“There is a definite lack in the number of fundable ideas in the ecosystem. What we need is more incubation funds.”
I am not sure if that’s so. Fundable ideas, in most cases denotes a team that is mature enough and has the market valuation and the credibility to be looked seriously by a VC firm, not random thought processes that spew out of high school students.
I am even more not sure as to how more funds can help. We don’t need more funds. We need a way for most of the already existing funds to engage in a meaningful way in the life cycle of the entrepreneurship ecosystem.
For some reason, it feels that the stages that an entrepreneur goes through here in India, is in the best form, jerky. There are no proper transitions and the environment is still a little too harsh on young entrepreneurs to foster themselves in the wild. Though there are quite a few incubation centres across the country, very few of them have success stories in their pockets. Most of them are academic institutes, and they run to understand and gain experience – as an insight into the lifecycle of an entrepreneur – and in most cases, a helpless spectator when the startup hits some obvious mistakes along the way. It could have been avoided, if there was an experienced mentor at the helm. In most cases, that term is still so very underrated or a misnomer for a poor substitute of something else. That’s one of the major issues.
The main gap that i would point out is the transition that a startup makes from putting a team together and having their first prototype ready, and then getting to a point where a VC is ready to fund them. I do have a better perspective on this aspect of companies – about 200 of them, thanks to Proto, and I think there is a definite Gap here.
The biggest asset right now, in terms of valuation has become the team and the market/product positioning of the team. If both of these are there then the company, is relatively in very good terms. Considering that the market is yet maturing, and there are very few players offering products, most of these companies have yet to decipher the art of market capturing and all, but for now, it is not a much critical skill. Alliances with the media – because of the spurge and growth in that sector – makes getting a slot much easier and joint advertisement campaigns arent that tough as they are in more matured, saturated markets.
Let me put it this way: If a team and product positioning is what is crucial, and i believe it is, most of the companies that do come to Protohave that. Or they have that within a timeline of about 6 months. What does it take, to take that company from there, to a point where a full-fledged VC firm could sit down and work out their financials? That’s the gap, I am talking about. There is absolutely no one as of now – except for the likes of Mentor Partners, and a few other firms who are looking at such a niche gap.
I personally think there should be more of those.
I hear talks of Angel investment funds trying to setup incubation centres and a couple of VC firms wanting to establish incubation centres or linkages with incubation centres to get their creme de la crop. I am not sure if thats the best strategy to go about. Spot potential and nurture it. We cant get into this vicious game of spotting the one in a million anamoly and positioning ourselves to pounce on it at first sight. There is a responsibility for a lot of VC firms, to invest in this gap, and do something about it.
I do have some thoughts. Actually, quite a few long nights of being awake and scribbling have gone into it. In the true style of a blog, and what the comments section is meant for, we shall discuss it there, as the occasion arises.
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Well Vijay and others we should definitely have a session on this when we get a chance to meet at proto or a barcamp! 🙂
But I would ask a question on another angle – is Venture Capital the only way out? Why cannot the companies think of bootstrapping in some way??
VCs from what I have understood talking to them have a minimum threshold to invest (couple of mil $$s) and look for a 5x to 8x return. You just cannot expect them to invest hundreds of thousands of dollars.
Anyway, coming back to the question I really would question your statement in the post:
“If a team and product positioning is what is crucial, and i believe it is, most of the companies that do come to Proto have that”
if that was really true – bootstrapping should be possible!!! Anyway lovely topic to discuss Vijay next time we meet. 😉
The Gap, as I see, is the inavailability of an ecosystem with resources, the help, nor the mentality to nurture a company from a “Alright, I have a prototype” stage… to “Lets get serious about business” stage.
I’ve personally worked with about three companies, and it takes about a year to get to the stage where their models are proven, their positioning assured and at a point where we are sure that the cost that is associated with scalability is going to be predictable.
I am not sure if incubation centres are churning out too many great companies – they seem to be running a little short of mentors and readility available “experience” as well.
The question is.. how are companies who are going from a prototype stage to a ‘initial deployment and growth stage’ – which is where i would ideally mark the time for their first round of funding – sustaining themselves and how are the 200+ companies that come out and the 100+ that we see every six months on behalf of Proto alone, going to sustain themselves.
