We need to think of entrepreneurship beyond VC-fundable ventures

We need to think of entrepreneurship beyond VC-fundable ventures

Friday February 27, 2015,

6 min Read

The startup ecosystem in India is progressing at a very stable pace. The percentage of young individuals as well as experienced professionals thinking of entrepreneurship as a career option is growing due to a number of reasons:

  • There is an enabling environment for entrepreneurs. Boot camps, accelerators, and incubators guide first-time entrepreneurs about converting concepts into ventures. The number of funding options is increasing, including venture debt.
  • The emergence of some media houses that cover the startup eco-system, as well as mainstream media that gives some space/time for startups is creating a better understanding of startups, and entrepreneurship as a career option.
  • The words startups and entrepreneurship have entered the vocabulary of the government and there is an expectation of policy and resources that will turbo-charge entrepreneurship.
  • Parents are now a lot more willing to let their children give up lucrative job offers and pursue an entrepreneurial dream thanks to what they have seen and heard in the media. There is now a critical mass for startups and entrepreneurs to not be considered an oddity, but one of the top career choices, at the beginning or in the middle of a professional journey.
  • Also, as a society, we have started becoming more accepting of failures, and have come to recognize that entrepreneurship is a set of experiments, some of which succeed and some fail. Till a few years ago, we used to say that in the Silicon Valley, failed entrepreneurs have a higher chance of getting funded because they have learned what does not work. Glad to notice that the same is happening in India too.

Overall, it is a great time to become an entrepreneur in India.

However, the entire entrepreneurial community, as we think of it today, is miniscule in comparison to the much larger number of aspiring entrepreneurs in the country.

Consider these numbers:

  • There are about 300-400 angel investors across angel investor groups in the country. Of these, 50 – 100 maybe active, and of these, just about 10 or so are doing multiple deals. There may be a handful more that are doing deals independently, outside of angel groups.
  • As a country we funded less than 300 startups last year. The largest angel investor group funded less than 15 companies. Compare this to about 5000 or so applications received every year by some prominent angel investor groups.

For a country of the size and scale of India, this is a very pitiable number. But the reality is much more encouraging. Entrepreneurship, as it is defined or articulated today, is largely about ventures that have the potential to get VC funding. And that is because entrepreneurship and startups are two new words that were added to our lexicon, when US returned Indian entrepreneurs began investing in tech companies. Business schools and engineering colleges became favourite hunting grounds of these entrepreneur turned investors, and later followed by institutional investors, as they were primarily investing in tech or tech-enabled startups that had the potential to raise venture capital.

And when young companies were funded, and their valuation figures were celebrated, ‘startups’ suddenly became a buzz word on campus and among young professionals wanting to make it big. As a result, entrepreneurship popularly started getting associated with angel investors and venture capital funding. All business plan competitions in b-schools and engineering colleges had VCs and angel investors as guest speakers and judges. All entrepreneurship conferences agenda tilted towards venture capital driven entrepreneurship.

Yet, before the words startups and entrepreneurship became fashionable, Indians were already very entrepreneurial. Our commercial acumen was known by the word ‘dhanda’ or ‘business’ and not as entrepreneurship. Somehow, along the road, we started forgetting that ‘starting a venture’ is about starting a business. Young people started thinking of getting angel or VC money as the starting point of starting a business. In fact, the word ‘business’ is often missing in the ‘thinking’ of young, aspiring entrepreneurs who think about a concept and their focus is about generating ‘wealth through valuation’.

Entrepreneurs will do well to remember that ‘wealth through valuation’ is a by-product of building a strong business, not the goal, and certainly cannot be the end goal.

Why I think India is at the cusp of moving from ‘entrepreneurship’ to ‘business’

Venture Capital can fund only certain type of ventures i.e. those that can scale-up exponentially and can create disproportionate value for the capital invested. They can, by definition of the kind of asset class, participate only in high-risk, high-return ventures.

However, there are several businesses that will not provide VC-sought returns, but will provide a healthy dividend on the capital invested. The risks in those businesses will also be much lower.

Programs like ‘Make in India’ and ‘100 Smart Cities’ will throw up significant opportunities for several businesses, many of which will not fit into the VC model. And that’s OK. What we need to create are platforms and mechanisms to provide capital to businesses that are outside of the VC model.

What we also need is to reorient our b-school and engineering college students that entrepreneurship is about starting a ‘business’ that will create value, employment and wealth. And VCs and angel investors are not the only way to fund businesses.

But we do need to expand the pool of angel investors and increase the pool of angel-funded ventures too.

While a number of non-VC-fundable businesses will emerge, we do need the capacity to provide starting up capital to thousands of entrepreneurs whose ventures have the potential to be VC-fundable. However, given the small size of the current investor eco-system, the number of transactions done is very limited.

Typically, angel investor groups invest upwards of USD 500,000. However, a number of startups can actually get started with USD 50,000 – USD 100,000. It becomes difficult for angel investor groups to invest in smaller deals because their members, who are typically ultra high net-worth individuals, are reluctant to write smaller cheques.

At Applyifi, we are on a mission to expand the pool of angel investors by enabling senior professionals and modestly successful entrepreneurs to co-invest in high-potential startups, along with more experienced angel investors. To do that, we are providing potential angel investors online access to standardized, comprehensive pitch decks of startups along with a 36-point scorecard and assessment report. This, hopefully, will make the process of deal discovery and deal short listing easier.

Our goal is to expand the pool of angel investors to about 10,000 individuals and thereby create the possibility of providing startup capital to 10x the number of startups than is practically possible through offline channels. Hopefully, by creating the online platform for showcasing startups, we will also be able to provide capital to ventures other than those with a high-risk, high-return space.

Overall, India has never had a more conducive macro-environment for fostering entrepreneurship. What we now need is to significantly grow the enablers in the ecosystem and enable entrepreneurs to take their concepts to the market.