How Securing Startup Funding In India Differs From The U.S.
As the startup ecosystem in India continues to take off, it’s interesting to note the unique way Indian entrepreneurs go about their fundraising efforts. Certain patterns are universal in the lifecycle of a typical startup, and specific traits differ based on cultural and local norms. India and the US, two leading nations in tech innovation, are excellent subjects for examining universal elements of international startups, as well as differences.
As an expat entrepreneur from India who currently lives and works in the U.S., I’ve had the opportunity to learn from the best practices and culture of each environment. Currently, my company is at the threshold of opening its first office in India following rollouts across North America – providing me with a unique full-circle vantage point.
There’s a growing appetite for investment in new Indian businesses, both locally and globally. A country of 1.2 billion people with first-rate human capital and a strong tech education base, India is nonetheless still considered an emerging tech market with its own share of challenges, particularly when it comes to capital investment. Here are just a few:
Door-Knocking Via Name-Dropping
When raising funds in India, it helps a great deal to have a ‘name’ attached to your business – meaning, a high-profile industry insider with a successful track record. Investors want to see that a well-regarded VC or angel has already put their money into a venture before reaching into their own pockets. Take for example the early executives and founders of some of India’s leading startups, such as Flipkart and Snapdeal, who are now investing in many newer companies, and their endorsements are considered just as valuable as a top-notch PowerPoint pitch. This trend is reminiscent of the “PayPal Mafia” days of Silicon Valley, when the payment company’s early investors and founders achieved royalty status for later ventures. As then, a successful reputation doesn’t just open doors in today’s investor scene in India – it writes checks, too.
Easy to Start, Harder to Maintain
Once you’ve got your VIP lined up, first-round funding does become accessible, but seed rounds in India are much smaller than your typical $1 million starting point in the U.S.: a $100k-$250k seed investment is more common, with $250k-$500k rounds considered high. It’s easy to get going in India, but it’s the later stages of funding that are actually more problematic. Series A, B, and later rounds can suddenly dry up – often leaving Indian companies with no choice but to seek out international investors.
New Investors, Unrealistic Expectations
Most Indian investors have backgrounds in conventional businesses, and are less experienced when it comes to startups. Unseasoned investors can bring unrealistically high expectations to startup investing, leading to a tighter leash on capital investments. Indian investors also expect to get their money back on each and every investment; when they don’t, they consider it a personal slap in the face. The high pressure to succeed is compounded by the fact that in contrast to American entrepreneurial culture, failure is deeply frowned upon in India.
U.S. tech investors, on the other hand, understand that startups involve higher risk, and that there’s a fair chance of their investment going down the drain. The good news is that as the market grows in India, investors are encountering more and more tech founders with successful exits under their belts, and learning from their experience – including the understanding that tech investment should not be seen as a guaranteed return.
The nature of the fundraising cycle is more or less the same in both countries, from meeting people to pitching the product to building the business to coming back again for the next phase. In India, however, it can often take more meetings and more extensive networking to find the person you really need to meet. In the U.S. especially, there is such an established network of startup founders and VCs that getting connected to the right person can happen in the course of a few emails.
M&A’s, though difficult everywhere, are notoriously challenging in India. Nonetheless, acquisitions do occur, though rarely, as most bigger companies in India are themselves perpetually working to secure capital. Acquisitions of Indian startups by US companies are more prevalent – in the first half of 2016, US companies acquired 41 Indian companies for $1.6 billion.
When startups in India do get bought by larger local companies, it’s usually at bargain prices – good for the parent company, not great for the startup’s investors. This leaves many young companies holding out for more traction and better profits to up their valuations, but, of course, investors aren’t usually interested in hanging on for that long. Bottom line: India’s tech scene isn’t quite ripe yet for locally-driven exit strategies. For now, the best bet for startups hoping for an early exit is to set their sights on an acquisition by an American or other international company.
This snapshot of the Indian investment scene may seem mixed, but at its core, India today is deeply reminiscent of the early days of Silicon Valley, with challenges and growing pains, but also with enormous potential for growth. As more Indian investors gain experience and the startup landscape continues to mature, the tech scene on the subcontinent will continue on its remarkable rise. Indeed, with a $1.8 trillion market and population rivaling that of China, it has little choice.