Friday, December 6, 2013

Startup Funding India

Startup Funding India

When I decided to become an entrepreneur, I had zero capital - absolute zero, in fact I had quite a few bills to pay - Credit Card Bills, small loans from friends etc. I had already exhausted my limited amount of savings on traveling around a bit and looking for the right ideas. So, I did what most people would do - I reached out to friends and family and got the very initial funds to kick start my business. The place I would start my business at,  had to have the absolute minimum cost for me in terms of personal expenses - what better than staying with Dad and Mom and So, I started at my home town in Assam.

India is a land of entrepreneurs if you look at the countless number of small businesses - the neighbourhood grocery stores and the thelas, but for reasons perhaps related to western influences or maybe demographic, the word 'startup' is often spoken in conjunction to a few select businesses - these are usually related to Electronic commerce, tech products, education and somewhat lately, with sectors like healthcare. Traditional Manufacturing and Services companies typically don't come to mind when you talk of startups. This being the case with KraftInn - because we started out basically with the idea of making ecofriendly home decor items that we could hopefully sell to the bigger retailers in bulk made us somewhat of an business rather than a startup. However, a year later, when we decided that we would primarily focus on selling online - we also started getting some attention as a small ECommence brand. This is when we figured out that it may not be such a bad idea to try approach for some angel or institutional funding. I reached out to a few angels and venture capitalists. I really had no idea how much money I exactly wanted but then, I gave it a shot and managed to meet a few.

Here are a few things that I found out (experienced) :

There are various types of investors available, two of the important ones include :

a) Angel Investors - They usually invest at an early stage and provide seed capital and usually is a high net worth individual or a group of them. They seem to invest primarily based on the strength of the business idea or the pedigree of the team

b) Venture Capitalists -  They usually manage a fund which is pretty big (hundreds of millions) and invest in somewhat mature businesses (compared to angels - maybe some initial success story or prototype)

There are numerous other ways to get funded, but usually that is based on debt or more attuned to established businesses. Funding from Angel investors and VCs make a lot of sense because they are equity based instruments.

Based on my interactions, I have noticed a few things :

1) Team/Pedigree - This is something that matters a lot. Different people have different methods to gauge this - but good degrees from Ivy league colleges seem to help, previous startup experience seem to help, family background etc.

2) Scale - At this moment, In India, investors dont seem to care much about profits - a lot of the conversation usually is around revenue scaling - A business that can show the potential of growing by 500 percent a year in a large market is likely to get funded as opposed to a niche profitable business with more modest growth targets. VCs are probably looking at a business that can scale to 80-100 Million dollars in 4-5 years. This is probably the right thing to do from a investor standpoint because a business that goes from 0 to say 2 Million USD in 4-5 years is still very small from a investor return standpoint

3) Exit - Currently there are two possible exits for indian startups - first is an acquisition and the second is a IPO. For an angel investor, probably there is a third option - which is offloading stake to a bigger investor. So a business that looks likely to provide more exit options is likely to get funded - hence it is difficult for certain niche businesses like say a technology product company to get easily funded - because the exit is not clear or there isn't much precedence.

4) Market Size - Investors seem to love the idea that the addressable market is big - it is somewhat of a strange argument in itself - because every business can always expand with the right capital and success metrics and address a larger market - I mean a successful tea stall can probably become a restaurant and then a chain or restaurants and potentially the biggest chain of restaurants in the world. However, if at the outset the initial market looks very small, investors seem to lose interest.

From the above funding kind of scenario, our business is not really a favourite for such kind of investment probably at this point - our location is too remote, our business focus is too narrow and our addressable market is somewhat small. Maybe once I reach the first significant economic milestone that I have set for myself, I will give it a wider canvas.

Have you spoken to any investors or got funded ? What has been your experiences ?


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