How strong is the Indian startup-investor ecosystem?

How strong is the Indian startup-investor ecosystem?

Author | Abhinn Shreshtha | Thursday, Jul 16,2015 9:12 AM

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How strong is the Indian startup-investor ecosystem?

The start-up ecosystem in India is vibrant and growing. According to a media report, Indian startups raised $1.7 billion from investors. This is up 300 per cent from $450 million raised in the same period in 2014, says the report research.

Investors from India and across the world turning to India in the hopes to discover the next Facebook or the next Amazon and are pumping in money for the same but this has also led to an increase in pressure on start-ups to scale operations as quickly as possible. In some cases, the most recent being the well-publicized one of Housing.com, it might lead to disharmony and acrimony between investor and founders. According to some theories that emerged after the exit of CEO Rahul Yadav, the investors were forcing Housing.com to expand more quickly than the company was ready to, which led to the confrontation.

Is Housing.com a representative of start-up-investor relations?

It does make sense to question whether the incident was just an anomaly. Or is it possible that with increasing pressure to grow and with competition increasing, start-ups will be pushed into making rash decisions to justify investments and to meet ROI?

Most start-ups and investors we spoke with agreed that this was usually not the case.

Alok Kejriwal, Founder of Games2win, who also doubles up as a mentor and investor, maintains that the start-up ecosystem is a healthy one though he agrees that we need to see more entrepreneurs. Giving his thoughts on Housing.com incident, he said, “They (Housing.com) had no maturity. When did arrogance ever give a dividend anywhere? Knowing how to behave in society, this comes from upbringing or taking the advice of the mentor.”

Similarly, Sameer Narkar, Founder and CEO of Mumbai-based Konnect Social opines that investors are usually highly optimistic about B2C models though this is the first time, he says, that he has heard of an incident like this in India. “Having too much money right at the outset can also become a problem,” he suggests.

However, this does not mean that there is no pressure to scale or expand.

“Whether it is an investor or a promoter, they want the company to scale up. It is up to the founders to get the company ready. If it cannot scale then no one will be interested. ROI will only come if the business scales up,” says Rohit Bajaj, an industry veteran and who is currently CEO at 99yrs.com.

Investors, especially VCs, do expect revenue even though most angel investors seem more stoic about their investments. For example, Kejriwal maintains that start-up investments are all about 100 per cent risk. “You just hope that at least 1-2 actually succeed. If it were that easy, you would see banks becoming angel investors,” he said. However, he did opine that any start-up should have at least one person who understands business.

“ROI is definitely a consideration,” agrees Diwakar Chittora, Founder & CEO at Intellipaat, “Investors are looking for a high ROI growth, atleast 2x or 5x returns, and fresher ideas that you can create a brand out of,” he added. Intellipaat is currently in the midst of seeking VC investment.

When asked what are the most important things investors look for in a start-up, the most common answers were scalability and the team. “The primary thing is the commitment. I need to know whether they are in it for the long haul. Then you look at the problem they are trying to solve, is there traction for it, are they offering a differentiated product or service and whether there is an IP component to it,” opines Jaspreet Bindra, SVP (Digital Innovation and Ecommerce) at Mahindra & Mahindra and who also acts as a mentor and angel investor.

Is low ROI Shackling Investment?

“There is too little that is happening. The entrepreneurship rage has just started in India,” says Bajaj. He points to the example of online sellers. “China has 1 crore sellers that sell online while we have about a lakh. India has the potential to have about 4 crore online sellers and we could see about 25-30 lakh online sellers in the next 3 years. So the potential to expand and grow is huge,” he says.

According to Bindra, seed funding still forms just a small proportion of the total investments being made in the country. In the US, he says, angel investments are much more than VC investments but the situation is opposite in India. “There are just a few people/investors who keep putting in money. Only recently have we seen others start investing. It should be 100x right now but it is just 10x or 20x,” he said.

Perhaps a reason for this is that RoI is still something that most start-ups struggle with. For example, Bindra informed us that whereas in countries like the US and Israel, 1000x returns are not unheard of, in India, getting a 100x return is considered very high and this happens rarely. Even the big players like Flipkart, Snapdeal, etc., who have raised millions in funding so far, have yet to show any RoI on their investments.

“As long as a business is able to prove sustainability or even show proof of concept early on, risks go down significantly and the capital can be invested towards growth of a proven module besides, giving the much needed confidence to investors,” opines Shobhit Arora, Founder & CEO WorldArtCommunity.com.

But no one’s patience is infinite. As one investor told us, investors might keep putting in money for 4-5 years but not forever; they want the company to become self-sufficient as quickly as possible

On similar lines, Chittora argues that though an investor might keep the money flowing, sooner or later the talk will come around to revenue.

On the flipside, Praveen Sinha, Founder and MD of Jabong, maintains that the ecosystem is moving in the right direction. Speaking about pressure to deliver RoI, Sinha agreed that seed funding tended to be more about passion than revenue but also said that VCs are also usually flexible in their approach. “The pressure (on start-ups) comes because now you need to deliver because if you cannot then someone else will. The typical start-up requires an idea, capital, a team and the actual execution. The first two are easily available these days but the pressure is now on becoming the best to execute the idea,” he opines.

Narkar agrees that the money being invested does add to pressure. According to him, one solution to this is to bootstrap in the first couple of years so that when a company actually goes to raise funds, it has a more realistic projection and valuation. “Valuation is always difficult because you will always believe that you can earn a certain amount and the VC tends to be more cautious,” he said.

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