Indian product startups need robust investment ecosystem

Mahesh Lingareddy, co-founded Soft Machines and serves as its chief executive, discusses* how India's ecosystem needs to adjust.

Over the last 15-20 years, while India has been primarily focused on "services", China though started with “manufacturing” but quickly extended its focus to “product” companies. As a results, in addition to being the manufacturing behemoth, China has also produced product brands like Lenovo, Huawei, ZTE, Xiaomi, Baidu, Alibaba, Spreadtrum etc., spanning hardware, software and e-commerce. India desperately needs to create several high value product companies to meet domestic demand and create wealth. A strong product ecosystem drives healthy manufacturing industry as well. As such, make in India shouldn’t be just about “manufacturing” but also be about “making products”.

Product centric startups require totally different mindset and approach. They tend to take tens to hundreds of millions of dollars and five to 10 years before reaching profitability. This is quite a contrast from “services” model that doesn’t require lot of capital and usually have small but quick returns. But, product companies create lot more value and wealth. We must create Apple, Google, Amazon, Intel, Oracle, Lenovo, Xiaomi, and Facebooks of the world. In my view, successful startups require passionate and persuasive founders, great vision, innovative technology, strong team, patient capital, good market timing and little bit of luck. India has no dearth of entrepreneurs, innovation, talent and markets. The biggest challenge for Indian startups today is lack of access to risk capital especially early to pre-revenue stage. This must be addressed quickly if we want to create high value product growth engine.

Startups need different kinds and levels of capital through its life cycle, from conception to profitability. At the beginning, they need seed capital typically provided by founders and the so called angel investors ranging from $100,000 to $1m. Then, startups need early stage to first product investment from venture capitalists and corporate investors, ranging from $10m to $100m through multiple rounds of equity financing. Then, startups need late stage capital from institutional investors, private equity firms and corporate investors to support revenue ramp, profitability and IPO, ranges in hundreds of millions of dollars through a combination of equity and debt financing.

In India, at the moment, there seems to be lot of appetite for participating in late stage and mezzanine rounds by global investors such as Softbank especially in the areas of e-commerce, social media and apps. Recent investments into Flipkart, Snapdeal, and, are good examples. But, I see two issues with this trend. First, these are late stage investments means products are already proven in the market with some revenues and customer traction. Secondly, most of these investments are done by global investors, which means return on these investment are not going to have domino effect on other startups as desired. There also seems to be good number of angel investors, incubators and startup villages to support very early and seed stage capital. Of course, startups can definitely benefit from more organized angel investors and government driven grants along the lines of National Science Foundation (NSF) and Small Business Innovation Research (SBIR) grants in USA.

So, the real missing link is early to pre-revenue stage venture capital in the form of series A to series C rounds of equity financing, which requires robust ecosystem of venture capital firms and corporate ventures. In order to create 10-15 product global brands over the next 10 years, we need to invest in hundreds of companies because many of the startups die along the way. The survived few create huge value. As such, we need to build an investment ecosystem that creates huge funnel effect supporting the launch of hundreds of starts ups every year so that few will make it. I have come across many small teams and companies in the recent years that had that early angel money but couldn’t find the next level of funding to develop and launch the first product into the market. This is where government undertake various investment initiatives to directly and indirectly support startup investment ecosystem.

Indian government can take inspiration from some of the recent sovereign initiatives by countries like Russia, China, United Arab Emirates, Kingdom of Saudi Arabia, and Singapore. Russia has launched Russian Venture Company in 2006 with $1bn as fund of funds that directly invests in companies as well as in other venture funds. Currently, they have more than 15 active funds ranging from technology to biosciences to renewables to infrastructure. Russia has also launched $10bn Rusnano fund that focuses on late stage large scale nano-technology investments. Abu Dhabi sovereign wealth fund,Mubadala has launched $100bn technology fund in 2008 and invested more than $20bn in creating GlobalFoundries, the second largest semiconductor manufacturing company.

Needless to say, China has launched numerous funds both at provincial and central levels pumping hundreds of billions of dollars into start up ecosystem in the form of investments, incentives, and subsidies targeting specific sectors such as manufacturing, semiconductors, energy etc. Kingdom of Saudi Arabia has recently launched TAQNIA, a technology investment vehicle in addition to their support for early stage R&D through King Abdallaziz City for Science and Technology (KACST). Countries like Singapore and Israel have very active and successful government driven investment vehicles.

There is no short cut here. Indian government must launch numerous investment funds both at central and state levels targeting wide range of sectors by directly investing in companies as well as in private funds to create and sustain healthy startup and venture capital ecosystem. Electronic Development Fund (EDF), National Microprocessor Initiative fund (NaMi) and Karnataka Information Technology Venture Capital Fund (KITVEN) are few good starts.

But, government must find ways to quickly deploy and disseminate this capital into the system to accelerate the pace of innovation. Some of the recent announcements related to relaxation of Securities and Exchange Board of India (SEBI) rules related to IPO filings for startups is also the step in the right direction. But, more needs to be and can be done. As such, I have been focused on building a platform that promotes product innovation through investment, development, marketing and sales support. This effort to be successful require strong participation from entrepreneurs, financial investors, corporate world and the government.

* Article republished with permission from:

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