##Why don’t we have investors in the early to pre-revenue stage?
There are plethora of institutional and non-institutional incubators and accelerators across India from SINE, IIT Mumbai to Startup Village, Kochi and from Khosla Labs to TLabs. They are hosting hundreds of very early concept stage companies. Incubators generally provide some very basic infrastructure and general corporate services while mentoring the founders and often provide very limited or no capital. Ideas are a dime a dozen. And incubators can only do that much with a well thought of business proposition. What will take these startups to the next level will entirely depend on the overall investment infrastructure.
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 US$100,000 to US$1 million. Then, startups need early stage to first product investment from venture capitalists and corporate investors, ranging from US$10 million to US$100 million through multiple rounds of equity financing. This leads to the need of late stage capital from institutional investors, private equity firms and corporate investors to support revenue ramp, profitability and IPO, ranging in hundreds of millions of dollars through a combination of equity and debt financing.
In India, at the moment, there is lot of capital chasing 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 etc., are good examples. But, there are two problems with this trend. First, this doesn’t solve the problem of lack of access to capital for early stage to pre-revenue investments. Secondly, since these investments are done by global investors, huge returns on these investments may not flow back into venture capital ecosystem.
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 global product brands over the next 10 years, we need to invest in thousands of companies and tens of billions of dollars because many of the startups die along the way. The few that survive can 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 at least a few make it. Many small teams and companies in the recent years have 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 the government can undertake various investment initiatives to directly and indirectly foster robust venture capital investment ecosystem.