Start-ups hold back on offering stake to mentor companies

Bangalore: When Visham Sikand decided to launch his own business in December 2007, the 31-year-old entrepreneur was clear about two things—the start-up would be a product solutions firm for the services industry and he would not seek capital from venture investors.

Instead, Sikand decided to leverage his domain expertise, contacts and work experience. Having worked as a national product manager for credit cards at ABN Amro Bank NV, he already had a list of people willing to try his product. He approached a $3 billion (Rs14,400 crore) business process outsourcing (BPO) firm and a product company to support his endeavour by allowing him to use their infrastructure—his biggest need at the time.

The trio signed an open-ended agreement. Today, Sikand’s Plat5 Consultancy Pvt. Ltd has seven banks, a telecom firm and an airline firm in its list of clients. It broke even in the first month and in 2008, generated revenue of Rs100 crore. “Plat5 will give them work for 12 months and share profits only,” says Sikand about his start-up’s relationship with the BPO and product company.

He is one of a rare breed of entrepreneurs who started their businesses in the last two years and have already taken these to the next level. What is remarkable is that they forged ahead by associating with corporate houses or enlisting their first client as a backer, or by getting financial help from an industry expert, but without offering any stake in return.

“Give business, not (a) stake,” says Sikand, adding that offering a stake at the onset of a business, particularly to venture capital (VC) firms, can bring more constraints than support. “Investors are bosses. They put constraints on you, be it your creativity, independence of running your business or control on it.”

Sikand says he is now getting merger and acquisition offers, as well as funding offers from private equity firms valuing Plat5 at as much as $10 million. Had he approached a VC firm at an earlier stage, the valuation would not have been more than Rs20 crore, he says.

Sikand adopted an approach that contrasts with a wider trend in which many businesses are starting out on the premise that VC funding will take care of their future needs. Within a few months of inception, entrepreneurs start scouting for venture investment without realizing that most VC funds do not invest at the seed level, and having at least one paying customer is a prerequisite.

Bangalore-based Kreeo’s Sumeet Anand, in fact, leveraged his contacts with venture investors.

Anand, who started the collective intelligence platform provider in November 2007, got his business idea validated by at least four VC firms. “We had references from common friends and consultants, which made it easy for us to have access to them (VC firms),” he says.

With the validation, he was confident that the business model would work, and invested Rs20 lakh of his own to jump-start Kreeo. Today, one of the three customers of the company is an investment firm—Nadathur Holdings and Investments Pvt. Ltd.

Then there are start-ups such as Scopial Fashions Pvt. Ltd that have been able to strike the kind of deal that most fledgling firms only aspire to. This less-than-a-year-old online community-based T-shirt designing company was started by two brothers. Now, the firm has signed a contract with a prominent retailer, whose name they refused to divulge, citing competitive reasons, for selling its merchandise.

“We will start generating revenues of Rs5 lakh a month. We are planning to launch the line in mid-October before Diwali,” says co-founder Rahul Yadav.

India lacks an ecosystem of risk-taking funds and customers to pamper a new product or firm, crimping the availability of capital for start-ups. “The risk-taking ability is limited. We do not have mentorship capital. No one supports you at prototype stage,” says Sunny Ghosh, chief executive, Wolf Frameworks India Pvt. Ltd, a cloud computing and Paas or platform-as-a-service start-up.

deepti.c@livemint.com