had a business plan—and this was among the first things they did when they decided to start a business. The four were MBA students at Sanghvi Institute of Management and Science, Indore, then and the idea was to start a coaching and a personality development institute in Indore for students between class V and class X. The start-up capital was Rs25,000, which they rustled up, but eight months later, they had to shut down.
“We had financial constraints, we needed Rs1,00,000. There was no financial aid coming our way. We were not advertising enough and needed space for running classes for batches of 50 students,” says Agarwal who is now running his family’s plywood business.
Stories such as Agarwal’s abound in the start-up space—of venture failing for lack of capital, or mentoring.
In Kolhapur, 24-year-old Koustabh Raj Pandhare started a herbal drinks company after an MBA from Pune’s Symbiosis Institute of Business Management. With an investment of Rs45,000, his company, Nutrolics, was soon making a net profit of Rs40,000 a month, but he couldn’t manage the enterprise and had to shut it down.
“There are two things that I wish I had while running Nutrolics. A mentor, who could share his experience and advice me on how to solve day to day work issues and, secondly, someone to help me with marketing, distribution and expansion plans,”says Pandhare, who is now working on another business idea—a group buying platform for real estate.
The death of start-ups—especially, student start-ups, because others have the benefit of being started by experienced executives with slightly fatter wallets—for lack of financing and mentoring is intriguing because investors and mentors say they are open to helping student entrepreneurs. The problem, they add, is the students don’t know much, even about the businesses they have started.
Many of these students have ideas that are cool and exciting, but often, they don’t have a sense of how big the market is, says T.C. Meenakshisundaram, managing director of IDG Ventures India, a venture capital firm that makes early stage investments in companies and which has backed two incubated college start-ups. “We want to go for a differentiated story, businesses that target large markets and (have) a strong execution team.” That’s all too rare, he adds: “Ideas are a challenge and often the focus is on solving small problems.”
Most students who turn entrepreneurs in college have never worked before, don’t know what it’s like to work and that’s a problem too, say investors. Unlike the US, where students work even during and after high school, Indian student entrepreneurs are raw, says Sandeep Singhal, co-founder, Nexus India Capital, a venture capital firm, which also has a seed fund programme and has been evaluating college start-ups.
“In India, start-ups don’t create applications or offerings for peers. (Their) applications are targeted at enterprises. Facebook was started by a college student for college kids. This is not happening here,” Singhal says. He claims investors aren’t deliberately staying away from college start-ups: “The number of investment opportunities is too high in India. We have the ability to pick and chose. College start-ups tend to fall below the line due to better plans, experience and business validation of other entrepreneurs.”
Put simply, student start-ups don’t make the cut when it comes to investment and the numbers bear this out. India has around 500 student start-ups by some estimates and, at the most, 5-6% get funded with this funding too largely being prize money (for business plan competitions that have become fashionable and common), grants, and seed-money. And Singhal’s statement reflects the behaviour of other investors as well: they evaluate a student start-up the same way they do an early-stage company; the latter are mostly mature, have a proof of concept; generate some revenue; and probably have loyal customers.
“Investors are in the business of making money from their investments. They look for risk and rewards involved an investment. If these are favourable for one company they will back that. We can’t really blame them,” says Sushanto Mitra, chief executive officer, SINE, or Society for Innovation and Entrepreneurship, at Indian Institute of Technology-Bombay.
Even angel investors, who back start-ups in the concept stage, do not seem to be keen on student start-ups. India’s two organized network of angels, the Indian Angel Network and Mumbai Angels have thus far not backed any student start-up.
“We looked at one college start- up, but it got funded by someone else. We are now exploring a couple more ideas,” says Anil Joshi, a member of the Mumbai Angels. “These entrepreneurs are enthusiastic and know what’s hot in the market but proof of concept doesn’t come easily to them. Commercialization is an issue and selling is not easy. Where do you put money if it is not for a commercial offering.”
“They lack experience in terms of what it takes to grow a start-up, but this is an issue with all start-ups not just the ones from colleges,” says Padmaja Ruparel, president of the Indian Angel Network, the country’s largest group of angel investors.
There is another reason why investors shy away from student star-ups, though, paradoxically, it can be argued that their interest itself will address the problem: most student start-ups don’t last beyond college. Business schools typically charge a fee of Rs12-14 lakh and many students avail loans to fund their tuition. When they graduate, paying back the loans becomes more important than pursuing entrepreneurial aspirations, says Shradha Sharma, founder of YourStory.in, which tracks start-ups and has the largest database of fledgling firms in the country.
“How can one sustain a start-up in such a scenario? Knocking doors to get help is not easy. In the US, students connect through Facebook and meet corporate heads over coffee; it does not happen that way here.”
Finally, investors don’t worry too much about student start-ups because most tend to be in the Internet and mobile Value Added Services (VAS) space where it doesn’t take too much capital to start a business. Vijay Anand, a serial entrepreneur, who runs an incubator called Startup Centre in Chennai, says finding truly disruptive ideas in colleges is a challenge, as student entrepreneurs tend to cater to needs they see around them. “I have come across ideas like multi-level phone recharge, selling junk jewellery online or collating question papers, but these are nor scalable,” he says. And without mentoring, he adds, the entrepreneurs behind these start-ups won’t look beyond the Internet and VAS.
So, even as the number of student start-ups has increased over the years (there are more student entrepreneurs now than, say, in 2001), it may be plateauing. “It was a result of non availability of jobs in 2009 that led to the euphoria we witnessed about entrepreneurship. Jobs are back now and we don’t see that craze anymore. People are increasingly saying that they want to be entrepreneurs, but not right now,” says Sharma. “The number of student entrepreneurs continues to be what it was two years ago, which is close to 500.”
At the Centre for Innovation, Incubation and Entrepreneurship (CIIE), attached to the country’s best Business School, Indian Institute of Management, Ahmedabad, the number of start-ups has actually declined over the past two years. Chief executive Kunal Upadhyay cites increase in tuition fees which has more than doubled to Rs12-14 lakh since 2007 as one reason for this.
Yet, there is hope, say experts. Startup Centre, The Indus Entrepreneurs and the National Entrepreneurship Network (and several other organizations) are helping student start-ups by showcasing their ideas, mentoring them, even facilitating or providing funding. “In five years, the number of student start-ups will go up. Things are improving, there are more seed funds now compared with what was available three years ago. People are becoming more aware in terms of business plans, scaling up, go-to-market strategies,” says.
And student entrepreneurs themselves are realizing the benefits of experience. “There are more student start-ups in our one-year PGPX (Post-Graduate Programme in Management for Executives) programme than in our two year PGDBM programme,” says CIIE’s Upadhyay. And this is a good move, he adds. “It’s important to be grounded and know realities of the world. Investments are far more likely if the company is set up by people who have worked in the industry.”
Good start-ups, even if they have been started by students will always find investors, says one investor. “We have heard of interesting companies from customers, angels...,” says IDG’s Meenakshisundaram.
“One can’t hold back a good company.”
In India, start-ups don’t create applications or offerings for peers. (Their) applications are targeted at enterprises. Facebook was started by a college student for college kids.
Sandeep Singhal, Co-founder, Nexus India Capital
This is the second part in a series on student start-ups. The next part will look at the challenges before student start-ups.
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First Published: Fri, Apr 22 2011. 12 58 AM IST