Venture Capital For Start-Ups

Entrepreneurs would do well to prepare realistic business plans and identify the appropriate venture capitalist or angel investor to fund their start-ups if they are to secure the required funding.

After a rather glum two years, the financial markets are back on the upswing in India.
The improved situation is clearly reflected in the quantity of private equity and venture capital funding that has come through in the country recently. In the first quarter of 2010, India saw about $1.9 billion of PR and VC fund flow, nearly half of the total amount of $4.4 billion seen in 2009, according to figures released by global consultancy Deloitte.

The funding of $1.9 billion came in through 88 transactions and the average deal size of $22.1 million. Larger deal sizes compared to last year, when the $4.4 billion was on account of 299 deals and the average value was just $14.6 million, signifies more risk appetite and confidence on the part of investors.

Venture funding traditionally has strong associations with entrepreneurial ventures. Start-ups, in fact, aspire to venture capital seeing it as a sign of mentorship and confidence when an established venture capitalist supports their start-up by putting in an investment. However, venture funding is also the most expensive form of funding and one in which the entrepreneur is required to share equity. It also means the venture capitalist would be involved in taking business decision to some extent. It's wise, therefore, for start-ups to consider VC funding only if they are looking at building a large business. Venture capital requires businesses to scale up very rapidly so that an exit in a 5-7 year time frame with good returns is possible. Smaller businesses would rather go on for debt funding. In fact, angel funding, which is a softer form of venture capital ore suitable for businesses that need mot just the money, but also the intellectual capital, guidance strategic assistance. It's a fledgling group of angel investors in India right now, but a model more likely to grow given the unorganised

Looking at the issue from the investor point of view, however, the challenge for funding lies largely in the quality of projects. Especially in the information technology sector, where VC funding is more common, VCs have reported that they find it difficult to find bankable projects in India. This is partly because of the lack of exposure of entrepreneurs and the inability to afford/access expertise to build a credible business plan. Lack of primary research like dipstick surveys that can validate a business idea, for instance, can often drive away venture capital and that is something start-ups need to keep in mind.

The VC scenario in India is changing rapidly, however, and analysts are seeing venture capital broadening its reach into other areas besides ICT. In India, entrepreneurs exploring sectors like clean energy, healthcare, infrastructure and education are more likely to interest venture capitalists. Industries like pharmaceuticals, retail, media and telecom are growing rapidly. SMEs are bringing in a lot of innovation into these sectors and changing the face of how business is done. Venture capital is therefore an area to look forward to as SMEs grow in importance and as resources and awareness building platforms for entrepreneurs gain popularity and reach.