TC Debate: Are Indian investors too stringent when it comes to investing in early stage startups?

Like you already know, we are innovative chaps (yes we are, period!), and keep trying to come up with new sections to entice as well engage our readers. We recently started with a 'startup advice' series that focuses on successful entrepreneurs / investors giving important 'gyaan' on starting up in India. The challenges faced by them and how they overcame the same, as well as life learning's acquired in the process.

Today we bring to you the first edition of the Techcircle.in Debate, or as we like to call it TC Debate. To give you a better idea, every week we will pitch a relevant question (pertaining to the Indian startup ecosystem) to a few industry veterans and get their views 'for' and 'against' the motion. We will then compile the same and present it to you in a debate format.

The first question that we asked was 'Do you think Indian investors are too stringent when it comes to investing in early stage startups? And is it very tough to get them to loosen their wallets?'

Here is what we found out:

Manoj Gupta, founder, Craftsvilla.com (For the motion)

I totally agree that Indian investors are indeed stringy. And in cases where they actually loosened their wallets, a lot of the investments have been in back-end technology companies going global. "Unless you build a global product we will not invest," is a statement that many entrepreneurs must have heard in their lifetimes. This is probably because the capital efficiency of an early stage investment is best in a technology company.

In hindsight, not a lot of these investors are (or have been) technology entrepreneurs themselves and hence they lack an understanding of technology companies and experience in investing in them. That is the reason we don't see a lot of technology startups being built from the country. I have interacted with many entrepreneurs and the consensus is always that "investors did not understand our technology".

Also, I feel there is a lack of risk appetite in the Indian VC community. What this means is that only a few VC's will bet on a standalone entrepreneur based on a certain idea or a certain approach of a business model. In Craftsvilla's case, I was lucky because since I come from an investor background myself (I was earlier a principal at Nexus Venture Partners), I did not actually face any challenge in raising seed funding for my startup.

A reason for them to be stringy could be that there have not been many significant exits from a pure homegrown Indian technology company, apart from maybe InMobi.

To summarise what I have said, the three main reasons behind Indian investors being stringy probably are-

1. Lack of exits

2. Lack of experience / understanding of technology

3. Lack of risk appetite

In addition, rather than focusing on the important fundamentals, the investors also waste a lot of time on creating hype for the companies.

Remedy

The core problem I feel is that a lot of VC's focus on investing across sectors. The same investors will invest in sectors like e-commerce, healthcare, technology, etc. It doesn't work like that. Because of this, they are not able to delve deep into any one sector and get a better understanding of the same. In contrast, VC's in the Silicon Valley pick one sector and are completely focused on that.

Also, more VC's with technology backgrounds will make a better class of VC's, especially for the technology sector. Even entrepreneurs respect such VC's more.

Anil Joshi, president, Mumbai Angels (Against the motion)

I think calling Indian investors stringy is not correct. A lot of funds today, including Mumbai Angels (MA), invest in ideation stage startups. In fact, we have been doing it for a while now. The biggest example of this can be InMobi itself, which was just a laptop plan when MA invested in it. And its not only about MA, other groups have also been equally supportive of early stage companies.

With so many angel groups, accelerators, and funds cropping up in the recent past, there has been a lot of positive development in the ecosystem and investors are supporting entrepreneurs left right and center. But what entrepreneurs have to understand is that no one is going to right a cheque just because you have an idea. For any idea to get backing you also need to have a business case supporting the same.

There are a lot of people just waiting to write cheques, but not every idea is worth backing. We keep evaluating a large number of startups on a continuous basis, and most of the times, entrepreneurs are not able to define basic fundamentals like the problem statement, whether they are a product or services company, what is their target audience, etc.

In addition, if you look at the profile of any investor group, most of the members are either first, second or third generation entrepreneurs or are serial entrepreneurs. And even the ones that are not, they are running big businesses.

Remedy

Entrepreneurs with ideas should ascertain how to pitch to investors and learn how to communicate their plans in a better manner. There should be clarity on their solutions and offerings and the size of the market they are planning to cater to. It's also important to have a solid core team. To summarise, I would say the three things required are-

1. Clarity of problem statement and their (the startup's) solution

2. Clear profiling of the team

3. What is the addressable market and how they are planning to address the same?

That is all for the first TC Debate, we now throw the topic open to our readers. What is your take on today's question? Do you actually feel Indian investors are stringy, or is it just a case of sour grapes. Share your comments below.