What ails startups in India

Startup companies find it difficult to raise funds in their early stages.

I remember, the day I started my company. I approached many banks for loans. All of them offered personal loans( 18%-20% interest- to high to repay). None of them offered any other loan cos I was dealing with a service and there was no physical stock to show(it didn’t matter that I had IP). I did’nt get any loan and I had to beg and borrow money from friends and family to get started.

My angst was echoed at the TIE conference held here. They discussed that the seed funding structure was like an inverted pyramid. There is a shortage of funds at the startup level and there is a lot of interest in later stages of funding. This spells badly for many start ups, as primarly cash is important for startups in the beginning.

(For those newbies who don’t know about funding,  let me elaborate on the funding nature.There are primarly 3 sources of funds for startups. They are-

• Friends and family funding-When the other two stages don’t work
• Angel funding- Happens when the company is 1-3 years old. Source of funding-Angels fund managers
• Venture capitalist funding- Happens when the company is 3-5 years old. Source of funding – Private equity firms.)

On the contrary, in western economies good funding exists at every stage of the development of the company. Probable reasons why there  is less money in India for startups is that there are higher  executional challenges for newer companies in India than in the west and there is a dearth of quality mentors who can guide start ups in the early stages. Fund managers  prefer to leave a company to its fate for the first few years, check if it survives and take a call in the 3rd or the 4th year of operations to start or not. That is indeed a sorry state of affairs.

Maybe the HNI(high net investors) in India should invest more in startups than in real estate and gold. The overall startup ecosystem has to improve for all of us tomorrow.