Get set, grow
Apr 04 2014 , Chennai
Indian startups have come of age as angels begin to fly
Ask the little guys at LittleEye Labs in Bangalore. They will surely tell you how. After all, they have just been bought out by, who else, but Facebook for an undisclosed amount, which analysts believe is anywhere between $10 million and $15 million. Ever since, they have been attracting a lot of traction. For the uninitiated, LittleEye Labs builds mobile app analysis tools for developers and testers that provide detailed insights into how an app behaves.
Yet, long before Facebook made it happen for the startup scene in India, IT industry lobby Nasscom woke up to the potential of seeding ten thousand creative minds with the spirit of entrepreneurship so that boys and girls barely out of their knickerbockers could stand up and be counted.
Why then, this sudden buzz?
Global innovation has accelerated with the advent of cheaper smartphones that billions of people moving around the globe can afford. High performance computing is now readily available as utility and at low cost on demand. These trends have unleashed a torrent of innovations dealing with reinventing our lifestyle and redefining the enterprise. “The confluence of emerging trends will unleash opportunities to innovate in healthcare and education,” says Vinod Dham, popularly known as “father of the Pentium chip”.
Having earned his billions in Silicon Valley, where he is still based, Dham is now the executive managing director of the IndoUS Venture Partners, a venture fund focused on Indian startup opportunities. “India, with its rapidly growing middle class and a powerhouse of software talent, stands to benefit enormously from these developments,” he points out (see interview on Page 10).
In other words, Dham suggests that you no longer need be born with a silver spoon in your mouth to launch a venture in India. In any case, you really do not need loads of cash to convert your dream into a big business opportunity.
An ecosystem, comprising angel investors, incubators, accelerators and venture capitalists, has taken root in India over the past decade, to nourish your dream and help convert that opportunity into cash. But, for that to happen, you must first have an innovative, workable, scalable, and above all, saleable, IDEA that can help them recoup their investments and earn you handsome profits.
“Although India’s venture capital industry is in its first decade of evolution, great progress has been made in creating a robust ecosystem, especially in the early stage investing,” says Dham.
But, that was not the case here decade ago. Even when you had a great idea, it was not easy to raise enough cash, especially from the early stage funds. Promoters of the startup Stayzilla.com realised just that. “We started in 2005. Instead of the future, it will help all to understand our past. When we started, there were no established angels or even VCs looking at startups here. The ecosystem simply did not exist then. People did not understand what we were planning to do,” says Yogendra Vasupal, founder & CEO, Stayzilla.com that books online hotel accommodation for travellers.
Gradually, small incubators or recognisers arrived on the scene. “The startups actually caught the attention of the mainstream during 2008-10. Today, there is an entire ecosystem and people prefer to look at startups more favourably than associating with existing large organisations,” adds Sachit Singhi, director and partner at Stayzilla.com.
When his company finally got its funding in 2012, about 40 angel investors had to come together to inject all of half-a-million dollars, through the Indian Angel Network, the foremost of all similar networks now operating in the country. It’s another story that the company has gone on to raise its Series A funding from Matrix Partners and will boast a headcount of 200 by June.
So, where did it all begin?
“When we started in 2006, we brought in the concept of angel funding to India. There were very few startups and entrepreneurship itself was yet to gain currency among a large number of people. However, over the next few years, from being the last choice as a career, entrepreneurship became the first choice of career for a large section of people. Today everyone, from a fresher with barely a couple of years into jobs to someone with several years of corporate profile, is bitten by the startup bug,” says Padmaja Ruparel, president, Indian Angel Network (IAN).
Ruparel believes that India is blessed with the cream of talented people with immense knowledge. They are coming together. “As a country too, we are changing in terms of economic culture and growth; from remaining a closed economy for decades to being an open economy; from a limited choice of goods and services to a variety of choices. The old economy icons, which became household names under the licence raj, have fallen off the pedestal, with new icons like Raman Roy replacing them,” she points out.
And what this has done is create a new paradigm for wealth creation and risk appetite, as opposed to the fear of failure that haunted the past generation. Today, India and individual Indians boast huge self-confidence. That’s what the IT czars taught this country as first generation entrepreneurs. The entire ecosystem has now become a fertile breeding ground for entrepreneurs.
From its initial days, when IAN used to hardly receive 20-30 business plans a month, it now gets flooded with almost 5,000 proposals a year; from barely two investments a year, it has vetted almost 30 in the past two years. It disburses almost a million dollars a month now; and from just about 15 investors when it started, it has 260-270 investors today.
Starting from Delhi, IAN now has investors from more than 10 countries and has recently started its overseas operations in London.
“People do not get money in any other way than as equity for early stage in India. And literally, there are no assets. Hence, investments are made by way of equity holdings. A pot of money is good, but a pot of high quality money is very good. That’s what IAN strives to bring in,” Ruparel says.
TCM Sundaram, founder and MD at IDG Ventures India Advisors believes, “The startup ecosystem is at its vibrant best today, compared with 5-10 years ago in terms of quality and quantity of companies and businesses being started. This is mainly due to some of the enablers that have come into play.” It focuses on a broad set of technology sectors in India for potential investments.
