Firms cash in on the start-up business, offer consultation5 min read . Updated: 14 Sep 2009, 10:16 PM IST
Firms cash in on the start-up business, offer consultation
Firms cash in on the start-up business, offer consultation
Bangalore: When Rakesh Antala started his background verification firm Crederity Info Services Pvt. Ltd in 2007 in India, he realized that the local market was a mystery. Antala wasn’t sure if Indian companies and job seekers would take to the services he offered, including screening potential employees and checking their credentials.
“It was more of a tangible help than a strategic one," says Antala, Crederity’s chief executive officer (CEO). “MVP was very hands-on and helped us in issues like hiring on key positions, product testing and gauging feedback." It was better to get on board “someone who has been there and done that", he says, referring to the entrepreneurial background of MVP partners Indus Khaitan, Sameer Guglani and Nandini Hirianniah.
The move has certainly helped. Earlier this year, Crederity raised funds of sub-$1 million (around Rs5 crore today) from venture capital firm Ventureast Fund Advisors. Over the last 18 months, a number of firms have opened across India targeting start-ups such as Crederity, offering handholding, mentorship, consultation and advisory services, including legal counselling, and exclusive start-up-oriented job portals.
MVP, for example, has a portfolio of 18 companies. The firm, less than two years old, engages with a start-up in the first 12-18 months of inception, the most crucial period for a start-up (known as the “valley of death" in the venture capital business).
Mentoring and consultation includes product design, technology, operations, marketing, sales, fund-raising, team-building and finance. MVP takes on a firm for four months for equity stakes of 4-7%.
“Our investment horizon is five years and we give consultancy of 10-15 hours every week," says Khaitan, partner at MVP. Even after the stipulated period is over, MVP continues to consult with these firms, but not on a regular basis.
Bangalore-based i2india Ventures Pvt. Ltd is more like an incubator that takes care of everything. The firm not only sources patents with commercial viability from institutes and inventors, it also manages intellectual property management and licence negotiations. Further, it floats a firm and even hires its top management.
For its efforts, i2india picks up an equity stake of 30-40% in the start-up, while taking a 20-60% share of the revenue.
New Delhi-based management consultancy firm Growx Ventures Pvt. Ltd deploys its own executives to run entire businesses or manage specific functions in a company, typically a start-up or an early-stage firm, in return for monthly revenue-linked fees and substantial equity holding.
Growx’s monthly fees can run up to 40% of a firm’s revenue, while its equity holding ranges from 5-30%, which will be vested over a three-five year contract period based on pre-agreed performance criteria.
“Cashing out on the start-up business seems viable now. So we are here," says Ashish Taneja, managing director and CEO of Growx.
One factor that seems to go in the consultants’ favour is their experience in running their own enterprises in the past.
“The whole vision is to improve the probability of success. The challenge is to improve the current 10% success rate of start-ups, by weeding out possible hurdles," says Taneja. “My guess is in years to come, some success rate would increase rather than failure rate remaining stagnant."
For Mumbai-based Sutra Services Pvt. Ltd, which has an exclusive job portal featuring opportunities in the field of technology, Internet, gaming and mobile, the growth of new firms means a new business opportunity. “We are looking at partnering with companies as they are scaling up. The idea is that we will grow with them as they grow," says Waqar Azmi, the firm’s CEO.
In fact, SutraJobs.com’s business model is an example of how start-ups are creating a niche for themselves as they cater to other start-ups. As job sites such as Naukri.com and Monster.com have already created a market for themselves, “the other option for us is to create a niche or an industry-specific portal", reasons Azmi. “I guess a lot of vertical portals will come up, that’s the only way to go up."
A lack of knowledge about legal procedures for setting up a new venture and a broad feeling that start-ups do not need particular services such as a corporate legal structure is further leading to the mushrooming of such firms.
“Most tech companies are good in technology, but they do not understand legal perspective. All firms face the issue of little or no awareness of legal procedures," says Sharda Balaji, founder of NovoJuris Services India Pvt. Ltd, a Bangalore-based legal consultancy. It helps start-ups in capital structuring, compliance, right employment agreements, intellectual property—their own, or licensing. NovoJuris takes an equity stake of 1-2% in these firms and cash as well, depending on individual cases.
One thing that stands out in the revenue models of these mentor start-ups is that they are increasingly opting for equity stakes in these fledgling firms. A big reason is that most start-ups lack an easy flow of cash. Also, an equity stake is expected to give higher returns than a cash payment. It is important for promoters to gauge what kind of value additions these associations bring. Also, just striking such alliances does not assure success.
“These firms only fill gaps. But at the end, it’s you who run the business. An entrepreneur can expect them to do everything and change things overnight. There is no guarantee that things would improve," says Himanshu Khurana, director at LifeMojo, a venture of iStrait Software Solutions Pvt. Ltd.
Investors, on the other hand, see this as a positive trend. “No VC (venture capitalist) will invest in you just because you have a referral. A referral, however, from a well-known consultant does get attention," says Mohanjit Jolly, executive director of venture capital firm Draper Fisher Jurvetson India.
Sarath Naru, managing partner at Ventureast, says advisory firms need to sit back and guide these start-ups towards sustainability and cost-effectiveness so that they can run longer without seed or very early-stage funding.
What: Startup Saturday
When: 2-6pm, 10 October
Where: American Center, 24, KG Marg (near Connaught Place), New Delhi
More: Registrations are not open yet. For more details, log on here