On Monday (Dec 19), I attended the soft launch of Mentor Partners, a unique technology-focused seed fund, in Bangalore. The firm plans to initially invest $1 million each in 10 product-focused companies in the IT and telecom space: around $500,000 as seed investment or “bridge loan” and the remaining as part of the first round investment along with other Venture Capital firms.
With two partners on the ground in Bangalore (Ravi Narayan who earlier co-founded Nextone Communications in the US and V.Prabhakar, a co-founder of Bangalore-based software testing services firm RelQ), Mentor Partners will help its investee companies get access to top companies in India, the US and other markets via its about 35 other members in its network. The network includes those who are either operating managers (like Vish Narayanan, Head of Telecom Operations at General Motors in Chicago) or “been there, done that” entrepreneurs (like Rosen Sharma who has founded several start-ups like Solidcore, VxTreme, Ensim, Stratum8 and Green Border).
While the number of entrepreneurs with good products ideas is growing rapidly in Bangalore and other cities, the bane of genuine early-stage investments in recent years has been lack of ability and willingness on the part of VCs to provide seed capital (a typical VC firm cannot invest less than $3 million) and more importantly, play a hands-on role in growing start-ups.
Mentor Partners plans to raise its corpus from high-net worth individuals and Silicon Valley venture firms. (Several Sand Hill Road firms have recently made similar investments into local VC firms in China. There are several reasons why it makes sense for Silicon Valley firms to make such indirect investments-despite the issues it create with respect to “double carry fees” for their own investors. For instance, they don’t have to prematurely invest in setting up a full-time team and office in these developing markets. Plus, they get proprietary deal flow for making follow-on investments.)
A key source of strength for Mentor Partners is that there are enough follow-on investors (including some two dozen Silicon Valley VC firms and strategic investors either already on the ground or very keen to invest in India) who can invest $3 million or more into their portfolio companies – when they are ready for it. Plus, as B.D.Goel, a member of the Mentor Partners network, points out, “success” for such a seed fund would be in validating the business models of their investee companies and helping them access name-brand investors as part of the first round. Mentor Partners will then rely on the follow on investors to take its investee companies to the next level, rather than having to hand-hold companies all the way to an exit. For entrepreneurs too, this is much better than having a larger fund invest $1-3 million when their products are still being built and then, just when they seem to be getting their marketing act together, start pushing towards a premature exit.
Mentor Partners’ model-including its relatively small fund size and its unique partner network-is a welcome addition to the Startup-VC ecosystem in India. What’s even better is that there are more similar seed funds that are either up and running or being raised. While Bangalore has seen the launch of the $3 million Erasmic Incubation Fund, Mumbai-based angel investor Mahesh Murthy has teamed up with Pravin Gandhi (a co-founder of Infinity Venture) to raise a $10 million fund to be called, well, “Seed Fund”.
Here’s hoping that these seed funds-which are filling an increasingly obvious and large gap in the eco-system-will close their funds quickly and invest in creating some very exciting technology companies out of India in 2006.
Arun Natarajan is the Founder of Venture Intelligence India, which tracks venture capital activity in India and Indian-founded companies worldwide. View sample issues of Venture Intelligence India newsletters and reports.
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The first comment is too true.
I started a venture (which hasn’t technically started yet) in a niche domain with a brilliant product (it’s not just me saying it, it’s the investors as well).
Getting angels to invest was a no-brainer with this kind of idea, and my kind of experience. Guess what? The angels asked for 80% of the company – with 20% left for 2 partners and the team! I was dreaming of keepig 20% for the team!. No, I did not laugh but the deal was a no deal instantly. That they were offering thrice the money I needed, is another story altogether. The one thing u do not trade for ur heart’s desire is ur heart.
Their argument : we’ll need to create a board as well and that’s expensive. Clients will come but only due to our contacts, you r just engineering the product (which isnt completely true). Well, so sweat! 🙂
Hence, m back to sqaure one, needless to say after having wasted a month, looking for money again and this time, with everyday m loosing time, m loosing market for the product (the world is getting used to dabur lal dant manjan while my colgate is on papers – ha ha – no offense to manjan users really 😉 – and all this while the angels are still in touch, waiting for me to give up.
I won’t call it a fair deal. As Sunil rightly pointed out, future will tell us what this “seed capital” really means.
— Pooja.
Think the first comment hit the nail on the head.
It seems there a wide difference in the number of venture shops who say they do seed capital and those who actually buy their startup lottery tickets.
I wouldn’t blame anybody though. Lately, I’ve been at a loss to explain why nascent ventures almost always suffer the fate of premature death.
My best regards to any venture shop brave enough to finance some wide eyed, pre-revenue, entrepreneur’s product development, because that’s certainly not my cup of tea.
At the danger of starting some sort of a meme, I’d like to rally all fellow entrepreneurs to really roll up our collective sleeves and do something about the shocking lack of success enjoyed by seed stage investment opportunities.
We have to do better. Enough is enough. Let’s just say “NO” to 90% failure rates.
Prasad
Please refer to my earlier post regarding different stages of investment, and who to approach where.
In your context, I assume that you already have lead clients — in that case, you could go to angels if you are looking at a crore or less. If you are looking for 5 crores upwards, VCs might work. VCs will expect a much more complete team than angels. Both angels and VCs will want to ensure that the ideas have feet and have been validated with customers.
Alok
Hi,
I am following this blog for quite some time now. The information provided by this blog to rookie like me is invaluable but I getting confused between the terms which are repeatedly used. For example what’s the difference between Seed funding & Angel funding? PE & VC funding.
I would also like to know which sort of funding is appropriate for startups in different phases. Lets take an example of my company – we are a Pune based product company working in the area of “Advance Data Visualisation”. We are a three year old company having 3 products ready in our basket. Now we need resources to market these products worldwide. In this situation what type of investment is ideal for us? What sort of funds would be interested in us?
Thanks & Regards,
Prasad Kapre
It’s good to see venture funds with seed money coming into India. What still needs to be seen is how much of this venture money would actually be “seed” investment? Will the seed investor bet on young inexperienced teams with brilliant ideas and execution skills and help build team and the company OR they still would follow the angel investment route where most of the investment flows needs a full management team from the beginning.