Photo: Abhijit Bhatlekar/Bloomberg News
Step aside big business, startups are the flavour of the season - and that season is likely to be around a while thanks to PM Modi's much-hyped Start Up India, Stand Up India unveiled today.
The initiative which first found mention in his independence day speech last year, is aimed at strengthening the startup ecosystem in India.
It's no secret startups are booming - but while innovators and entrepreneurs may seem the face of the movement, it's the angel investors, the bigshots with the big bucks, who are really giving the startup industry its real boost. Their decisions - is this idea good enough, and how much should I invest in it - are crucial to the existence and survival of the ecosystem.
TV Mohandas Pai is one of them - a leading angel investor identifying startups that have the ability to disrupt the market and scale up. A former Infosys board member, Pai quit Infosys in 2011 and co-founded Aarin Capital, a $100 million venture capital fund that invests primarily in sectors such as life sciences, medical devices, education & education services and technology.
And he's clearly aggressive in his search for the next big thing: he's been on every list of top angel investors in 2015, with the highest number of deals. We asked Pai to decode the behind-the-scenes of angel investing, and what the government's role in a startup ecosystem should be (hint: as little as possible, he seems to suggest).
Would you say 2015 has been one of the best years yet for Indian startups? To what would you attribute such a spike?
Absolutely and every year it's getting better and better. I think it's a natural evolution of the market. More companies are coming up, there's faster execution, the e-commerce companies have done well in terms of growth. India is one of the largest digital frontiers and the PM's visit to Silicon Valley also helped focus more attention. The industry has seen more entrepreneurs, and the government having a relatively positive attitude, all this has had a cumulative effect.
The PM just unveiled Start Up India, Stand Up India. How far do you see govt efforts bettering private investors' efforts in this domain?
The government can't do what private investors can. What they can do instead is to ensure they get out of the way. There's too much harassment at multiple levels. To get the name of a company in Bengaluru, officials ask for a bribe, income tax procedures are a hassle, foreign exchange regulations aren't clear. In most procedural things with the government, they either create problems or ask for money. That's why most top startups have redomiciled to Singapore.
All we want from the government is to make it easy to start the business. Bribe taking should come down. Just recently, someone was trying to get income tax work done, and he was asked for a bribe. So what are we supposed to do and to whom do we complain? No-one stands up against such officers and the government does nothing. All governments are impotent, they can do nothing to protect citizens' rights.
So how can the government help?
Simply by creating a conducive environment for startups. They must create a fund of funds. Funding of incubators in at least 500 colleges across India, for example. See, the startup ecosystem is doing fine but needs to increase in size. Look at the money that goes into startups in America, almost $40-50 billion, and compare that with India! We need foreign exchange regulations to be more understanding. Because there's no point having startups who redomicile to places like Singapore. The value gets captured there, investors make money there, so the money that comes back here is insignificant. We need to change all that, ensure they are domiciled here and the business is run from here.
When an aspiring entrepreneur comes to you with an idea, what are the key questions they should be prepared to answer?
Simple: how the idea can be put into practice. How the idea is unique and different from what already exists, and what kind of problem does it solve. It shouldn't be a 'me too', and it should be scalable.
What kind of return on investment do you look for in a startup idea?
When you invest in an idea, you look for whether the idea has legs. Can it catch on. You don't look at how much money you can make off it, because no one knows the answer to that question.
What's the best stage for an investor to come on board - the seed stage where you don't know how the company will fare, or once some time has passed and you know the company actually is viable?
It depends on the risk appetite of the investor. If you're an ideas person and want to work at the grassroots level, and you want to meet with new entrepreneurs and know the market, the seed stage is the best.
If you're risk averse, and you want to invest in an idea that already has some ground - and you're willing to pay a better price for it, then you opt for Series A (First round of financing undergone for a new business venture after seed capital. Generally, this is the first time that company ownership is offered to external investors: Investopedia). If you want to be absolutely safe and reduce your investment risk to the minimum, you go for Series B (Second round of financing for a business by private equity investors or venture capitalists: Investopedia).
Typically how much money can start ups these days expect from angel investors, without having to lose too much control?
I think it should be Rs 2-3 crore or 25-30%. And angels, too, have to be careful that they don't dilute the founders too much and make them employees. Because if they need more capital in the future, and you're making them like employees, the model will fail. People will leave. You've got to create proper metrics whereby you can dilute to an extent and still have a substantial stake over a period of time.
What's your take on startups that have failed a couple of times and keep coming back? Have you faced such entrepreneurs & what's the experience been?
We have faced some of them. Then again, most people fail because they don't know how to read the market or read it wrong. I've met a few myself. I suppose it all depends on whether they've learnt the game. Every start up requires 3 kinds of people. A visionary who has ideas and can do things. A hustler who can go and market. And a hacker, who can focus on operations and technology, and make it good. So it has to be a team approach.
What's been some of the best projects you've invested in and why?
We've invested a large sum of money into a start-up called Think and Learn, which has scaled up well and is doing really great. They have a unique pedagogy to their advantage. There've been some women entrepreneurs who've done well too. But then we've only been around for 3 years so it's still early for us to say which ones have been our best projects.
A recent Credit Suisse report says India has more than 2000 high net worth individuals (HNIs), with over $50 milion net wealth. That number is expected to go up by 65%. Will we see a proportional rise in startups getting funded?
HNIs aren't really investing in startups. Only 5% of total capital going into startups is coming from Indian capital and that has to change. For China, the figure stands at 60%. So, in fact many more HNI families need to learn how to invest in startups, they're usually risk averse.
A lot of non-entrepreneurs have turned investors, from Yuvraj Singh to Amitabh Bachchan. Is there any advantage to those fresh perspectives, from a radically different background?
I think a lot of them have no perspective at all. So let us not kid ourselves! Yuvraj Singh is a good cricketer but he's just lending his name, which people think might draw in the crowds. But I think it's alright, as long as more money flows into this market.
What's the next hot startup sector for 2016?
Well e-commerce has done very well. FinTech (Financial technologies) has seen a lot of companies come up. Deep technology has also been doing well. But I think in the coming year FinTech will be the next hot sector.
What sets a successful startup apart from the thousands of others?
For every one startup that does well, four or five come up to a certain size and don't grow and around another four wind up. My advice is to focus on good marketing and of course, the customer.