One of the ideas that I have mulling over to resolve the impasse between the early-stage capital needs for a business and the difficulty that there is in raising that capital is to create some sort of stock exchange where entrepreneurs can list their companies right at the start. They can publish an outline of the business plan and provide details of their capital needs. Then, individuals seeking to invest can make their own decision. (I have not looked at the regulatory implications of doing this in India but am sure there is a way to make such a thing possible.)
I think one of the most important untapped opportunities amongst the potential investor community are the million or so Indians who are working in software or other technology companies. Many have done well financially on account of a combination of salary growth and stock options. After taking care of basic needs in life (house, car, children’s education and the like), they still have surplus capital available. They can be a good source of capital for the new entrepreneurs. For one, they understand the technology space and can thus also provide valuable insights. Second, even if they do not want to leave to start a venture themselves, this sort of an investment gives them the opportunity to get a flavour of the world of startups and live a ‘second life.’
The challenge lies in matching the two groups, and at the same time providing liquidity to the investment made. This is where a stock exchange comes in. Market caps of the companies listed here will be in tens of lakhs to a few crore rupees. What is needed is the equivalent of a market maker who can match buyers and sellers. BSE and NSE listings will always be limited to large companies with profits. We need something on a much smaller scale where investors are clear of the risks. In fact, an investor should only put money into companies if he is okay with losing that capital. That is the worst case scenario and one must be prepared for it.
For an entrepreneur, this stock exchange helps to raise capital quickly and on-demand from investors who genuinely believe in the business (and the team). It will create for a deeper relationship with a set of people on the outside who can also be champions and advocates for the company’s solutions. If this idea works, then this will lead to a surge in entrepreneurs willing to create new ventures which is exactly what will spark innovation and the creation of more locally-relevant solutions in India.
TECH TALK Ventures and Capital+T