Incubator Funds in India: Synthesis
Check other articles in the series...My first experience of technology entrepreneurship in India was in 1994 while I was still a grad student at MIT. The most vivid memory I have of that experience is that it took me 6 months to get a phone line. It was before wireless. It was, most certainly, before venture capital in India.
Things have obviously come a long way. Last summer, I did a body of research on the Indian entrepreneurship scene, as I watched huge amounts of capital finding its way to India. Through that work, I also came to the conclusion that there is way too much money, and not enough fundable deals, and that India needs more incubator funds.
A year has gone by. Not a whole lot has changed.
So I chose to revisit the topic of Incubators in India in a series of posts, on which I would like to hear from entrepreneurs, investors, incubator managers, and whomever else in the ecosystem with meaningful input.
Here are the posts:
- Incubator Funds in India: Idea Crucible?
- Incubator Funds in India: Product Marketing?
- Incubator Funds in India: Engineering Talent?
- Incubator Funds in India: Sales & Biz Dev?
- Incubator Funds in India: Distribution?
- Incubator Funds in India: Legal & Financial Structuring?
- Incubator Funds in India: Real Estate & Infrastructure?
- Incubator Funds in India: Adult Supervision?
- Incubator Funds in India: Fund Structure?
- Incubator Funds in India: Management Team?
I look forward to your comments.
This segment is part 11 in a 11 part series
Jump to part: Idea Crucible?, Product Marketing?, Engineering Talent?, Sales and Biz dev?, Distribution?, Legal & Financial Structuring?, Real Estate & Infrastructure, Adult Supervision?, Fund Structure?, Management Team, Synthesis
Sramana,
Your overall template for incubators in India sounds very feasible.
I am part of a group of friends planning on a similar setup, but our scale is quite small. We want to do micro venture investments focused on Indian market alone. And not all ideas we incubate may relate to technology. We are currently doing the groundwork for the same and hope to start in January/February 2008.
In addition to what you have listed, I am thinking of: 1.Common HR and Admin services for all teams (as they will be sharing the premises), 2.A few top notch technical talent that can flit between different teams/ideas - by doing this, I want to amortize the cost of the talent over 4-5 startups.
We are trying to come up with a fair model of compensation where a particular talent (technical/legal/biz dev) distributes the time between 2-3 startups. Should they get stock options in each of the startups etc.,
Even more importantly, we want to understand how much stake an incubator firm should get in the startup. We will be investing on facilities and talent for all the startups (this will be common for all 5 ideas/teams), plus we will be investing separately on the salary plus other essentials for each of the teams (will range between Rs.200,000 to Rs.1 million for each startup.
What is the best approach to determine a fair distribution of stock between the Incubator firm and the startups? As we are planning to house all startups in one facility, we want the teams to feel that we are implementing a fair model, and not taking more stock simply because one team is less adept at negotiation.
Thanks.
Hi Kumar,
This is not a simple equation. Deals have different dynamics. You cannot have all deals be equal. You can, however, have all deals be fair.
Also, I don’t 2-10 Lakhs per team will get you very far, given where salaries, etc. are in India right now. I think, below $25 Million per incubator, my model doesn’t work.
Sramana
Sramana,
The funds I am talking about are in addition to the common facilities plus the funds being brought in by the startup team it self. In one case, we are committing a few lakh on buying some SW licenses. In another case, its about Rs. 10 lakh for salaries for 6-member team for 6 months.
I feel the model is feasible below Rs. 100 Cr ($25 million) if the focus in only on Indian market. Once an idea goes beyond prototype phase, we will pump in more funds as required.
My question: All deals have to be fair. So, what is a fair stake for the incubator firm where we invest $100 K over 6-9 months and the startup team invests the idea and sweat equity.
Thanks in advance.
I don’t agree with you, Kumar. Even if this gets the companies some distance, your fund will get diluted in subsequent rounds, because valuation uprounds only happen if you meet meaningful milestones.
My advice would be to save yourself the trouble, the heartache, and the money.
$100k = 5-10% equity, no more.
Sramana
Kumar: Sharing technical talent is a nightmare you don’t ever want to get involved in. Firstly it doesn’t align incentives - which startup does the person really care about? Second, when you get further funding for one of the startups you will have to orphan one or the other - not a wise thing for the other side.
You can get “advice” or “consulting” shared - this can involve architecture or brainstorming or what they call hallway consulting (typically advice over cigarettes or coffee!).
Sramana: Excellent set of articles, thanks.
Kumar: I am really curious to know, in which part of India are you able find 6 engineers working for 6 months in Rs.10Lacs, i.e. @ ~3.25L p.a. salary, you’d probably get freshers, and that too — not from a college of some repute (forget IITs). And in technology startups, the quality of software engineers goes a long way in determining the outcome, i.e. whether even a single milestone is met with any degree of succes.
Sharing ops, and pure advisors is a fair thing, and is happening quite a bit already. We even have real outsourced CFO’s, and back-office shared service providers, but core engineering, architecture etc., that’s an altogether different ball-game.
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