Is there enough funding for startups in India? The buck stops here.

18th Jan 2013
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In what has been one of the hottest topics of discussion in the Indian startup space, availability of funding for startups is what everyone wants to know about. Is access to funds easy or not? First, let’s get a couple of rebuttals out of the way:

Your customer has to be your VC: True, that is the ultimate aim and that is why we’re building the business but funding is crucial, there are no two ways about it. Businesses need capital.

You’re better off running your business without intrusion: Yes, the entrepreneur herself knows her business the best but there has to be someone to question. And an investor is someone who’d ask the right questions because even his/her money is on the line.

Now, let’s assume that the fact that funding is necessary has been established. And here comes in variable India. Not harping about the diversity of the nation, if we look at the startup ecosystem in India- it has hardly been 3 years since it has caught some serious steam. People are getting comfortable with the idea of entrepreneurship and it is becoming an accepted career choice.

The last year saw VCs pour in $768 million into the Indian startup ecosystem via 206 deals which is encouraging but if you ask the early stage new entrepreneur, he’d tell you, “There’s absolutely no (access to) funding!” And yes, when you look at it from his point of view, there isn’t any because he’s not mature enough. He doesn’t know the right doors to knock, he hasn’t seen it happening and hence, it is pretty obvious for him to believe so. But if you ask someone who has raised a seed round, they’d say it was relatively easy and there is no dearth of funding.

This was exemplified at the World Startup Report meetup at the Microsoft Accelerator where all three entrepreneurs in a panel (Manish Sharma- co-founder of Printo, Shivakumar Ganesan- founder of Exotel and Richa Kar- founder of Zivame) who had raised money earlier shared that their fund raising experience wasn’t tedious. They believed raising the next round of funding is difficult because concrete numbers play a very important role in discussions with the investors and the scale suddenly increases. Mukund Mohan, the CEO in residence at the Accelerator put forth a point about the Boomerang effect. It basically means that once you’re through it, you probably think it wasn’t very hard. The entrepreneurs who’re looking for Series C believe that earlier rounds were easy, entrepreneurs looking for Series A believe the seed round was easy and naturally, the entrepreneurs who haven’t raised money before will feel that raising money is altogether difficult.

And India being the nascent startup ecosystem it is, the entrepreneurs who haven’t raised money will surely be in the majority! Another example of this was clear at the Mobile India 2013 event where a very high authority of ComsNets believed that there is not enough funding. Now, his point of view was coming from the fact that students at IISC were coming up with amazing products that weren’t getting funding to scale and commercialize. Now these students have no clue which doors to knock and if I were an investor, I wouldn’t invest in these entrepreneurs as I’m most likely to lose money.

So, it’s just a mindset that is undergoing a shift. Angels and VCs look for mature products that have the right market fit and have the potential to scale and there is enough funding in the system to build these promising companies. But from the point of view of a young entrepreneur, the system is encouraging only when it is ready to back him when he is not ready which will call for a high risk taking appetite from the investors. And with the market hotting up, this is beginning to happen as deals are being closed on quicker and the investors don’t want to miss out on good bets because if he doesn’t, someone else will invest.

This can end here but drawing inspiration Benjamin Joffe’s Ecosystem 101 post on Techcrunch wherein all the major startup ecosystems were mapped in terms of 6 key parameters (India wasn’t on it at that time since Benjamin hadn't been to India till now). We’re taking a shot at it first to map out India. ‘Market’ is the potential, ‘capital’ is how easy is the access, ‘people’ is the social link- how conducive is the social environment, ‘culture’ is how encouraging the ecosystem is and how well failure is accepted, ‘infrastructure’ is what it means and ‘regulations’ are about how hard it is to startup. (indepth details about the parameter in the post)

ecosystem criteria mapped

India is in blue, China in green and USA in red (The scale is qualitative and has been decided by Benjamin, we’ve just drawn the curve for India). The picture isn’t very optimistic but the optimistic part is that it can only go up! And it is, you’ll see the trend lines converging soon.

To sum the funding part up, there is enough money in the system to fuel the startups but they just need to mature a bit more. And the process will be accelerated by higher risk appetite from the investors.

P.S. The points on the scale can be contested for India as every argument will have something in its support. Let us know what you think.

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