Too Much Money, Too Few Deals

This is the story of today’s India.

Every US VC is running after India. The entrepreneurs are not mature, deals are mostly not fundable. Seed stage “mentor-capital”, essential at this stage of the game to build a pipeline of startup companies, is largely absent from the scene.

As Subrata Mitra and Prashanth Prakash of Erasmic explained to me this week in a phone call from Bangalore, most experienced technology managers in India today make too much money and lead too cushy lives to want to be entrepreneurs. A mid-thirties middle manager with 10 years experience is easily making $100K. Why would they bother with a startup where the total startup capital, at best, is $50,000?

Yes, $50,000 (Rupees 25 Lakhs) is the US $250,000 equivalent of seed capital to start companies. Often even less. We’re talking real micro-cap here …

As a result, those who are becoming entrepreneurs are younger folks in their mid-twenties, 2-3 years of experience, with not much to lose.

Remember the mid-nineties? Entrepreneurs in Silicon Valley were mostly 23-30 years old. My generation. I was 24 when I started my first venture, 27 when I started my second, and 29 during my third. Marc Andreesen was 23 when he started Netscape.

The two Erasmic guys have looked at about 80-90 deals in the last 12 months. Not absolute zero-stage deals, but those with a little bit of validation, those that have already been set up with $10-$20k of friends & family money. Of these, 20 qualified as worthy of further investigation, with only a couple being fundable.

Erasmic claims to be the first of its breed of “mentor-capitalists” in India, with a small $10 5 Million fund, that is focused on moving ventures to the next level with extreme hands-on involvement. Their team has experience running full-scale India operations, as well as of founding and exiting companies in the US and in India. They bring substantial contacts to the table, both in the venture community and on the field, in India.

They are a good example to follow, if you are an Indian in tech, with substantial experience with startups and venture in the valley (or elsewhere), and are looking for your next career step. Raise a small fund, move to India, and leverage your skills over a portfolio of seed-stage deals.

That’s what Ashish Gupta is about to do. Move to India. His new $100 Million fund, HelionVC, is to focus on early-stage deals in India (probably not seed-stage, because $100M is too large a fund to do seed-stage in India).

In my opinion, the bigger hole in the market is seed funds for India, and a $25 Million fund would be perfect to play that market, say with 3 partners.

But, you HAVE to be IN India. Not sitting in the valley. In fact, you may even pick a region to focus on. The Erasmic guys only work with Bangalore companies. They don’t believe it is possible to provide the same level of hands-on expertise in multiple cities, without spreading themselves thin.

And for those VCs who are looking for slightly later stage investments in India – you better facilitate the setting up of some of these $25 M funds now, or else you will have no pipeline to draw from in the next 5 years, as the competition for deals continue to be brutal.

Further Reading – Concept Arbitrage: Summary Trends