In the last few months, I have had the chance to sit down with a few fellow entrepreneurs and discuss business plans, thanks to me wearing my HeadStart foundation hat. I noticed a few things that were common – entrepreneurs knew their product very well but not really their target customers, most of them had not spoken to more than a handful of prospects and when it came to fund raising, everyone first indicated they need a couple of million dollars. When we jointly ripped the business plans and re-worked them through, the fund requirement came to a few hundred thousand dollars (most of these companies were pre-revenue or have revenues of upto $300-400k per year, thanks to some related project work) except a couple of them.
Intrigued enough, I ran a survey trying to understand how much startups think they need to get to the next stage (pre-revenue->revenues->profits) and the survey results are very revealing (see here).
I asked a lot of entrepreneurs why they chose a ‘couple of million dollars’ as the figure to ask for and this is what some had to say
1. VCs in India expect a particular % share of a company, no matter what they invest, so better to raise more money than less. Funnily enough, some of them said a couple of VCs (do not want to take names publicly) indicated they will need 25-30% no matter what investment within the $1-2 million range.
2. Some entrepreneurs do not know what to ask for. In the absence of any sales plan and rickety financial models, they go by the million dollars story just because thats what everyone is raising.
I also looked at the E&Y VC Report of 2007 and 2008 and found that Indian startups raise, on an average, similar amounts of money (think it is around $5 million per startup on an avg) compared to Europe and the US; this when, we think India is relatively inexpensive to build products. Is it because VCs in India invest much later in the startup cycle or is that fresh US returned/US mandated VCs have not somehow grasped the Indian ‘value for money’ or is it something else ? Maybe, all of you can throw some light on it ??
Whatever it is, there is a huge hole in the pre-revenue/early stage ‘small deal’ (Rs 1-2 crore per startup) demand and supply for funding. And I hope this gap is filled very soon so that real innovation is not stifled.
Note: the survey results are taken from the Mint article where I put my thoughts on these numbers. 105 startups responded to the survey.
- Demystifying consumer hardware product development - February 14, 2014
- the First Startup Camp @HeadStart Ventures - July 24, 2010
- My experience of raising an Angel fund. - July 18, 2010
If the need Rs. 50 that still 50 more than what you are offering them, Kallol.
I think each of the above post has some value and personal experience behind it. Let me leave my own bit. Its totally personal experience.
I need Rs. 8 lacs to get my company up and running. Rs. 5 lacs will also do. I’ve been trying to raise this amount for the past 5 months and am unable to do so.
Here are some feedback I got while I was trying to raise the money:
a. This is a very small amount why don’t you go for a bank loan. (Why would I come to you if I could do that?)
b. Try bootstrapping, take it from friends or relatives. (If I had such people around me, I could’ve already started it, why would i go rounds)
c. The minimum we invest is $100,000. You are way below our radar. Now, when I mentioned this feedback in a conference to a seasoned entrepreneur, I was told to alter my business plan so that what I need is $100,000. Use what is required and put the rest in the bank for further use.
d. I met more than 200 people whose requirement is similar as mine. Less than Rs. 10 lakhs. Now, I have a business plan that needs $1mil which would invest in these startups.
What I want to tell is, there are many innovators and entrepreneurs at grass root level, who can do a good job and their need is very less. If an eco-system can be developed to cater to these kind of people, wonders could be created.
So finally we reached in our comments where coin has achieved equally head and tail. So life is fair and enjoy it. Just smile on VC face if he feels you to be fool. Because anyways he will laugh after you leave.
Any ways VC’s are smart people. They know what they are doing. But do they know what they r not doing. They will learn with time as we people are learning with time.
@Avtar : yes, i do agree with you. No point over-analysing things. I did the survey work on our (HeadStart Foundation’s) way to put certain things in place. That includes links to industry, mentors (includes service providers that provide services for free to some extent), and incubators in academic institutes. A lot of paper work is going on as I do not believe in some fancy relationship where there is no process to doing things.
I will be posting the first working partnership this week or early next week. I will also post details on VentureWoods.
Those who have money will always feel that those who ask money are asking more than required. You tend to wear a “different hat” when you go to the other side of the table. I guess it ultimately boils down to trust and being smart.
Gap of 1-2 crore area or pre-revenue or early stage is not something that has been discovered anew. Those of us who are in that stage have faced it first hand. But, apart from the fact that we Indians love to analyze and debate things to death, can the gap really be filled? It takes guts to invest at that stage and, with due respect to the Indian VC fraternity, I feel most of so called investors have very low risk appetite. Investors/Angels/VCs need to do something about it.
Not-great teams, incomplete business plans, ideas not thought through are the reality of India. The great-teams that VCs are looking for are happily doing jobs in good companies and are not even aware of risk. Can you plug it besides just putting up a problem statement? Can you, for example, make a team complete by bringing in great complimentary talent? Can you, for example, get one big customer for the startup so that they can move to the next level? Can you do PR for a team not belonging to IIT-IIM or whatever your beloved college was?
If you do that, you might get more involved like what Sunil Bhargava from Tandem mentions. I have no relation to Tandem but atleast they sound like they are doing their bit.
What a great day it would be for India when the so called 1-2 crore gap or pre-revenue funding or early stage funding is really available with genuine risk appetite.