No money for early stage ?

Written by: Vivek Garg

On Nov 30th, 2006

We have asked if India is ready for web2.0 here. Also we raised our concerns about our booming internet industry here. Although we have our doubts about the industry, we are seeing a lot of money flowing into India recently. We saw grabbing $7 million and then we saw sulekha getting $10 million and more recently we see that travelguru, the leading travel portal got $15 million. See a comprehensive list of investments here. We have stats and reports of VC firms raising billions of dollars to invest in India. New funds are coming into existence every day raising even more money. But the point to note here is that most of the investments we have seen till date are either late stage in nature or in the companies that mimic proven business models elsewhere. Some of the companies we recently interviewed like redbus here, onyomo here and picsquare here are all still working on angel funding. These companies are more or less in early stage now. The feeling we got after talking to them was that the VCs are queued up on the sidelines. VCs don’t want to miss the opportunity when the time comes but they don’t want to move in unless they see some traction in these markets. Is it the traction or is the risk of investing in early stage Indian startups way too high?

There is a lot of buzz about a maturing investment ecosystem in India with impressive exits. We saw that with the Info Edge IPO recently that is trading at 85% premium. This article here states how early stage funding has grown YOY in India listing some good examples. Still it’s not scratching the surface of billions of dollars already waiting to be invested. In the report “Is the Venture Capital Market in India getting overheated” – Evalueserve reports that over 44 VC firms are now seeking to invest more than 4.4 billion dollars in India over next 4 to 5 years but cautions that there will be a glut of VC money. It also highlights that it is not possible to invest in 150+ startups if the VCs are going to be sticking to their favorite sectors and just the late stage investments for that matter. Well, we are not saying that they should start throwing money at every startup out there. What we are trying to understand that if the VCs will be at ease with the risk levels associated with early stage funding in India, compared to rest of the world. While looking for an answer, we found a paper on “Accessing Early-Stage Risk Capital in India” by Rafiq Dossani, a senior research scholar at Shorenstein APARC. Some of the points in the paper resonate with our thinking about web 2.0 companies in India. Following points might be the reasons why a lot of early stage ventures are not getting funded. We have read similar arguments earlier in the blogosphere in some form or the other and this paper actually goes in much more depth. For the sake of discussion we will reiterate some of them

1. Lack of confidence on early stage entrepreneurs.
2. Lack of weak ties network like the one in Silicon Valley.
3. IP creation and protection not clearly defined.
4. Domestic consumption and market not easily identified.
5. Govt. hurdles – redbus founder confirms this sentiment after spending a day in offices to register their company.
6. Poor internet penetration and computer illiteracy.

As per this paper, India has 6.9% of total risk capital invested in seed and early stage ventures, compared to 12.5% in China, 29% in US, 32% in Israel and 39% in UK. What can we do to change this? Is getting into a proven business model the key for Indian startups? What will drive business process innovation? India is a different market and what works elsewhere might not necessarily work in India. Key dynamics are different. We access internet not from schools or homes but from cyber cafes. We do more texting than typing on keyboard. Mobile penetration and growth far exceeds internet and broadband penetration. In our opinion we will need some serious business process innovation to build good companies and this can only be possible with money going into innovative and not yet proven ideas.

Let us know why do you think early stage is not getting funded or if you think otherwise. Read more on early stage investments at iLeher trusted sources powered by Google customized search.

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Entry Filed under: Venture capital,web2.0

19 Responses

  1. 1. IndianPad said on November 30th, 2006 at 6:24 am

    iLeher » No money for early stage ?- All about Internet industry in India…

    iLeher » No money for early stage ?- All about Internet industry in India posted at…

  2. 2. Santosh said on November 30th, 2006 at 4:52 pm

    I’d like to add to your list of reasons why it is hard to land early-stage funding from VC’s and Angels –
    Valuing startups in India is hard due to the lack of robust M & A activity. Outsiders hesitate to invest in Indian startups when the possibility of an exit and the returns are uncertain.

    I can’t imagine startups (like some of those you mention in the first paragraph) in India absorbing a million dollars in funding in a single year taking into account costs for RND, Marketing, and other major one-time/recurring expenses. These startups have to justify the investment. Of course, it does happen as you demonstrate – my initial assessment could be wrong.

    I’m not sure if the Government is really posing a major hurdle. Regulations are pretty thin now and things are getting progressively better. I do agree that there is room for improvement here.

    Finally, my personal experience and research tells me that in the years 2005-06, startups (fewer than 25 employees) in the technology domain were overwhelmingly bootstrapped for the first year or two of operation. Dunno if VC’s will ever look at early-stage favorably.

    – Santosh

  3. 3. Madhur said on November 30th, 2006 at 5:29 pm

    Santosh, great point about M&A activity. Haven’t seen any of that at all esp. in the consumer Internet space. Believe one of that could really kick off some investment in early stage companies.

    Btw, anyone can throw a rough idea on how much is the typical burn rate in say 20 people Internet company in India?

  4. 4. Vivek Garg said on November 30th, 2006 at 7:21 pm

    ofcourse, burn rate would depend on the company but the Evaluserve report mentioned in the post puts it roughly at $3 million a year making it $9 million for 3 years as early stage investment. IMHO this looks like a company in silicon valley.

    lets do some math here for indian company with beefed up estimates

    20 employees * 25 k salary per year = 500k salary to pay.
    servers and bandwidth infrastructure = 1 million
    real estate and misc = 500k
    total = $ 2 million

    These figures have no backing and they are pure speculations. i will look around if I can find something more concrete.

