Making the idiot box intelligent may appear impossible, but that is exactly what software engineer Rabi Gupta is trying to do in his two bedroom apartment which doubles as his office in Noida, near Delhi. Gupta, 27, runs iDubba.com, a portal that alerts television viewers about the shows they might like to see in their spare time rather than surf hundreds of channels aimlessly. He says the idea struck him three years ago while watching a fascinating Beijing Olympics documentary on the Discovery channel that had him wondering how many such programmes he was missing. To transform the idea into reality, he quit his job at Wipro Technologies and ploughed his savings into the venture.
Very soon Gupta learnt the hard way that his savings were not enough to crank up operations or hire software programmers. He did not have any experience or contacts in the television industry, either. This is when he met entrepreneur-investor Sameer Guglani, who gave him Rs 5 lakh in August 2011 and introduced him to Google India head Rajan Anandan and four others. Gupta remembers a piece of advice from Guglani: "Don't sound desperate for money when you meet investors. Just focus on grabbing them with your idea."
BLOG: Nine mantras to raise seed capital
In January this year, Gupta raised Rs 50 lakh from Anandan and the other investors. iDubba.com was launched in April and now has 15,000 registered users. Gupta's venture is among scores of start-ups that are now getting funding even when the business model is untested and there is no team in place to run a company. This is starkly different from the situation two years ago, when most investors insisted on "seeing the rubber hitting the road," a proven model and some revenue.
Data from research firm VCCEdge show the number of early-stage deals
worth less than $1 million (about Rs 5.5 crore) jumped from 35 in 2009 to 72 last year. And 64 deals have been struck in the first six months of 2012. The deal value is often not revealed. But the total value of transactions, according to VCCEdge, nearly trebled to $20.3 million in 2011 from two years earlier, and has topped $34.1 million in the first half of this year. Sandeep Singhal, Managing Director, Nexus Venture Partners
, says there are probably many more deals out there as often such transactions are not made public.
How do early stage start-ups
get funding? And who are the brave people financing them? Seed-stage investment is not clearly defined but is typically less than $1 million. Traditionally, entrepreneurs have relied on what the venture capital industry calls "family, friends and fools" to launch businesses.
But now successful professionals with some spare cash are often the first to invest in start-ups, even if they do not know the entrepreneur. These so-called "angel investors" put in their personal money and buy a stake of up to 30 per cent in new ventures. Not all invest for financial reasons. "I love technology and enjoy working with entrepreneurs," says Anandan.
Venture capital (VC) firms focused on seed-stage funding are beginning to bring in financing in sizeable numbers too. These seed funds are backed by institutional investors and normally enter after a business has raised angel funding. For instance, more than half of the 18 companies funded by early-stage investment firm Inventus Capital Partners had previously been backed by angel investors, says Managing Director Parag Dhol.
Even the government has realised the need to encourage start-ups. A Planning Commission committee recently proposed measures to boost seed funding (see http://bit.ly/O8o3Wj). One of these is to set up a Rs 5,000 crore corpus that will infuse capital into early-stage funds.How to get start-ups off the ground quickly
The trend playing out in India is seen as a maturing of the local startups ecosystem. In developed economies angel networks have existed for a long time and seed funding is far more systematic. In the US, for instance, university incubators invest up to $20,000 in start-ups. Business accelerators such as Y-Combinator and 500 Startups invest similar amounts and provide mentoring support. This is followed by angel investors, who invest at least $25,000. Early-stage VC funds then step in, typically with up to $2 million. Later, other VCs and private-equity funds invest a bigger amount. Google and Facebook are among the most famous companies funded by angels. In fact, investor and Sun Microsystems co-founder Andy Bechtolsheim wrote a cheque for $100,000 even before Google was incorporated. PayPal cofounder Peter Thiel invested $500,000 in Facebook in 2004 for the social-networking site's first outside investment.DESI ANGELS
In India, the angel funding bandwagon is led by Mumbai Angels and the Delhi-based Indian Angel Network (IAN). Both were set up in 2006, and are among India's biggest such groups. Membership at these groups has jumped in recent years. IAN has about 200 members, after it added about 150 between 2008 and 2010. Mumbai Angels had 20 members until 2007 but now has 150. Similar networks have sprouted in Bangalore, Chennai and a few other cities in recent months.
