Logically, the definition of seed-stage funding should be ‘very small amount of capital for development of new products and concepts, validating assumptions, getting an early sense of the market, etc.’.
Based on our experience of reviewing 1000s of startups at Applyifi, it is clear to me that for most aspiring entrepreneurs in India, anywhere between Rs.10 lacs to Rs. 25 lacs would be adequate to test their concepts. However, it is very very hard to raise such a small round in India. Most angel investor groups, and certainly even ‘seed stage’ investors in India will typically do much, much larger rounds — usually Rs. 3cr — Rs. 6cr or above.
For investors to be comfortable investing upwards of Rs. 3cr as a first cheque in a startup would need the startup to have some amount of organizational maturity and some early-evidence that the concept, market opportunity, value proposition, pricing, business model, marketing program, sales program, product/service delivery, etc. are tested, and that the results appear to be encouraging.
In the absence of small-ticket capital for testing concepts, bootstrapping is the only real option available to most entrepreneurs. And, as not all businesses can be bootstrapped beyond a point, or not all entrepreneurs, even those with willingness to bootstrap have the ability to do so, very, very few aspiring entrepreneurs are actually able to start up. As a result, you have investors making statements like ““Everyone has capital but there are not enough deals in the market.” Read more at Economic Times.
To make good series A and B and C and D deals available, we need to enable 1000s of aspiring entrepreneurs to test their concepts, and out of the lot a few will then become ready for follow-on rounds of capital.
And that’s why, we need to have several micro-funds to provide very, very small ticket funding to entrepreneurs for testing concepts. This kind of funding for early experiments — typically between Rs.10 lacs to Rs.25 lacs in the first round — will create a much larger pool of startups.
Why creating the capacity for funding between Rs.10 lacs — Rs. 25 lacs is good for the startup eco-system?
1. The number of startups getting funded will increase manifold, and that will create a much larger pool of follow-on deals.
2. If the venture does not do well, it is much easier for investors to write off a Rs. 25 lacs investment rather than a Rs. 5 cr investment. With a Rs. 3cr — 5 cr investment, even if the plans do not seem to be working well, the amount is large enough to be tempted to try different options to save the investment. Since it is easier to write of a smaller investment, it will free up the entrepreneurs to explore other opportunities, rather than flog a concept that does not appear to be working as expected.
3. With smaller investments, exits with smaller sized M&A deals may be possible. It is harder to find buyers for an asset in which Rs. 5 cr has been invested and does not appear to be working well. However, if the quantum invested is lower, an acquisition that frees up the capital for investors may be a possibility, thus not just freeing up the entrepreneur but reducing the risks of investing in startups. Smaller exits will also expand the M&A market significantly as many more corporates, including emerging companies, can consider small-ticket acquisitions.