Having made a number of investments in very young technology companies in India over the years I came to the somewhat obvious conclusion that it is relatively easy for startups Â here to become ‘ramen profitable‘, but relatively difficult for them to exit. Making equity based investments in this scenario is problematic for the obvious reason that without an exit, investors don’t get paid. The alternatives I have heard people talk about to address this are dividendsÂ &Â convertible debt. Dividends are difficult to extract as the entrepreneurs would always prefer to reinvest revenue to fuel further growth. Debt is risky as it can lead to a scenario in which founders lose control of their company.
My dad was a software entrepreneur. When I was a kid he was always at work on the computer on the dining room table writing software to help scientists design experiments. Â After borrowing as much as he could from his father, he talked to a number of investors around us in Silicon Valley, but ended up taking money from John Wiley & Sons. At that point book publishers saw software as something that got sold in the back of books and they already had a model for providing risk capital to authors. In exchange for an advance of $50,000 and a promise of ongoing royalty payments, my dad signed over the rights to the product he was developing. The package sold reasonably for several years, and after 4 years John Wiley gave my dad another advance so that he could create version 2 of the software.
John Wiley & Sons made money on the venture. My dad made money. Everyone was happy. It is unlikely my dad would have been funded under the traditional VC model. Is experiment design a billion $ business ? Is an IPO possible, aquisition likely ? No.
I believe there are far more tech businessÂ opportunities that look like my dad’s business than Facebook. These businesses are largely ignored in Silicon Valley where the cost of living is high and the opportunity cost of not going big makes people shut down marginally profitable businesses.
In India, I feel we should embrace this type of business. Rather than bemoan the lack of an Indian Facebook or Google, we should strive to create thousands of small profitable online businesses that earn their promoters above market salaries and their investors above market returns.
The financing vehicle we use to do this will look more like the publishing industry and less like Venture Capital. Earlier this month I saw this article byÂ Om Malik,Â Why Apps Need a Different Kind of VC FundingÂ aboutÂ Vision+Â which appears to be a Finish VC making these types of investments in young companies. I think this will work well here.
- A Different VC Model - March 22, 2012
- Alternative Startup Financing Schemes - May 26, 2009
- iAccelerator – Supporting Early Stage Tech Ventures - March 18, 2009