Pramod Bhasin, founder and Non-Executive Chairman of Genpact, India's largest business process outsourcing (BPO) company, says the trend is picking up as more successful businessmen are getting into this area. Bhasin, an IAN member, has supported 15 start-ups over 10 years. Fellow BPO entrepreneur and IAN co-founder Raman Roy has invested in as many ventures.
Deal flow at these networks is rising as well. Mumbai Angels invested in 14 start-ups in 2011, from five or six the year before. In all, members of Mumbai Angels have pumped in money in 45 ventures and IAN members in about 35. "In the past 12 months, IAN has evaluated over 3,000 business plans and met with more than 1,500 entrepreneurs," says President Padmaja Ruparel.
Most networks follow a similar methodology for evaluating business proposals. The network's secretariat first assesses all proposals and may conduct initial interviews with entrepreneurs. It then prepares a short list for the group's members, who take a final call. The rejection rate is high, as most ideas are not viable, business plans are poorly defined, or an entrepreneur has limited risk-taking or managerial ability.
The first investment that IAN members made was in Knowcross Solutions, a maker of software used to improve operational efficiency at hotels, in 2006. "I believe what got me the cheque was that I had bootstrapped my venture for more than three years, which showed my commitment," says founder and CEO Nikhil Nath.
Apart from cold calls, start-ups and angels also connect with each other through business plan contests organised by networking forums such as The Indus Entrepreneur or through start-up focused events such as Unpluggd and TechSparks.
"Several start-ups which featured at Global Super Angels (a business plan contest), held in Gurgaon last November, have raised funding," says Ashok Hariharan, the founder of identity management start-up IDfy, which raised capital from seed fund Blume Ventures after the event.
To be sure, these early-stage deals are risky, say investors. "At that stage they are struggling to survive. All bets are on the entrepreneur and the probability of failure is very, very high," says Sasha Mirchandani, who along with Prashant Choksey founded Mumbai Angels. Mirchandani has invested in 30 start-ups since 2002. He floated the $25 million seed fund Kae Capital in February this year and recently invested in Gurgaon-based career counselling start-up Sattava Edusys. Mumbai Angels President Anil Joshi adds: "Statistics the world over show that out of 10 investments, four or five will go down the drain, one or two will give the principal back, and one or two companies will give great returns."
Bharati Jacob, a co-founder of Seedfund, an early-stage fund that has supported 22 ventures since 2006, is wary of investing over $1 million in start-ups. "Investing large amounts can backfire because the teams might not know how to make the best use of the cash," she says.
One of Seedfund's biggest success stories is redbus.in, the bus ticketing website. The venture was launched by Bangalore-based Phanindra Sama after he could not get tickets to visit his parents in Hyderabad during Diwali in 2005. Sama, then an engineer with Texas Instruments, developed software that could help bus operators manage their tickets' inventory better. But he did not know how to start a business or raise funding.
Sama and his two partners pooled in Rs 5 lakh from their personal savings to kick off the venture. Seedfund entered in February 2007 with a cheque for Rs 3 crore. Today, redbus.in provides tickets from more than 800 bus operators and has Rs 116 crore in annual revenue.
The start-up story is now taking a new turn. Large companies such as Infoedge, which owns portals such as Naukri.com, and top VCs like Nexus Venture, Sequoia and Accel are embarking on seed-stage funding. The aim is to get stakes in companies at lower valuations, says Nexus Venture's Singhal. One97 Communications, a provider of value-added services to mobile operators, set up a $100 million fund in late 2009. It invests more than $500,000 in start-ups and has backed 12 companies so far.
Is this the inflection point in angel and seed funding that India has been waiting for? Not yet, says IAN's Roy, whose millions came from the sale of his BPO company Spectramind to Wipro in 2002. The country needs hundreds of start-ups and even more investors, he adds.