  5. 5. Vivek Garg said on November 30th, 2006 at 7:37 pm

    just found this old discussion on “seriously clueless” blog. by Anand Sridharan that had late stage vs early stage investments.

    As reinforced by the recent Knowledge at Wharton article on Warburg Pincus, most private equity investors in India have focused on later-stage investments in mature industries. Over 80% of the $3-odd billion invested in India over the last 3 years are in late-stage companies. 90% of investments have been in fairly mature industries, such as construction, financial services, hotels, manufacturing, pharma, healthcare, IT/BPO and energy.

  6. 6. Santosh said on December 1st, 2006 at 3:12 am

    IMO, if your thinking of a real garage startup (no frills, cheap internet, low rent, assembled machines, hosted on a third-party grid) – the burn rate for a 20-25 employee company with modest market ambitions, ought to be less than Rs 20lakh per month, or $40,000 a month. Not even close to justifying a million dollars a year?

    – Santosh

  7. 7. Madhur said on December 1st, 2006 at 3:20 am

    Here’s a related news from ContentSutra that came up today:

  8. 8. Santosh said on December 1st, 2006 at 3:44 am

    To quote from the ContentSutra post and from, “From our experience, we figured the right amount of funding for an Indian startup wasn’t in the millions or in tens of millions of dollars range. It was closer to about $500,000.”

    – Santosh

  9. 9. Arun Natarajan said on December 2nd, 2006 at 3:35 pm

    From my Dec’05 post at

    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.

  10. 10. No money for early stage ? :: Newstack said on December 2nd, 2006 at 8:29 pm

    […] Read more: here […]

  11. 11. Vivek Garg said on December 3rd, 2006 at 3:31 am

    Thanks Arun for sharing the insight from 2005. Wow this article looks like the talks of today. Today we have similar seed funds coming into market every day and I am sure the ecosystem is lot better now than it was in 2005, but the key question still remains. what do you think this ecosystem needs in addition to what it has already achieved, to increase risk capital investment in india similar to that of other countries ?

    Actually one interesting statistics would be a list of companies that got killed after their private/angel funding vs those that did not take off after early stage due to lack of investment.

  12. 12. dn said on December 3rd, 2006 at 6:15 am

    Since hosting is so cheap now, and making money from advertising is easier, many prefer to be self funded

  13. 13. Indian_Enterprise said on December 3rd, 2006 at 6:46 pm

    I just came across an interesting new blog on enterprise software in India:

  14. 14. Vivek Garg said on December 3rd, 2006 at 8:32 pm

    found this news article today on related topic here

    […] In the first nine months of 2006, VCs have made 53 early-stage investments in Indian start-ups worth $355 million — nearly twice as much activity as the two previous years combined, according to Venture Intelligence, a Chennai-based research service focused on private equity and venture capital activity in India. […]

    This means an average of $6 million for each of these 53 investments. any takers for this stat ?

  15. 15. iLeher » where is the investment dollar going?- All about Internet industry in India said on December 9th, 2006 at 8:49 am

    […] I discussed “no money for early stage” and I said there is not enough money flowing into early stage investment. I also cited couple of reports that corroborated my thoughts. But couple of days after that post, I had found following comment on mercury news. […]

  16. 16. iLeher » Online DVD Rental: Behind the curtains with Madhouse- All about Internet industry in India said on January 9th, 2007 at 11:00 pm

    […] VCs waiting on the sidelines: We have said this before in earlier post that VCs in India are sitting at the sidelines with their money waiting for the traction in various markets. Madhouse also gave us a similar picture. According to them VCs are going to wait to see how they use their angel money. Some of the VCs think that Seventymm has already got a huge amount of money and this is a winner takes all market. Madhouse also told us that they are looking to increase the depth in the existing markets they serve instead of spreading too thin by expanding immediately. This will mean that they have to go beyond the early adopters of DVD rental business. I think this is a really good way to show to a VC that they are capable of gaining majority share but this also means that they lose the early movers advantage in other areas. What would you do in this case? Madhouse also suggested that VCs typically want to invest into businesses with 10X returns in 5-7 years and some of them don’t see the DVD rental as one. Other concerns raised were logistics and piracy and investors are still skeptical about the licensing and revenue deals with production houses. […]

  17. 17. Rohan said on March 2nd, 2007 at 1:53 pm

    I know some people in the VC space and generally the actual number of millions that are invested in most these Indians startups are an order of magnitude lower than the ‘marketed’ amount to build up the hype of the company…..most first round funding for indian web startups are in the $1-2 million range – not $10 million off the bat…

  18. 18. Advaita said on June 13th, 2008 at 9:41 am

    Hi guys,

    thanks for the very informative articles /thoughts out here on early stage funding.

    Quick question: any examples of recent early-stage funding in companies that are essentially replicating businesses that have worked in US /EU ? Which firms have been focussing on funding these “replication” businesses

  19. 19. Abhishek Manocha said on September 24th, 2008 at 9:36 pm

    I could share my story too. Though we faced problem in the registering part only, but cant agree more that there are problems in all the other fields you mentioned. In short it took us good 2-3 months to register it on the name of Urban Blocks Solutions Pvt Ltd, something not what we started with. But anyways that’s bitter sweet past now.

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