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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 guruji.com 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.