In what can be seen as an expression of growing confidence, venture capital (VC) funds are now coming forward to support and fund Indian start-ups even at the stage of ideation.
So far, VCs used to fund start-ups which either had product prototypes ready or had some customers on board. But now a clutch of VCs such as Morpheus Venture Partners, Opdrage Venture Partners, Telnet Venture and Centre for Innovation, Incubation and Entrepreneurship are not only mentoring start-ups, but are also ready to invest in them when a business plan is still at an ideation stage.
Most of such investment models replicate US-based Y Combinator, which provides 'seed funding' in the range of $15,000-$20,000 to early-stage firms and takes small stakes in them.
Having mentored many start-ups, Sameer Guglani and Nandini Hirianniah of Morpheus Venture Partners are now looking at investment opportunities in a few more upcoming firms. They have plans to invest at least Rs 500,000 in each firm. In fact, they are in the process of closing a fund.
"We ideally like to come into the picture in the first 12 months of the firm - a stage that is considered as 'valley of death'," says Guglani, founding partner of MVP.
MVP follows the model set-up by Y Combinator and plays the role of a co-founder. The VC firm conducts a business accelerator programme for entrepreneurs twice a year. The programme is for a period of four months and Morpheus partners spend 15 hours per week per firm, he adds.
Guglani and his partners are planning to select six firms from the third batch that is underway at present. The venture firm takes 4-8 per cent in equity for mentoring and has close to 20 firms in its portfolio.
So far, most of the VC firms used to only mentor start-ups with no or very minimal monetary assistance. But firms like MVP and Opdrage would work closely with start-ups on their business plan, product road map and vision of the team along with mentoring. Once a start-up is ready, these firms also help them in getting funds from Angel Investors and other VCs. But that seems to be changing now.
Opdrage is in the process of raising $1 million. Set-up in 2008, the Delhi-based firm has so far been acting as a mentor and as an advisory group. Opdrage already has 20 firm in its portfolio.
"We have been mentoring many firms. In some cases, we have taken equity and in some other cases we have charged a fee. Later, we realised that a lot of these firms need funds at a crucial time, but then we were not in a position to fund them," says Dipankar Sarkar, associate at Opdrage, which is planning to invest up to $50,000 per company. To start with, the VC firm will tap its existing portfolio firms.
iAccelerator, a programme run by IIM Ahmedabad's Centre for Innovation, Incubation and Entrepreneurship, started investing in firms from this year onwards. In 2008, CIIE organised the iAccelerator for the first time. It was a two-month programme in which it took care of the expenses of the participating teams. In the summers of 2009, iAccelerator was expanded to a four-month program in which it also funded companies.
"Typical investment is of the order of Rs 2-5 lakh. These companies are mostly idea stage or at started-developing-something stage. The first year was a learning process for us as well. But we realised that the two-month programme was more like a summer internship. Now we are hoping that the mentoring and funding will sustain these firms for six to eight months. Then, we can again invest or even help them raise funds," says Pranay Gupta, joint CEO, CIIE.
In lieu of the investment, CIIE takes 5-10 per cent stake in a start-up. Each iAccelerator session hopes to take 10-15 start-ups with a fund of approximately Rs 2-5 lakh each. The programme is supported by both government and private organisations.
Krishna Jha and Hemant Sharma of Telnet Ventures are gearing up to play the role of co-founding investors and are close to signing a deal with a start-up providing mobile location-based applications. "The overall allocation that we have is around Rs 6-8 crore and we will invest in the range of $100,000 to $1million per firm. We were ourselves entrepreneurs and, after a successful acquisition, have funds to invest," says Jha.
Being a co-founder, both Jha and Sharma will be working with these firms on a regular basis. Precisely because of such involvement, the VC will invest in two-three firms a year at the most.
How much equity the VC will look at in these firms? In the range of 25-30 per cent, says Jha.
