Start-ups need better financial support

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 result, in addition to being the manufacturing behemoth, China has also produced product brands like Lenovo, Huawei, ZTE, Xiaomi, Baidu, Alibaba, Spreadtrum, 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 start-ups require a totally different mindset and approach. They tend to take tens to hundreds of millions of dollars and five to ten years before reaching profitability. This is quite a contrast from “services” model that doesn’t require lot of capital and usually make 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 start-ups 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 start-ups 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.

Start-ups 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 US$1 million.

Then, start-ups need early stage investment from venture capitalists and corporate investors, ranging from $10 million to US$100 million through multiple rounds of equity financing.

They 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. My perspective comes from my own experience with cofounding Soft Machines Inc., a semiconductor company developing advanced VISC{+T}{+M} Microprocessor architecture and System on Chip (SoC) solutions for smart client and cloud markets.

We have started with founders’ capital of $100,000 and then raised couple of million dollars from several angle investors in the first 2-3 years that helped us to build a small team and transform the idea from paper to real models. Then, in the ensuring 5 years leading up to technology prototype demonstration, we have raised another $125 million from various financial, corporate and sovereign investors such as Samsung, AMD, Broadcom, Mubadala (Abu Dhabi’s sovereign wealth fund), RVC/Rusnano (Russian sovereign technology funds), and KACST/TAQNIA (Saudi Arabia’s technology fund). We are now in the process of closing a couple of hundred millions of dollars to support productisation, revenue ramp, profitability and potential IPO offering over the next three years.

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, housing.com, are good examples. But, I see two issues with this trend. First, these are late stage investments, for products are already proven in the market with some revenues and customer traction. Second, most of these investments are by global investors, which means return on these investments is not going to have domino effect on other start-ups. There also seem to be good number of angel investors, incubators and start-up villages to support very early and seed stage capital. Of course, start-ups can benefit from more organized angel investors and government-driven grants along the lines of NSF and SBR grants in the US.

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 a 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 start-ups die along the way.

The survivors few create huge value. As such, we need to build an investment ecosystem that creates huge funnel effect supporting the launch of hundreds of start-ups every year. I have come across many small teams and companies in 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 should undertake various investment initiatives to directly and indirectly support the start-up investment ecosystem.

The Indian government can take inspiration from some of the recent sovereign initiatives by countries like Russia, China, UAE, Kingdom of Saudi Arabia and Singapore. Russia has launched Russian Venture Company in 2006 with$1billion 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 a $10 billion Rusnano fund that focuses on late stage large scale nano-technology investments. Abu Dhabi sovereign wealth fund, Mubadala has launched $100 billion technology fund in 2008 and invested more than $20 billion in creating Global Foundries, the second largest semiconductor manufacturing company.

China has launched numerous funds both at provincial and central levels pumping hundreds of billions into a start-up ecosystem in the form of investments, incentives, and subsidies targeting specific sectors such as manufacturing, semiconductors and energy.

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). Singapore and Israel have successful government-driven investment vehicles.

There is no short cut here. The Indian government must launch numerous investment funds both at the Central and State levels targeting a wide range of sectors, by directly investing in companies as well as in private funds to create and sustain a healthy start-up 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.

Some of the recent announcements related to relaxation of SEBI rules related to IPO filings for start-ups is also a step in the right direction. But, more needs to be and can be done.

The writer co-founded Soft Machines and serves as its Chief Executive Officer.

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