Seed Investors In India: Why So Few?

As I have written in previous columns, the seed capital ecosystem in India is a real bottleneck right now. There are no more than a couple of hundred seed investments that are happening a year. Even if the number doubles this year, it is still a terribly inadequate number to build a real pipeline of hundreds of thousands of entrepreneurs that can meaningfully impact the country.

How can we change this?

To answer that question, we need to first understand why there is such a shortage of seed money in the Indian IT entrepreneurship ecosystem.

You see, Silicon Valley’s angel investors were all either entrepreneurs themselves, or part of an entrepreneurial venture that succeeded sufficiently for its early employees to make significant money. Most of them went through the experience of building a technology product, taking it to market, watching it take off in the market, and then reaping the benefits of that success.

Contrast that with India.

India has not yet seen a single IT product company succeed exceptionally. It has, however, seen numerous IT services companies succeed. It has also seen some Internet companies succeed. But very few of these entrepreneurs have become angel investors, and fewer still have become successful angel investors.

We’ve seen some Silicon Valley investors like Ram Shriram and Chamath Palihapitiya make money off Google and Facebook, respectively, and invest in a few Indian startups (InMobi, Ezetap). It is safe to say that Silicon Valley tech IPOs tend to send some seed money over to India on a routine basis. But this is not scalable, mainly because angel investors prefer to invest close to home, where they can spend time with their investments in person.

What about the IT services entrepreneurs? Why have they not become angel investors in large numbers? After all, IT Services has minted numerous hugely successful entrepreneurs in the last three decades.

Well, the answer lies in the simple fact that IT products and IT services tend to be entirely different animals. IT services can start generating revenues and profits very early on, making it possible to grow a business organically, making investor money a non-issue. Most of these entrepreneurs have built successful bootstrapped businesses, not successful investor-funded businesses. They don’t necessarily feel comfortable writing checks to entrepreneurs who plan to build a product for 18 months, before any revenue will start to kick-in. Where is the validation that the product will make it in the market?

Another factor, in my opinion, although not based on actual data, is that investors want to invest and multiply their fortunes. In India, the asset class that has offered the maximum opportunity to do so in the last three decades is real estate. An investor with a newly minted fortune, therefore, goes and buys a bunch of low-risk properties, rather than investing in high-risk startups.

What about the Internet success stories, then? They have enjoyed the benefits of the fledgling venture capital industry, and are they not of the profile that should be investing in more Internet startups?

Should, perhaps. But they don’t. Not in large numbers. The reason is possibly the asset class risk issue. They have lower risk alternatives for multiplying their money. As long as India’s real estate market sustains its boom, seed capital for startups will continue to compete with it.

That leaves a handful of angel investors who are intensely passionate about the technology industry, have made their money in technology, and perhaps, find real estate boring!

As such, in the short term, we have to bank on the resourcefulness of entrepreneurs, their friends and families, and other tried and true techniques like bootstrapping using services and bootstrapping with paychecks, to develop the entrepreneurial pipeline of India.

However, if you give three to five years to this current crop of entrepreneurs who are reconciled to the bootstrapping path, I predict that towards the end of the decade, India will have a wonderful portfolio of capital-efficient businesses ready to attract growth capital.

Say, an entrepreneur currently bootstrapping, in the next three to five years, will have a product in the market that is starting to hit its stride, ready to raise $5 million to $10 million to scale the business.

Essentially, that would mean, that India will leapfrog seed capital, and become ready for venture capital.

If, in the next five years, we succeed in preparing tens of thousands of bootstrapped entrepreneurs in this mode, by the end of the decade, India will have thousands and thousands of venture funded, high growth companies.

This would be a reasonable way to develop the industry as well.

Related Reading:

How To Navigate The Seed Capital Gap in India

Venture Capital in India: Age of Reckoning