Amit,
I am not too sure how availability of historical data would help in assessing the viability of a startup as that would mean it’s a clone of a pre-existing model. That would lead to comparisons and as they say, it’s always difficult to write the second book. Add to that the trouble of proving how you are *one up* over the other, is there enough room for two or worse, why are you here.
Yet another point you raise is on product companies. Do innovation necessarily have to mean only product companies? Don’t we see scope for innovation in process /service offerings…? I had to turn down quite some clients in the past that had modeled their venture on pure service/process innovation, because investors insisted on product/residual assets. I had wondered at this anamoly but then who am I to question an investor choice? Lately I see quite a bit of such companies being received warmly by VCs here. I see enormous promise in them but the only twist in the tale is, they need money not for capex or R&D expenses as is the convention, but for SG&A and other revenue expenses, to be met upfront to build a firm client base. It calls for some explanation, but the bet is far less riskier since revenues begin to trickle in the first few months itself.
Just that we have to sweat a bit more in structuring its capitalization schedule and earnout milestones. But then that’s our lifeline 🙂
I think that early / seed stage companies are in dire need of inputs that will complement what VCs bring to the table. It is supposed to be riskier investment and in the absence of any data, funders will use all possible empirical ways to evaluate the business model. In matured markets historical data is available and it becomes relatively easier (although still herculean) task to estimate viability and thereby separate out the rice and the chaff. In India this data is not yet available; we have only a handful product companies worth their salt. No wonder therefore there is a gap and a long agonising suspense that many souls have suffer.
The problem is to find ways how we can make our ventures more predictable right from the beginning. This would require skill sets borrowed from matured companies in similar business which I am sure the funders follow in great details, but it is equally applicable to start ups to follow. One of the common refrains to this is: will this not stymie entrepreneurship and innovation. My answer is is : if an entrepreneur is planning to create a global organisation and excel in teh market tomorrow, structural , metrics based approach should be ingrained in the organisation from its infancy.
Interesting discussion. So what you’re saying is: There are hajaar startups out there who have the right team and product positioning but don’t have what it takes to get approved by VCs?
So if VCs in-principle common minimum programme requirements are that companies should have such-and-such and falana-tikana, the problem is that most startups are a) not quite qualified yet and b) aren’t able to bridge the gap?
I’m trying to understand this specifically from the point of view of my company, now that we have gotten more clarity on our plans going forward, and need to look for funding. We’re on this side of the gap; we don’t even know how wide it is, what we’re going to face, how many no’s and you’re-stupids we will have to hear before we get somewhere. While I’m thick-skinned, I would like to avoid being the garbage bin of VC proposals.
Back to the argument: would it not be that an incubation firm is specifically geared to target the gap? Firstly,to get any enthu from potential employees, media or junta in general, you need air conditioned glass panelled office, with good workstations, conference rooms etc. Which, as entrepreneurs might realise, is not quite that easily available or affordable. Where one startup may balk at the rs. 200 per sq. ft rates, another might not get the 1000 sq. ft. required, as all office space is sold in 10,000 sq. ft. chunks. An incubators solves this by being a wholesale provider of space at what will obviously be a lower cost.
Other benefits are connections – and proximity. A hallway discussion, a chat over coffee, and a lot of things can come out of it; far more intangible than otherwise.
But of course,mentoring solves the largest problems, where a company is looking for HUGE kick-*** funding and scaling like crazy. Yet, like Alok said, it’s getting cheaper and cheaper to create an Internet startup. Our website took us chicken-feed to create, and we didn’t even use the jhatang type open source can-do-anything sort of portal source code; we wrote our own stuff. (Okay, we’re living in the 90s, but in hindsight it took us less time)
Now if you don’t need all that much money, can a mentor company or even an incubator solve that problem? I don’t know, but I think as Alok said, the money at that level is just not enough in India. The small a few lakhs to a few crores level.
Look at Wallstrip (www.wallstrip.com) – funded by a hedge fund manager who put in $500K into the exercise and sold for $5 million. I dont think many of the organised players would consider that a great exit – because it only took 500K.