I was talking to a friend recently on the problems of early-stage investing in tech companies India:
- lack of serial/successful entrepreneurs whom investors can bet on
- limitations of the digital (Internet and mobile) marketspaces (in terms of revenue opportunity) in India
- dearth of risk capital (from angels and VCs)
- not enough mentors to guide early-stage companies through the challenging initial years
- poor digital infrastructure (broadband, 3G) which limits scope in the domestic market
In this context, it is no surprise that the whole investment cycle has shifted: angels act like VCs, VCs act like PEs and PEs like banks. There are many entrepreneurs who start off, but end up in struggle because of limited capital. So, can something be done about this?
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.