Venture capital and angel investing may have made life easier for small businesses and entrepreneurs, but the latter still seem to outnumber the former by a large enough margin to be seeking other sources of funding, often from informal sectors.

At a recent meeting of entrepreneurs in Chennai, C K Ranganathan, successfully running FMCG firm Cavin Kare, said, “I should really thank the Marwari moneylenders who loaned me cash at the beginning of my ventures. Their short-term loans, though at high interest rates, helped me through the first 2-3 years of my business.”

“I have come across a number of entrepreneurs with a history of usurious debt and informal credit,” said Helion Ventures VP Satya Raghavan. “It does make a venture capitalist hesitate as investing in them could mean that our money may go to repay past debt rather than future growth. In short, it raises governance issues,” he added.

But, in his experience, informal credit also includes funding or loans from friends and family. Sanjay Raghavan of Pears Capital, attributes the situation to Indian averseness to long-term debt and risk.

“In the US, some entrepreneurs fund their ventures initially using just their credit cards as they are comfortable with long-term debt to their credit card companies,” he said. “But people here prefer to pay off their complete credit card bills every month.”

“Approaching a VC or angel investor means you do not have to repay them in a long-term. But it also means working with them for that term, having a long term debt, though it is in the form of equity share held by the investor,” he said.

From the VC side, it is a matter of numbers and choosing between them. “As compared to the US, where VCs look for a success rate of one per cent, Indian VCs look for a 10 per cent success as 2,000-3,000 entrepreneurs approach them every year,” Satya said. “VCs in India are also start-ups with the oldest ones being 15 to 20 years old. For us to invest in a company which already has a risk in its earlier usurious debt would mean our risk also increases with it.”

But, informal credit is not always a blot on your credentials. Sanjay said, “That entrepreneur must have surely known what he was doing if he could pledge his personal assets like a house or gold to an informal money lender to fund his business. He is pledging what is traditional Indian security investments to make his idea a success.”

Manoj Gupta of Nexus Venture Partners said, “Informal credit history works to the entrepreneur’s advantage if he’s successfully managed to repay it and bring his business up to a level that a VC is interested. It shows tremendous business growth and high entrepreneurial energy.”