The Indian startup ecosystem has fundamental problems to deal with. Instead of fixing these issues we are busy romanticizing entrepreneurship along Bollywood lines and promoting mass entrepreneurship which could eventually lead to a major backlash.
This was another key takeaway from my meeting with Angel investor Sharad Sharma the other day (read the background: Indian Entrepreneurs & The Happy Confused Stage). In this post, I’ll summarize some of the issues and consequences he talked about.
1. The Indian seed stage ecosystem is tiny
There are more deals done in the United States by 11am on the first day of a year than throughout a year in India. Including all the angel investments, not more than 200 early stage deals were done in India last year, whereas in the United States, an average of 500 angel deals were done on every working day in 2011.
2. The investors mindset
India lacks thesis based angel investors. Most of our early stage investors don’t invest in the problem and the team, but instead, look for companies that have already found product-market fit. They don’t create enough value by bringing in co-founders, helping with customer discovery and development of the business model. Most Accelerators, which claim to do some of these things, are time based which makes them useless in the Indian context, where companies take much longer than 4-6 months to be ready.
3. Arbitrage Players & their Money
Barring a few from the previous generation of entrepreneurs, none have invested in early stage technology startups. The IT Services entrepreneurs, from Infosys, HCL, etc., have made more than $20 bn but very little of it has spilled over to early stage technology companies. Even early stage Internet entrepreneurs have not become seed investors in a big way. Ram Shriram and Chamath have invested more in the Indian tech startup ecosystem than what all the IT Services co-founders have invested if you exclude NS Raghavan. This is because none of them are truly comfortable with making technology bets. Things will change when new exits happen (for instance Inmobi, Flipkart, Pubmatic and Druva). They will invest in the early stage but it is still 2-3 years away.
4. Longer Gestation Periods
Indian startups go through longer gestation periods as they go through the happy confused stage and other stages take longer to complete. For instance, customer discovery takes longer as decision making is slower. Also, there are fewer early adopters. More seed funding will speed up the growth of these startups as they can perform more customer trials.
Encouraging mass entrepreneurship without fixing these core issues will create a major backlash against entrepreneurship. Unprepared entrepreneurs coming to the system will have severe hardships. Most of them are clueless of these difficulties they will face. They are buying the Pollyanna vision of mass-entrepreneurship that is being sold to them.
It is a repeat of what happened with engineering. IT bodies like Nasscom championed the increase in supply from 400,000 to 1.5 million engineers knowing well that only 150,000 will get IT jobs.This has created a large pool of unemployed engineers and has resulted in a terrible backlash against engineering as a profession. Rather than learn from this experience, we are now creating a supply hype around entrepreneurship by romanticizing it along Bollywood lines. The excessive focus on quantity, instead of quality will not end well.