According to him, strong management teams with global product, marketing and sales experience are now leaving the comfort of their jobs in global industry leaders in the technology sector, which has at least one R&D centre in India, to do their startup ventures. Technology and market changes like advent of cloud-based delivery of software as a service (SaaS) and open mobile systems through smartphones and apps have reduced the barriers and cost for starting a global firm from India.
And last, but not the least, thousands of angel investors (both organised through many angel networks, as well as groups of individuals) who have an ability to do initial funding and mentoring the firms till they get ready for institutional Series A funding.
Take the case of I Vijaya Kumar, a long timer with Wipro, where, as CTO, he was popularly known as IVK. Eventually IVK decided to move on and pursue his own calling. “I have always been interested in new technologies and innovation ecosystems. Even at Wipro, I was involved in dealing with startups and new technologies for a long time. I came across a few interesting opportunities worth pursuing in education tablets and digital tourism and it was time to move on,” he says.
Besides being an angel investor/advisor/ accelerator for various startups in association with a few others, IVK is closely involved with Crayon Data, a Singapore-based startup that is navigating the ocean of Big Data. “Big Data is an interesting combination of problem of computation and challenge of visualisation. At Crayon Data, we strive to simplify the choices for a business user with a blend of advanced computational science and insightful visual language. We are seeing good traction in the market for our products and believe that we are moving into our year of scale now,” he added.
So, what do angel investors bring to the table, besides money?
“More than the idea behind a startup, it is the team that matters,” says IAN’s Ruparel. “They have nothing but the team and are trying to fill the gaps with resources they do not have, but which they need to make their venture successful,” she adds.
More than the money, the angels help in creating a basic structure, create a value system and draw the roadmap on the way forward for the startup and what it will do, say, 10 years from now, says Stayzilla’s Yogendra Vasupal. “Otherwise, starting-up is simply fire fighting on a daily basis. They bring in thoughts to make the startup, which otherwise is raw, into a more polished and mature firm,” he says.
They also help in connecting to the right people through their network. For instance, “If we were to tieup with a payment gateway, it would have taken a very long time. With assistance from our angels, we could accomplish such tasks in a matter of a day,” Vasupal points out.
Not only the angels, even accelerators like IVK play a big role in shaping the future of startups. Accelerators offer a finishing school for startups for about 15 weeks or so, to address the gaps in their offering, market connect and team profile. Hence, it is like visiting a clinic to get a health status and get on to an action plan to improve the performance parameters. “At the end of the day, the mentors at the accelerators do not run those companies, and hence, the chemistry with the promoter team matters a lot and the feeling is mutual. Most of them accept the advice and act on it, but we should let them drive it,” says IVK on his role with startups.
In spite of such efforts, not all startups are ready to attract investments. “Not all are investible class because they are unable to provide a validation of their offering in the market and convince us that they can scale. It is quite possible that the idea is great and even, at times, the product is great, and hence, it is still a candidate for further incubation for proof of scale. Many such firms are referred to various incubators in India and we do follow up on their progress,” IVK pointed out.
We asked around if the ecosystem has helped improve the quality of the start-ups. “Yes,” says IDG Ventures India Advisors’ Sundaram. “Both the quality and the quantity of deals that come today is significantly better than what we have seen before. They are getting better with democratisation of technology and exposure of Indian entrepreneurs to global trends as part of global tech leaders. This is only getting better by the day,” he says.
For instance, the late 20th century saw more IT services companies. Then came the BPO companies in early 2000s, followed by product companies in the mid-2000s, and now, consumer focused companies in the early 2010s. “We expect this trend to accelerate and help build a globally competitive company that goes on to list or be acquired for large valuations,” Sundaram believes.
But, it seems it is easier said than done, especially given the track record of Indian startups, barring a few.
Sundaram knows why: “The main reasons for Indian startups not getting lot of acquisitive interest from global tech leaders are lack of defendable IP/patent in core technologies that could compete with or hurt global leaders. It is still very low at less than 2 per cent of deals seen/funded, which should go up significantly.”
Further, where the companies have cool technologies in consumer space, they should also achieve significant scale of users/revenue at a global level a la Instagram and WhatsApp, to attract global consumer/ advertisement tech leaders, Sundaram adds.
And IVK seems to concur: “Many startups are tech driven with no clear differentiation in technology solution and its relevance to the customer problem space. Also, many of them underestimate the time taken to get customer validation in a B2B segment, as they get swayed by the super star success of a few B2C firms in short time.”
In addition, the imbalance in the core team of a startup adds to the problems, as many think that it is enough to have a great idea to launch a great business. “It is a very different world and access to markets is tough, the moment one leaves the corporate lifestyle. Many of them find that difficult without a big name to rely on for business development,” he says with a piece of advice: “Show hunger for growth, but stay humble.”
According to Dham, although India’s venture capital industry is in its first decade of evolution, great progress has already been made in creating a robust ecosystem, especially in early stage investing. “India’s domestic market is big and desperately needs solutions in practically all aspects of livelihood,” he says.
