• Money

Being a strong believer in the spirit of entrepreneurship, my heart fills with pride whenever I read about leading global private equity and venture capital giants striving to catch a piece of action in emerging India. But then, let us look a bit closer and list out the infrastructure and support available for young startups or enterprises that might need funding of less than Rs.1 crore­—as well as intense mentoring—to take them from being just an idea to an actual, sustainable business.

You will be surprised to find that there are few ‘organized’ institutions that support this breed of tomorrow’s business tycoons. This leaves several entrepreneurs with potentially billion-dollar ideas wavering and wondering what to do. And if your idea is not related to the ‘hot’ sectors—such as IT and mobile applications—the radar of your possible support infrastructure further diminishes.

I have attended several business plan contests held at leading management institutes—and I’ve been faced with the same set of questions: “We don’t know what to do with our idea now. Perhaps we should first do some jobs and then get to it?”, or “We have approached a few funds who have liked our idea, but they want to see some traction first. How do we proceed?” We do need more than three Idiots here!

The Existing Infrastructure
It would, however, be incorrect to say that the country totally lacks such an infrastructure. Bold initiatives have been made by organizations like TiE (The Indus Entrepreneurs, promoted by Silicon Valley champions), the Indian Angel Network (IAN, so far one of the strongest platforms of individual investors that promotes and supports startups) and the National Entrepreneur Network (NEN, promoted by the Wadhwani Foundation).

Organizations such as these have provided a strong impetus and been catalysts of growth in the Indian entrepreneurial journey. But they suffer from certain shortcomings. All these organizations are based on the premise of rich, established, individual investors coming together and employing their proprietary money and support to nurture selected startups. This, at times, leads to situations where the efforts of various investors become disjointed, thanks to the lack of a well-defined due diligence mechanism or established exit strategies.

Startups are confined to being mentored by single or a few ‘private’ investors; hence, they miss out on the opportunity to be guided by a central pool of cross-disciplinary experts. Primarily, none of the current models are able to guide startups in the ways of ‘proven and established’ VC or private equity methodologies—and neither are they able to pool ‘external’ investors to build a wider support base for
the startups.

On the other hand, we have institutes following the well-established ‘Y-Combinator’ model of the West. In this model, a group of cross-disciplinary experts get together and mentor as well as fund new startups; this is done within a defined investment model and is taken right through the exits to second-stage venture funds. Morpheus Venture Partners (promoted by Sameer Guglani, a serial entrepreneur) and iAccelerator (a joint initiative of the Centre for Innovation Incubation and Entrepreneurship, IIM, Ahmedabad, led by Freeman Murray, a technocrat and evangelist) are examples of this. They invest small amounts (starting from Rs.5 lakh), take a small equity stake (10-15 percent) and actually provide a ‘VC/PE’ culture. But they cater to six to eight ventures each year and work with self-sources of funds. In a country of a million ideas, they are only a drop in the ocean. We need many more such institutes.

Incubators
A third route has been via incubators that are promoted by leading educational institutes and supported by government initiatives. But again, their services, too, are largely limited to the alumni or passing students of their own alma mater. So what stops us from creating a robust startup support infrastructure?

Primarily, there are two challenges…

* Regulatory challenge: Any ‘VC’ activity in India needs approval from the Securities and Exchange Board of India (SEBI). As per the SEBI Domestic Venture Capital Fund (DVCF) Regulations, 1996, the minimum commitment that any venture fund needs to mobilize from ‘external’ investors before initiating activity is Rs.5 crore. This limits the creation of any structured VC fund for ‘startups’. But there is hope in sight in the form of the National Innovation Act 2008, which recommends financial and regulatory incentives for ‘angel funds’ and promotes setting up ‘Innovation Centers’.

* Structural challenge: A bigger challenge comes from structural issues and funding operational expenses. Normally, any VC fund charges its investors a ‘Fund Management Fee’, which can be around 2 percent per annum of the total investment commitment. Since these VC funds normally mobilize huge amounts of money, the management fees are able to cover operational expenses. But they cannot invest a small amount and manage such investments; that would mean spreading their resources too thin, risking effective control over investments. And if they have to support startups,
the overall fund size cannot be very large to effectively take out the requisite management and running expenses.

Suggestions
There are a few suggestions to counter these challenges. Can VCs allocate a part of their investment portfolio to just startups, along with a different set of investment guidelines, expectations and a focused team (as startups need more mentoring than money)? Even a small percentage of the total VC/PE corpus in India, if dedicated to startups, can open new doors for new ideators. Regulators like SEBI, too, can come forward and include this as part of the investment norms.

Yet another way to tackle these challenges could be to allow a ‘Hybrid Model’; here, a group of experts could manage the ‘proprietary’ money of investors and charge management fees, thus bringing the benefits of a dedicated team to manage investments as well as providing for running costs. This might require necessary regulatory amendments.

‘Crowd sourcing’ is another way the internet is redefining sources of funds. Growvc.com is the most recent addition to this domain; it has established a potentially strong ‘crowd-funding’ model to fund and mentor startups. Finally, we need to take entrepreneur support infrastructure to the grassroots, to the ‘real’ startups. Only then will the country have more Idiots to create new blockbusters!

The views expressed here are personal and may not necessarily subscribe to the organization’s views.

SATISH KATARIA is the Vice President, Religare Venture Capital. The author may be contacted at satish.kataria@gmail.com

Tags:
fund, Satish Kataria, startups