How To Navigate the Seed Capital Gap in India

Even though interest in entrepreneurship is at its highest in India, the country has a nominal seed capital infrastructure. As you know, I concern myself with issues of scalability and pipeline building. The question that I have been pondering for the last ten years is: how do you develop a sustainable pipeline of entrepreneurs?

Of course, this discussion pertains to my field: IT and IT-enabled services. India has numerous small retailers, service providers, etc. who are shining examples of scrappy entrepreneurship at its best.

But how do we take advantage of the increasing penetration of information technology into the consumer and business populations in India? And how, through technology, do we empower Indian entrepreneurs to build global businesses?

India has done well in the last twenty odd years to build its technology industry through services. Today, we’re seeing a maturing of the industry, and entrepreneurs now want to build products as well. Or, they want to build online businesses – e-commerce, mobile apps, so forth. Sometimes they want to build hybrid businesses – both online and physical. Or, they want to combine products and services.

As far as I am concerned, all those permutations and combinations are fine. However, in today’s India, building capital-intensive businesses is difficult. Even more difficult is to build a business that requires capital out of the gate.

In other words, if you can bootstrap your way to validation and revenue, ideally, to profitability, then there is plenty of capital available. However, if you need capital to validate, you are operating in a zone that will be full of very dark hours.

You see, all risk capital in India is in effect growth capital. You will need to absorb the risks yourself, and present a growth opportunity to angels and VCs. If you can bootstrap your way to, say, $1M in revenue, there is enough capital out there to give you $5M or $10M to get to the next level (provided, of course, your business fits the high growth, high TAM parameters required by investors).

But if you need funding in the seed stages, before validation, there is very little capital in the system.

My friend Sharad Sharma, an active angel investor, sums up the situation well: “US does more seed deals by 11am on the first day than what India does in a year. I haven’t dug up the 2012 numbers. But in 2011, $30B was invested by angels and $24B by Series A venture capitalists. If one assumes each angel deal was $300K per deal, then about 100K deals were done in 2011. That is about 500 deals per working day. In India, Indian Angel Networks did 13 deals last year, Mumbai Angels about a similar number, Harvard Angels did three, Chennai Angels did six, etc. The optimistic number for the number of angel deals would be 100. Even the most optimistic observer who’d count every informal deal would not put it past 200. So the Indian seed stage ecosystem is really small. This is not what the media makes it out to be.”

More recently, there is an over active incubator network that has come about. The Indian government is offering money for people to set up incubators, which has led to a lot of clueless people setting up incubators. They promise seed funding to naïve entrepreneurs who, more often than not, are entirely unfundable. They lack the experience or skills to mentor entrepreneurs and tech them what needs to be taught. Several VCs, who for obvious reasons do not want to be quoted, have complained to me that “incubators” and “advisors” in India are dishing out plain bad advice to unsuspecting entrepreneurs. Some even run scams like asking for 5-10% equity to “introduce” to angel investors. And most claim to “graduate” entrepreneurs from their programs in 3-6 months with nothing to show.

Given this rather messy environment, entrepreneurs have a few pragmatic choices on how to navigate the seed stage bottleneck:

(1)  Bootstrap with Services: Many Indian IT entrepreneurs come from the services industry background. Using IT services to generate cash and develop customer intimacy, it is eminently possible to build products. We have numerous case studies of this being a tried and true procedure, and recommend it strongly.

(2)  Bootstrap with a Paycheck: Many aspiring Indian entrepreneurs are currently sitting on the sidelines, not yet ready to play. I suggest, you hold on to your paycheck, and start validating your idea. Learn what it takes to build a business. There are concrete, defined ways in which you can do so. Especially if you are building online businesses, this is an excellent strategy. Quit your job only AFTER your fledgling business achieves a certain level of validation.

(3)  Friends and Family: Historically, in India and elsewhere, entrepreneurs have built businesses with the backing of their friends and family. The biggest difference between professional investors and friends and family is that the latter cares about YOU.

Please understand, the Indian market is a slow adopter of new technologies. As such, you cannot expect to be able to get to a product-market fit in three months. It may be 18-36 months before your venture really starts to find its stride.

Until then, you are better off sticking to one of the three above principles of bridging your capital gap.

In summary, there is a miniscule pool of seed money in action in India currently. Most of this money will go to validated businesses, not to concepts, and not to entrepreneurs experimenting with concepts.

Stop wasting time chasing capital unless you have reached sufficient maturity.

In India, by and large, the definition of seed capital is misunderstood by naïve entrepreneurs. They think entrepreneurship is sexy, and investors are sitting around, waiting to write checks for them to start their businesses.

This expectation needs to change.

As angel investor Nandini Mansinghka puts it, “Seed capital needs to return to its old fashioned definition of people who know you putting in money in your venture, because they believe in you rather than your 100 crore idea. The only difference as we mature as an ecosystem, is these known people will not just be family, but the extended network built both personally and digitally.”

And if you don’t have such friends and family to help you get off the ground, then focus on the other two options: bootstrap with services, or bootstrap with a paycheck.

In India, in 2013, those are your options.

Related Readings:
Seed Investors in Inda: Why So Few?

Venture Capital in India: Age of Reckoning