“Since, recent advances in the technology relating to mobility and cloud have brought the world closer, there is no reason why the next Whatsapp cannot be delivered from India,” believes Dham.
Seedfund.in’s Pravin Gandhi agrees: “The ecosystem is still relatively new. So, we can't really be too judgmental about the lack of quality. Over the past few years, exits are increasing. Redbus, Makemytrip, Just Dial investors have had very good exits. So, we just need to give it more time.” Seedfund works closely with the ecosystem by collaborating with all the players, including TiE. It also works very closely with its investee companies, guiding and mentoring them on a regular basis.
“Having said that, it is also important to create a focus on products. We tend to have many execution-driven enterprises, but not products, like LittleEye. We need more such companies. There are several new opportunities to create products for the global market. I am confident that that will happen over time,” says Gandhi, who is also general partner of Infinity Venture Fund I, which is said to be the most successful early-stage fund out of India.
In IT services, the large export businesses were not built overnight. Also, global giants like Microsoft, Google and others that are also active here, will have a significant role in further developing the ecosystem, Gandhi points out.
However, he feels that two issues must be tackled on an urgent basis to strengthen the ecosystem and spur the growth of startups. “The early stage ecosystem has come a long way over the past three years, but it still has a few snags,” he feels.
According to him, the emergence of angel groups in various cities is helping new startups. Organisations like TiE are helping mentor new entrepreneurs. In addition, several incubators and accelerators have been launched that help entrepreneurs get over the early hurdles.
“While there is a reasonable amount of money available to launch new enter-prises, there is a bias in favour of Delhi, Mumbai and Bangalore. Other cities are not well covered in the angel space,” says Gandhi.
He says enough money is not available after the angel round. “There is a need for at least $300-500 million to support angel-invested firms. Because of lack of these funds, many startups die earlier than necessary. And to have universal growth, other cities and regions like Chennai and Hyderabad too should attract funding, for local enterprises.”
Kanwal Rekhi, managing director of the US-based Inventus Capital Partners says. “There are two perspectives one should look at, when talking about Indian environment driving the startups. There are no big assets, at least, not yet. Whereas investors have got fantastic returns in China that are several times higher, there have been no big returns from India.” Rekhi is the name behind several successful startups and exit stories in the US, India and elsewhere.
Rekhi squarely blames the government for lack of big-time investments. The government’s wrong moves and actions include restriction on overseas IPOs, even when the local primary market was dull; the Vodafone tax wrangle; and the recent move to tax investments by angel investors.
“These did not send the right message to investors. Venture capital is the lifeblood of entrepreneurship. But the rules are vague here. And with your latest move, you have ended up taxing the investment and not the returns. Delhi is totally blind on this,” says Rekhi. “Hence investors are less interested in the India story, as they are unwelcome,” he laments.
Praising the spirit of Indian entrepreneurship, Rekhi wants bigger things to come out of the basket. “Indian entrepreneurs are really good. They have succeeded despite the government. But, they are yet to achieve scale,” he says.
According to him, the returns from RedBus, touted to be a big deal in India in terms of exit for investors, was a mere 2 per cent of what Baidu in China gave. It gave 50 times more returns than RedBus. “The Baidu exit in China produced more than $5 billion in returns for the investors, both angel and VCs, which is 50 times the value of the RedBus exit and more than all the exits combined in India,” Rekhi said.
The Indian startup entrepreneurs and the ecosystem need to ask the government, “What are you trying to achieve? Give us a break... Everywhere in the world, they are welcoming entrepreneurs and VCs, except India. A VC is noble capital and willing to take 100 per cent risk. What the government needs to have is some clear rules. The Indian environment will be 100 times more productive, if only the rules are clearer and more purposeful,” believes Rekhi.
Despite the prospects and opportunities, the Indian startup scenario is not totally hunky dory. There are problems. For instance, the Section 56 (of the I-T Act) is a hindrance, and because of it, some very good companies are relocating to places like Singapore and the US. “It is a high-risk move, but nevertheless they are willing to take that risk at an early stage than face recurrent problems here. As a result, our own IPs, talent and job creation potential are going out of India,” says IAN’s Ruparel.
Another issue is the failure of startups. It is not deliberate, but natural. But, it is difficult to close a business in India, both for IT and non-IT firms, due to tax regimes and approvals. This, when angels are putting in their tax-paid money.
“We have delivered so much, despite the system and governance. We have even invested in manufacturing,” Ruparel says.
According to her, entrepreneurship in India, especially the new age one, is just over two decades old, against in the Silicon Valley, which has existed for 50-60 years. While the US has been culturally an open economy for over two centuries, India remained a closed economy till about two decades ago. “But, we picked on our strength from the temples of education to deliver IT services globally. Yes, we have not created a Facebook or a Twitter. What we need is a made in India, made for India delivery. We do not need a Google for knowledge, when so many are still illiterate. Healthcare is another area, where a lot needs to be done. Unlike in the US, India is a country that is culturally diverse. Given this backdrop, we have done far better than the US, because we could do so much, with so little. I am very optimistic on India and Indian startups and we will make it happen in the years to come,” she concludes.
That’s a wonderful thought to start up with.