Innovation-driven tech start-ups struggle to find VC funding
Lack of scalable business models and absence of a successful precedent have kept investors and entrepreneurs away
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Bengaluru: Over the past two-and-a-half years, Arvin Padmanabha has been trying hard to find an investor for his interactive marketing products start-up, Cross Works. He has not succeeded yet.
Shubham Mishra, co-founder of Absentia Virtual Reality, a start-up that churns out three-dimensional representation of any two-dimensional content, even contemplated shifting to the US, after several rounds of futile talks with investors.
Padmanabha and Mishra are not the only ones struggling to raise capital, at a time when consumer Internet companies are mopping up billions of dollars from venture capital (VC) firms.
They have company in start-ups, such as Global 3D Labs, run by Additive Manufacturing India Pvt. Ltd, which makes customized three-dimensional printers; Vinfinet Technologies Pvt. Ltd, which manufactures devices to remotely control irrigation motors; and Papertrell, owned by Trellisys.net Pvt. Ltd, a digital publishing start-up.
“We have been looking for people to fund us, but I am not able to get through the right kind of investor or put it across to them as to what we do or even understand what they are looking at while investing,” said Padmanabha.
The lack of investor appetite and entrepreneurial inclination for innovative technology are consequently ailing the domestic start-up ecosystem. India was ranked 76 in the list of global innovation hubs, as against 66 the year before, according to a 2014 survey jointly published by Cornell University, Insead and the World Intellectual Property Organisation. India’s rank in the list has been slipping steadily since 2011, when it occupied the 62nd position.
Venture capital firms typically back firms that have an addressable market of Rs.1,000-5000 crore and the potential to capture at least 10-15% of the market in about five years. This is not the case with most of these businesses in their formative years.
“It is not that they are not healthy and viable businesses, but they won’t fall in the category of venture capital fundable businesses,” said Sanjay Swamy, co-founder, Prime Venture Partners, a venture capital firm.
“The venture capital firms will look at standalone companies or those with potential to become one,” he added.
Consequently, these start-ups, which are mostly boot-strapped, also struggle to bear the cost of manufacturing and launching the products without external funding.
“It’s hard to raise funds, especially when you’re a technology start-up. We met many investors and they were just looking for traction. For us, it is more difficult because we can’t get traction, as of now, because we can’t manufacture these products at our costs and get it to the market,” said Mishra of Absentia Virtual Reality.
To be sure, it is not like their products have not found any takers. For instance, Cross Works counts Nestle SA, GroupM, Oracle Corp. and Philips among others as clients, while Global 3D Labs claims to have sold at least 100 printers, priced Rs.60,000 to Rs.200,000.
Vinfinet Technologies claims to have sold at least 15,000 devices. Papertrell has published more than 100 paid e-book apps.
While the consumer Internet start-ups are riding a valuation bubble, lack of scalable business models and absence of a successful precedent have kept both investors and entrepreneurs from treading paths never walked before.
“Investors are funding copy-paste start-ups. That is a transitional period and happens everywhere. We are in that interim period where is a little muted for innovation-led entrepreneurship,” said Sharad Sharma, angel investor and co-founder, iSPIRT, a technology product think-tank.
Indeed, investors have been pumping money into start-ups in online retail, hyperlocal logistics, on-demand delivery services and taxi aggregation segments, among others.
For instance, Flipkart, Ola and Snapdeal, three of the largest home-grown consumer Internet companies, have together raised at least $5.6 billion. Similarly, the hyperlocal food, grocery and on-demand services start-ups have raised at least $100 million in the past eight months.
Industry bodies have been working hard to connect more investors with innovators.
For instance, iSPIRT recently hosted Innofest to herald a shift from a me-too approach to innovation-led businesses.
Experts say it will need many more events like these and a sustained effort on part of entrepreneurs, investors and the industry bodies to bring about such a shift. In many cases, the investors are not familiar with the sectors, and hence unwilling to fund such firms, said Alok Goyal, partner,Helion Venture Partners.
Absence of many previous instances of such start-ups making it big and a big enough local market also acts as a hindrance, said Ravi Gururaj, chairman of Nasscom Product Council, an affiliate of the software lobby group. “Besides, we have to be unbiased in judging whether something is really innovative. Investors try to figure out if something is a global innovation or something new in the Indian ecosystem that we have never seen. Again, we have not seen a lot,” he said.
In an attempt to ensure availability of funds for smaller start-ups, the government last week announced a fund by Small Industries Development Bank of India (Sidbi).
The India Aspiration Fund, which will have an corpus of Rs.2,000 crore, is a fund of funds that would invest in venture capital funds for meeting the equity requirement of start-ups.