I just read this article by Rajesh Jain where he pointed out an important aspect of Indian venture capital investment and entrepreneurship. He pointed out that missing strings in Indian entrepreneurship ecosystem are the first two stages of the investment pipeline: Angel investor and 1st round investor.

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Although this topic is not new to Indian VC ecosystem but surely this topic has been much less talked about. There are host of reasons to such condition.

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One of the primary reason is that the risk vs reward equation is drifting more towards the risk than the reward. And the trade-off also doesn’t seems better off for many tangential reasons like for example, entrepreneurship in India has always been more like family oriented, especially if you look at the assets being created over the period of last 3-4 decades. So that puts lots of stress on VC fund houses to put in money when the founder or the product is not tried and tested. And if the product is in a me-too category then the whole idea of putting in good amount of sum doesn’t make sense since it’s not going to change the world at least. So the reward becomes paltry again. So the entrepreneur-VC ecosystem in India is running through a vicious circle IMHO.

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But this isn’t the case in developed countries  especially silicon valley where it started way back in 60’s. So investors (viz. Venture Capitalists) are less jittery about the risk-reward equation.

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So lets define the problem statement:

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We need to device a way which will act a bridge between entrepreneurs & investors where the risk is mitigated by the amount of money being put in the first place.

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Now wait. There is already ways entrepreneurs are doing it right? Yes there are! Enter Angel Investors who basically are the retired entrepreneurs and company execs. So their presence not only work as a short duration of cash but also due to their nature of patience, experience Angels also work as mentors.

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And after the Angels have helped much then the entrepreneur can try to their 1st round of financing through VC’s. Great story ends!

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But wait. This is not the end to it. If we forget the whole aura of Silicon Valley for a while and get a reality check about India’s investing scene then it might give a different picture. First of all, in India we don’t have enough Angel Investors. Whereas, in US, in 2005, according to the University of New Hampshire’s Center for Venture Research, the total amount invested by angels exceeded the amount invested by venture capital funds.

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But the question arises then why VC’s don’t invest in Indian startups? There can be lot of gibberish around it but the moot problem remains the same. For a VC, they won’t ever consider making an investment in the order of $150-200 Mn out of their corpus in Indian startups because that’s a lot of money for Indian startups and risks are also highers because of the above mentioned reasons. Also, a VC fund of $150-200 million may have a genuine problem in financing a start-up this early and this small. The fund’s overhead cost limits are such that they can afford at best two or three experienced people to find and make investments and work with entrepreneurs. This naturally limits the number of deals they can do to ten or fifteen a year. Thus, they tend to concentrate on deals of larger sizes, say, and a minimum of Rs 10 crore as the starting investment.

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So that makes the need of intermittent investment process for Indian entrepreneurs much more important.

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Also Indian startups don’t need that huge amount of sum initially. What they need is just a small fraction. Also the much needed mentorship through the initially phases. All the criterion makes an Angel a perfect fit.

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But what we have in India is handful of Angels. Also in the post which I mentioned earlier where Rajesh Jain pointed out the sum which Indian startups need IMHO is way too much.

In the Indian context, angels should typically invest 1-2 cr ($200-400K) to give enough money for the company to get started and through to the early product prototype. First round investing (typically by a venture firm) should be between Rs 5-15 cr ($1-3 million) for products focused on the Indian market.

I personally feel that is still way too much; especially for companies who are developing consumer internet products. I think around INR 10-15 lakhs ($20-30K) is more than enough to take products of that nature from prototype to marketability stage. This also puts less stress in small time angels to put in their money with lower risk appetite. And the best part is what it does for the overall industry. When a lot of smaller amount of money follows many small startups, then surely it would be great for overall startup-VC ecosystem also. At least its good to have many startups who fail than having nothing at all since the experience curve will help to make fewer mistakes going forward.

But I’m sure that Rajesh Jain would come up with some fantastic idea which he promised for tomorrow’s post. Will try to plug in more thoughts on it laters. For me, let me know what do you think? Do you see a bail-out from such condition? Let me know!