Seed stage investment in India : Reality check

VC investment in India stands at 777mn $, and private equity closed deals worth $13.5bn in 2007. India Shining? Well, yes but the real question is where is the money…

VC investment in India stands at 777mn $, and private equity closed deals worth $13.5bn in 2007. India Shining? Well, yes but the real question is where is the money going?

As per the report by Stanford University and TiE, majority of the funds go to late-stage initiative firms and NOT the early-stage ones.

  • Of all the funds that go to India, only 6.9% is invested in seed and early-stage firms.
  • Similar stats for China is 12.5%, Israel – 32%, UK – 39% and US – 32%

Few reasons why seed stage investment hasn’t happened:

  • Mismatch between the resources and skills of risk capital providers and entrepreneurs’ needs
    Early-stage entrepreneurs, though skilled at cost-control and technology, lack market awareness, product development skills, global standards of professional and ethical behavior and team building skills.
  • Transition into and from early stage investments is difficult
    Seed and early-stage entrepreneurs’ professional networks consist primarily of a few strong personal connections and brokers. A wider network of professional associates,

  • incubators and prior-stage financiers, is largely absent.
  • The business environment discourages sophisticated standards of
    Corporate governance : holding board seats and minority shareholdings, even when the majority of the board consists of independent directors, were inadequate for influencing startups.
    Intellectual property creation and protection.
    Domestic consumption in some important markets, such as for IT
  • Bureaucratic, regulatory, legal and tax hurdles

Over 90% of the money is invested in late-stage initiatives by mature firms. Even the remainder mostly finances new firms replicating proven business ideas. As a result, very few innovative startups are funded

Few excerpts from the report

Silicon Valley’s success has been attributed to a vibrant network of ‘weak ties’, i.e., opportunities for would-be entrepreneurs to interact with financiers, potential co-founders and fellow employees in settings such as meetings of professional associations. On the other hand, strong ties, such as close business associates and friends, have been found to be less useful for entrepreneurship than weak ties because of their overlapping domains of information.

The academic literature on social networks identifies ‘social capital’ as a key requirement for startups to innovate and grow. Such social networks offer information and risk-mitigation that is often crucial for startups. In Silicon Valley, for example, it is argued that social capital supports a tolerance for experimentation (and possible failure), provides a network of angel and other risk-tolerant investors, a network of research ideas through linkages with Stanford University and University of California, Berkeley, and opportunities to find the complementary members of a founding team.A thought well documented in this post (and comments). Though the report is one year old, nothing seems to have changed!

What do Indian entrepreneurs have to say about this? Do they feel let down by VCs (who would rather fund a desi version of FaceBook/MySpace and not something innovative?)

Download the report

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