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.