Wednesday, July 05, 2006

On why you won't get funded

Here’s a note to fellow entrepreneurs.

You won’t get funded

This is not to discourage you. This is only to make you more realistic. You will not get funded by the VCs in India. The news items that you see may prompt you to believe that there are many VCs looking for good startups in India. Examples: 1, 2, 3, 4, 5. Those news items are indeed true. But what is not stated in those news items and which will you will eventually realize after having traversed the path of entrepreneurship for one year and spent 20 lakhs or more is the following.

You will not meet their selection criteria

India is not Silicon Valley. And the selection criteria of most VCs are more suitable for Silicon-Valley-kind of companies. As such the concept of VC itself is very unique to Silicon Valley. Though it has been emulated in other parts of the world, the VC community still retains the flavor, culture and formulae it developed in Silicon Valley. Even those VCs who are based in India and focused on India are emulating these models developed for starting companies in Silicon Valley. They even chase after the trends that they see in Silicon Valley. Silicon Valley is benchmark for all these VCs. Even though they water down their selection criteria to a great extent to accommodate local companies, it never comes close to reality for Indian startups. Some of the criteria you may not be able to meet (I made up these):
1. The company should be within 15 miles of the VC firm
2. There should be a big-name ex-entrepreneur attached to the company
3. The company should be in a high-growth market and should be catering to that market through its presence

While these VCs are keen on taking risks in Silicon Valley they may not be able to do so in India.

Don't blame the VCs. They don't have enough precedents in India to allow them to take the risks they usually take in Silicon Valley. The same VCs which are focused on early stage and seed stage in Silicon Valley are taking up private equity deals in India. (Examples: 1, 2, 3, 4)

Why did their focus change when it comes to India?
'Not many precedents and no ecosystem' is the simple answer. If you dig deeper you may get more reasons. But I would like to keep this simple and crisp here.

You, as entrepreneurs, can't overcome these problems for them. Instead, what you have to do is make it on your own and set precedents so that startups like yourself may get funded in future.

Why is there no ecosystem in Bangalore?
'Bad roads' is my simple answer.
If you probe me further, I would say the answer is deeper- Each successful entrepreneur in India thinks he is an exception and quickly assumes that what worked for him will not work for others and hence his ability to take further risks (in investing) stops right there.

Though the first part of my answer sounds crazy there is some logic to this answer. An ecosystem is formed when ex-entrepreneurs live in the same city further promoting entrepreneurial activity. Ex-entrepreneurs are very valuable for promoting further entrepreneurship to take it to the next level. Though Bangalore has the best weather, it really sucks when it comes to commuting and travel. Many rich ex-entrepreneurs settle down in those places where there is less traffic. My answer to this problem is simple. Get rid of Defense establishments out of Bangalore, make wide roads, create big parking places, open big convention centers, close Brigade road for traffic and make a walking avenue out of it, keep pubs open late instead of closing them down and make this city attractive for rich ex-entrepreneurs to live in.

Now for the second part of the answer! Take Infosys for example. Here's a good startup. They have created lot of jobs but I do not credit Narayana Murthy and others for creating more startups. They think they are an exception. There are many such ex-entrepreneurs who are averse to taking risks once they become successful. My idea is not to accuse any of them. I would like to put the reality in front of us so that we don't have false expectations.

So what should an entrepreneur actually do?
First, don't expect anyone to make it easy for you. What you set out to do is not easy. And it will be a long arduous path. The key thing is to survive. And it's not easy to survive. Forget expansion, innovation and dominating the market; your energies, efforts and time will be spent in just surviving. But surviving is good. If you survive in India and survive long enough you have passed a big test. Surviving in India will also make you innovate. You will come up with some weird ideas to cut costs, come up with new methods and solutions because you have to survive. These methods, skills and ideas that you learn and come up with will be very valuable if ever you become successful. You will manage with small money and still produce big things.

Hopefully, in another ten years, we will have enough success stories and hopefully VCs will start funding tech startups. Till then, you are on your own.

How do you survive?
If you believe in your idea, and you are able convince yourself that this idea is worth taking a risk, that's the first step. Then you go about convincing others why this idea is good and worth taking a risk. If others get convinced, hopefully, you will have a team. Once you have a team, you go about making a prototype or creating a small company or team which can execute and you use this to gain traction with your customers, investors, partners, etc, to go to the next level. But how do you fund this whole thing? You can take a personal loan, say 5-10 lakhs, before you quit your current job. That's good for your expenses for 10-20 months depending on what your lifestyle is. The same could be done by your team. Otherwise, you talk and convince your parents, family and friends to loan you money or invest in your company. If you can't convince people around you, its tough to convince a VC or an angel investor. And remember this- you can't convince your people and investors if you are still holding onto a day-job.

Is quitting your current job so important?
You can't create a startup working part-time. Those who do or did are exceptions. Assume you are not an exception. If you are thinking on making it happen working part-time, realize this- you have no ability to take risks. If you can't take risks, don't think of a startup and instead concentrate on your career to become a director or a VP. Buy a good property, build house, buy a good car, and if you still have free time, write blogs!

Don't analyze and evaluate. Act!
If you are making cost-benefit analysis, ROI, evaluating business models and other calculations to see if you should start or not, you are better off joining a consulting firm or a strategy department of a big company to write reports, or joining a VC firm as an analyst. As an entrepreneur you have to act. You have to put the things in motion, get it going, and deliver- whatever your idea is. You will have a life time to think and brood over what you should have done and what you shouldn't have. It's for VCs to analyze; it's for you to act. May be your idea is not a good business model and you will realize that soon. Meanwhile, give it a shot while you can. Else, you may regret this forever.

Is there any hope of getting investment?
Hope is what makes entrepreneurs tick. Keep that hope alive and keep working at it. Once you have crossed that first hill on your own, of having made the prototype, or having the first customer, or having garnered enough traction with customer, partners and investors, you may get funded by a big name VC. Meanwhile, keep up the good work through angel investment, loans, investments from friends and family, selling that piece of land, etc.

What have you got to lose if things don't work out?
You can always get a job. Your experience at a startup will only add value if ever you have to go back to employment. You may have a loan of 15-20 Lakh rupees. That's not a big amount for an engineer in Bangalore to clear off in few years. That is a small price to pay for the ride.


Rajiv said...

funny. there is talk of a vc bubble in india!

Mohan said...

Interesting comments.

Samir said...

Very well said. This is exactly what India needs.


simon said...

well written, interesting, and beautiful blog.
I thought about including a link to your site on my blog.

if you ever get the chance, come visit me back


my blog is (not nearly as superficial as it sounds ;-) )

Hemant Hepat said...

Amazing,Worth Reading and well acquainting to the realities of India Inc.