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Blog Past: Early-Stage Investing

April 24th, 2011 · 3 Comments

From a series of two posts last year:

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.

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3 responses so far ↓

  • 1 StatSpotting // Apr 24, 2011 at 10:02 pm

    ” 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.”

    why should the business model be even considered at this stage as frozen? would it not evolve anyways?

  • 2 David Locke // Apr 25, 2011 at 1:49 am

    The lack of digital infrastructure is a tip off. You are talking about Internet companies. These companies are not early stage companies. They start in the aftermaket, and barely make a return, hence, there is hardly any reason to invest in them.

    As for VCs wanting the resume, aka someone that has done it before, is yet another clue. VCs expect institutionalization to happen quickly. It ordinarily isn’t necessary in an early stage company, because they are years away from their IPO. The Internet company is post-IPO. The VC expects the exit to happen in the near term.

    Early stage companies do not need capital and financial expertise. Again, late mainstream/consumer, rather than early stage.

    The reality today is that products are what is being sold, not technology. Companies are using standardized technology. They are not creating new technologies. A website is not technology. It is use. The real monetization is in advertising or something else. So go to bank. You don’t need angel or VC money. You are a TV station or a magazine in terms of your business. You are in a hits business.

    Still, the underlying myth will continue to prevail even as VCs watch their returns fall and the level of their invest fall as well. Internet companies don’t need very much money. This means that VCs really can’t be involved in the running of the companies, because they invest little money in many more companies than they used to.

    I can’t wait until people get over the Internet and get back to pushing technological progress, instead of replication.

  • 3 magento themes // Apr 28, 2011 at 3:52 pm

    You are right.But There is no guarantee that with big companies, your investment will remain secure.You must have heard about Lehman Brothers.

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