Why funding seems elusive to start-ups Only 10% of the 800 start-ups that enter the Indian market each year survive to make it to the next level

Fifty-two e-commerce companies have raised close to $700 million in venture capital in the last three years.

 I have an idea, but no money”—that’s the commonest refrain among aspiring entrepreneurs. Investors say there are only a few good ideas they can back.

Only 10% of the approximately 800 start-ups that enter the Indian market each year survive to make it to the next level, experts say. On average, start-ups in India have received 52 angel and 155 Series A investments in the past three years, according to Venture Intelligence, a research service that focuses on private equity and mergers and acquisition. Only 22 angel and 86 Series A investments have been made in the first seven months of 2013.

While the number of start-ups that have entered the market in the last two years has doubled, the number of early-stage investors in India has remained fairly constant at less than 10, widening the mismatch in expectations between the two groups.

In addition, run-of-the-mill business ideas such as websites to sell handicrafts are unlikely to receive serious consideration from investors.

“If you are just another e-commerce website and want to sell handicrafts, then you will think there is a Series A crunch,” said Bala Parthasarathy, managing partner, AngelPrime.

It took Y Combinator, a start-up accelerator that provides money, advice and a networking platform to founders, nine months to make Airbnb, an accommodation search website, ready for the market in the US, while it took eight years to bring Stayzilla, a hotel bookings website, to reach the same stage in India.
“The pace of doing business in India is much slower, which means India needs longer gestation periods,” said Sharad Sharma, executive council member of Nasscom, a lobby group for Indian software services companies.

Also, some experts feel that the surge in the number of e-commerce start-ups in India has made it more difficult for them to raise funds. Fifty-two e-commerce companies have raised close to $700 million (around Rs.4,500 crore today) in venture capital in the last three years.

“You can count with your fingers how many companies got funded,” said Sharat Potharaju, chief executive and co-founder of Mobstac, a mobile technology company founded in 2009.

There might be a lot more entrepreneurial participation today, but the quality of entrepreneurs entering the ecosystem plays a pivotal role in funding.

“We look for founders who are passionate and motivated. They must know that their market target is large enough and their product distinctive. It is important to invest behind people and not ideas,” said Sandeep Singhal, managing director, Nexus Venture Partners, a venture capital fund.

“Sometimes we see companies with incomplete teams, no prototype and no monetization plan. Plus the product sucks—not even their families use their products or they are clones of other companies. Will they get funded? No way,” said Ravi Gururaj, chairman of Nasscom Product Council.

When an idea works in one part of the world, entrepreneurs hope to replicate the success in another part. These are called reflection ideas, according to some experts. Microsoft Accelerator, now renamed Microsoft Ventures, received about 22 travel planning ideas in 2012 and 36 car sharing ideas in 2013.

Though Google Inc. and Intuit Inc. are great examples of copycat companies, their successes came from the “secret recipes” they embraced to make it possible.

Nasscom sees more than 5,000 start-up applications every year, out of which many are only aspirational ideas and do not make for great business plans, said Gururaj.

“There are no bad ideas, only half-baked ideas. The way to get from a zero idea to a hero idea is the iterative method,” said Sharad Sharma.

Angel investors in India avoid taking blind risks because any irrational funding sends out a wrong message to the market. Some early-stage investors decline to fund mobile apps, education and data analytics because the sectors are overcrowded. Entrepreneurs disagree.

“VCs (venture capitalists) have to loosen up a little more. Education research and development, transport and bio-tech are chaotic sectors, not crowded sectors. There is development scope, but nobody wants it. They would rather invest in known things that are already in the market,” said Gowdhaman Margabandu, chief executive and co-founder of Digital Future of Education, a company that provides electronic classroom solutions for students.

The best way to describe the Indian ecosystem is that entrepreneurs have ready-to-cook ideas, but investors want ready-to-eat products, said Sharma.

Some experts say that VCs, including Nexus Ventures and Accel Partners, operating in India have raised significant capital in the last year, but have avoided expanding their portfolio.
There are two ways to beat this evident non-availability of funds, according to experts—create more funds and accept whatever is offered.

“Unlock more high net-worth individuals. Encourage large companies to do alternative investments-to-early-stage funding. Create smaller exits, so that entrepreneurs can exit and become investors,” said Sharma.

Any change in the ecosystem will take time, so “if you want $2 million and get only $0.5 million, take it, tweak the product and try raising funds over and over again. Raising money is not a one-time occurrence,” said Abhishek Rungta, who holds the title of chief gardener at Seeders Venture Capital Pvt. Ltd. “And the very best companies always get funded. So you figure.”