Still, says Mirchandani, the rush of start-ups seeking seed capital is already such that there is little time to conduct proper due diligence. "We get over a thousand business plans a year. It is not possible to go through all of them," he says. "I have missed so many ideas that I can write a book on that." One of those was Pangea3, a legal process outsourcing company later backed by Sequoia Capital and acquired by Thomson Reuters in 2010 for a reported $100 million.
"The global best practice is to spend at least 20 hours evaluating the technology, entrepreneur or the market before handing over the cheque," says Joshi. "But we are far away from that."
Aggressive investors are joining multiple angel groups. Anand Ladsariya, the founder of Mumbaibased chemicals maker Everest Flavours, is a member of both IAN and Mumbai Angels. This, he says, helps him conduct stronger due diligence on companies and get a wide variety of deals. According to Mumbai Angels, more than 10 per cent of its members have started joining other groups. Often angel investors play important roles as mentors as, being entrepreneurs themselves, they know the problems start-ups face. "More than the cheque, they (start-ups) need hands-on mentoring," says Karthik B. Reddy, a member of Mumbai Angels. Reddy, a former investment banker who previously worked with ABN Amro, founded Blume Ventures with a $20 million fund in 2010 to invest in start-ups.
"The connections they (angels) bring in are awesome," says Porush Jain at Sportskeeda, an online network of about 1,200 sports writers. Jain says he found high-profile writers such as Ayaz Memon through his investors at Seedfund.
But most angel investors have a day job as well, and finding time for start-ups is difficult. "I don't invest in companies that need a lot of mentoring," says Google's Anandan.
"Mostly it is over (phone) calls. I don't have the time to meet them," he says. This is where so-called accelerators fill the void (see www.businesstoday.in/accelerators). Accelerators such as The Startup Centre, Angel Prime, and The Morpheus incubate start-ups, guide new entrepreneurs, bring in useful contacts, and put in a small amount of funding that helps a business take off. The Morpheus, run by Guglani, who backed iDubba's Gupta, invests about Rs 5 lakh in each venture. "That works like a scholarship for a company of two software programmers working out of an apartment."EXIT OPTIONS
Most angels hang on to their investments for three to five years, and look for an exit when the start-ups get funding from VC or PE firms. Ladsariya has exited three ventures. The first was Reverse Logistics, a company that manages the movement of products back from the consumer to the manufacturer, which accounts for as much as 12 per cent of sales in India. Ladsariya had invested Rs 7 lakh for a one per cent stake and exited when the value of that investment swelled to Rs 40 lakh in a year. "We would like to stay invested in a company even if it is not doing well, but as long as the company is not going for a toss," he says. He recently invested in Birds Eye Systems, whose Traffline product informs commuters of traffic congestion in metros.
Angel investor Sunil Kalra earned six-fold returns in a year and a half from his first investment, in real estate company Assotech. Kalra, who founded high-end leather apparel export company BSLG and sold it in 2002, now has a portfolio of 30 startups. That includes online wedding planner Myshaadi.in and Tax Spanner, one of India's largest e-filers of tax returns.
Joshi, the Mumbai Angels President, cites the example of InMobi, a mobile advertising network company that turned out to be a big hit. InMobi got its first cheque for $500,000 in 2007 from 15 members, including Mirchandani and Anand Jhaveri, and gave the investors 20-fold returns. Online fashion and apparel ventures Myntra.com and Exclusively.in are other successes.
Those who have not made money with exits so far are content with how most of their start-ups are faring. "I have only made partial exits from a few of the 20 companies in my portfolio, but its total value has grown six times between 2008 and 2011," says Rehan Yar Khan, the founder of flower delivery company Flora2000 and an angel investor. Khan, along with a few others including Blume' Reddy and Google's Anandan, pumped in money in Bangalorebased Cherish Life Products, a venture started by Arathi Kuppu to retail clothing and accessories for new mothers and infants, in April this year.
Sashi Reddi, founder of Hyderabad Angels, who made his money with software testing company AppLabs, sums it up best when he says start-ups are far from being a popular asset class in India. But, he adds, "When we begin to see more successes like InMobi or Flipkart, this is going to change." With valuations of the two companies touching $1 billion each, the change may have already started.Additional reporting by Geetanjali Shukla