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Early-Stage Tech Investing – Part 2

April 29th, 2010 · 7 Comments

In India in the tech space, only a few companies end up getting funded. My guess is that out of every 100 companies that start off, less than 5 end up with adequate capital to build their business. So, what can be done to change this?

What many of these early-stage companies need is a combination of capital and management expertise. For this, they should be willing to give up a significant stake – provided they have not managed to raise capital for an extended period of time (say, a year). In this situation, the product/solution already exists. But it has not succeeded in the market for a number of reasons: the idea itself could be bad, the lack of money makes for decisions that are not optimal for the business, the company is not able to hire the people, or the business model itself needs some change.

In this scenario, what the company needs is a combination of cash and top-notch talent. Rather than go down the path of the “living dead”, the company should be open to bringing in an entity or a group of people which takes up 40-50% stake and can also help drive the company’s execution process. Money required will be about Rs 5-10 crore ($1-2 million). This will provide a lifeline for the company in the short-term, and an opportunity to succeed in the medium-term.

From what I know, there is no entity which can provide cash and management expertise for early-stage companies in India. Is this an opportunity worth looking at?

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7 responses so far ↓

  • 1 Ruchit // Apr 29, 2010 at 5:40 am

    I think there is a culltural or mindset issue.

    from my limited experience discussing valuation, ownership et. al, Entrepreneurs in general in India focus too much about the total ownership in the company than actually focus on making company big by taking money.

    We have some incubation labs in India run by universities, but i am not sure how much is participation from the veteran entreprenuers in them.

    Having a program like TechStars or Y combinator would definitely help. Founder Institute is great too!

  • 2 talll.com // Apr 29, 2010 at 9:42 am

    I agree with Ruchit, its basically a mindset issue. ppl do not want to take money and make it big, they want to play safe mostly.

  • 3 Vijay Basrur // Apr 29, 2010 at 9:50 am

    I think the ability to get guidance on the execution is probably more valuable than the money, though the money also would be quite an important catalyst required to take the firm to a different level.

    I think the concept is a great idea.

  • 4 kasi // Apr 30, 2010 at 3:06 pm

    40-50% in the first round sounds little too much. Should not finally end up like HP.

  • 5 Alok Mittal // May 1, 2010 at 4:21 am

    umm, whats wrong with 5% of the entrepreneurs getting funded?

    There are several people who are beginning to come up with Y combinator style programs in India. I am personally not convinced that that level of engagement and capital will drive value,

  • 6 Pranj // May 3, 2010 at 7:23 pm

    Rajesh, I was just reading the 2 articles by Vivek Wadhwa about boot strapping instead of VC.

    Your and his point of view seems to be opposing. He says only 5% of startups get funded by VCs. Would love to know how you feel.

    http://techcrunch.com/2010/05/01/advice-from-founders-who-bootstrapped-their-way-to-success-2/

    http://techcrunch.com/2010/04/24/ditch-the-biz-plan-buy-a-lottery-ticket/

  • 7 Indus Khaitan // May 10, 2010 at 12:13 pm

    IMO:

    1. The formative months of the company should be organic and executing on the vision of the founding team, instead of bringing talent from outside.

    2. Good technology built does not need $1m-$2m in the first year, all it needs is between $100K-$200K to sustain a team of 10 or so

    3. There are several initiatives in India which are providing cash & management support which take approx 5-10% equity and provide between $10K-$20K of startup capital

    Indus

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