Entrepreneurship ecosystem is reaching critical mass

N. Ramakrishnan | Updated on February 15, 2012


Ecosystem. This is one word that you would constantly find being used by those associated with entrepreneurs. Be it angel investors or venture capitalists or private equity players. It typically refers to the environment that fosters entrepreneurs and entrepreneurship.

As Mr Saurabh Srivastava, an IT entrepreneur and Director of the Indian Angel Network, the largest group in the country of successful entrepreneurs who invest in start-ups and mentor them, puts it, 2011 saw the ecosystem gaining critical mass and momentum. There were more angel investors, although far lower when compared to the US, and more of them were forming into groups across the country.

Decisive phase

“It was a seminal year,” says Mr Srivastava, of the year that has passed by, “when entrepreneurship came of age.” “The entrepreneur ecosystem is now beginning to come alive,” he adds. More educational institutions are setting up incubation centres and a larger number of graduates are willing to start ventures on their own, instead of joining a well established company.

Mr Rahul Khanna, Managing Director, Canaan India, a venture capital firm, points out that till recently it was extremely difficult for entrepreneurs to get the first cheque, apart from family and friends. Now, thanks to angel investors, funds are becoming available for that stage of investing.

Another significant development is that entrepreneurship is now on the Government radar. For the first time, says Mr Srivastava, a Government committee has been set up to look at how to promote entrepreneurship. “The criticality of early-stage entrepreneurship is now being fully recognised,” he adds.

That entrepreneurship is finally gathering momentum is acknowledged by all those who play an important role — the angel investors, VCs and PE players. For, it is they who walk the talk — either by providing the extra money to get an idea off the ground, in the case of angel investors; or, infuse the much-needed capital to help the venture grow, in the case of VCs; or, pump in larger sums of money than the earlier two as the business needs that extra bit of capital to take off, in the case of PE players.

Positive trend

According to industry and experts' estimates, nearly $10 billion was invested in 2011 in about 500 PE deals, which is almost 10 per cent higher than in the previous year. With e-commerce finally taking off, the VC industry also saw an increase in activity. A number of seed-stage funds raised funds during the year and made significant investments.

For instance, Blume Capital completed about 10 deals during the year. Which, according to Mr Khanna, “is a positive trend, because, by the time these companies come to VCs for the next round of funding, they have gone beyond the concept stage.”

Mr Khanna puts 2011 in perspective. According to him, there were a few trends that could be seen. One, is the whole experience of a much larger angel investor community. Thanks to this, funds are now available for that stage of entrepreneurs, even less than a million dollars, or about Rs 4-5 crore.

With the US economy slowing down, more entrepreneurs are returning to India, and starting Internet-based enterprises.

Plenty of players

Action is heating up in the e-commerce space. “We now have many players in the area with the larger ones doing Rs 30-40 crore in merchandise revenue and the smaller ones Rs 5-10 crore.

That space will become more competitive in the next year or so,” says Mr Khanna.

He points out that one of the largest rounds of financing that happened was in a mobile advertising company called InMobi, about $200 million. It will only validate the hope that a billion-dollar company will be created in India. “It is a seminal event that a company which is 4-5 years old is able to raise nearly Rs 1,000 crore,” he points out.

Growing Apps space

Another trend is the excitement around the apps — or application — space with a lot of small companies coming up. With companies increasingly embracing social media, one can expect more action in the apps space.

According to Mr Srivatsan Rajan, Managing Director, Bain & Co, a leading consultancy and private equity player, the PE market was up by over 50 per cent in the first three quarters of CY 2011 compared to the same period in 2010. However, it must be mentioned that a lot of this growth came from PE money going into the real estate sector.

He feels that 2012 could be a good year for the PE industry if the IPO markets continue to remain shut and the need for capital continues. “There is a lot of capital that is waiting to be deployed. If the right opportunities are there, people will be willing to put in the money,” says Mr Rajan and adds that the “issue is not so much as a supply of capital but more a demand of opportunities at the right valuations.”

The public markets being what they are, those who need the money have to compromise on valuations. Some are prepared and some others are not. The latter would prefer to wait for the markets before they go in for private equity funds.

Need for speed

Mr Anil Joshi of Mumbai Angels, an angel investor group, says entrepreneurs need to act with speed and also temper down their valuation expectations. The momentum that was built up is gaining traction. Some women entrepreneurs with reasonably good plans that can be funded are setting up ventures.

Interestingly, he says, “we are getting some reports from Silicon Valley entrepreneurs for funding from India, which is rare.”

Mr Joshi feels that capital gains tax on private investment are too high. There is no differentiation between early-stage investment and private investment.

“We are rocking and we continue to rock,” exults Ms Padmaja Ruparel, President, Indian Angel Network. Technology.

“From being a vertical, we have become an enabler,” she adds. Ventures are also building their proposition based on India rather than on the US or Europe. “That alone tells us how India is evolving.”

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Published on January 08, 2012

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