India early stage: Sowing seeds

Early-stage investor Unitus Seed Fund made headlines last week when it revealed that Microsoft founder Bill Gates was among 19 prominent investors that had come forward to invest $4 million in its latest Indian rupee fund. The vehicle will target investments in segments such as healthcare, education, mobile commerce, e-commerce and agriculture.

The fundraise, while relatively small, highlights the fact that more overseas investors are starting to take notice of India's seed stage and pre-Series A investment space. This is not only an acknowledgement of the country's growing start-up and venture capital ecosystem, but also the broader India opportunity.

"I think on a macro basis the general feeling is that there's a more favorable investment environment in India," Dave Richards, co-founder and managing partner at Unitus. "With the change of leadership in the country, more investors - who may have decided to slow down or step out of India - are now being attracted back into the market."

The rise in sentiment that greeted the election of Prime Minister Nahendra Modi is a common refrain across all segments of private equity. But does it go deeper than that at the seed stage? While India's start-up ecosystem has lagged behind its Asian counterparts, there are clear signs of renewed momentum.

Digital drivers

According to AVCJ Research, there has not been a massive increase in seed and early-stage investment since 2012 when the number of deals reached 180, up from 90 the previous year. Activity has since remained fairly consistent - 170 deals in 2013, 157 so far this year - but this does not reflect the size of opportunity.

"The Indian digital economy is maturing now, and the number of smart phones has taken off," says Rajesh Sawhney, founder of start-up accelerator and early stage investor GSF India. "The mobile internet story in India has now gained critical mass. We are inflecting now, in the digital sense."

This observation is backed up by market research firm Mediacells' projection that by the end of 2014 India will have more smart phone users than there are people living in Australia, Germany, South Korea, Taiwan and the UK combined. It is not the only area of growth.

Increased adoption of technology among India's very large young demographic - more than half the country is under the age of 25 - is having a knock-on effect in sectors like e-commerce, IT services, cloud services and internet-of-things (IoT), and tech-related sectors such as healthcare and education. The result, say industry participants, is that more entrepreneurs and more start-ups coming onto the scene.

"It is a great time to be an entrepreneur and a great time to be an early stage investor," says Bharati Jacob, who co-founded Seedfund in 2006. "Becoming an entrepreneur is a more socially acceptable phenomenon and a viable career option now for many engineering and management graduates."

Two other factors are attracting entrepreneurs. First, technology is more readily available and this lowers the cost of starting a company. Second, there have been a number of successful exits to big name tech companies, notably the acquisition of Ventureast and GSF-backed app optimizer start-up Little Eye Labs to Facebook. Blockbuster VC rounds for the likes of Flipkart also help.

However, the issue India still faces is a dearth of seed stage investors to bridge the gap to Series A. Unitus' Richard notes that to date, with just a handful of exceptions, the quality of accelerators - and their graduates - have been fairly low in India. More angels and potential mentors are coming out of first-generation success stories, but they are not filling the gap.

GSF's Sawhney notes that many of these individuals join large angel groups which have increased their membership in recent years, but the way they operate can be inefficient. "Start-ups find them difficult," he says. "Typically, start-ups have to deal with these organizations for six months before the money comes in. Having more members is great for larger rounds but their ability to do deals quickly is reduced."

There is a particular need for accelerators that can produce investible startups. Around 50 are currently in operation, but few are actually generating attractive investment opportunities, says Richards.

"Catalytic seed funding capital is missing in market and it is causing a lot of angst for the downstream investor," he adds. "Because there are not enough companies getting funded at the really early stage, few are mature enough that they are ready to get funded by a later stage investor."

To be fair, the picture is gradually changing. In September, Unitus started working with five accelerators to help them improve operations. Meanwhile, there are accelerators like GSF which launched its first program in June and is now looking to set up a further three vertical accelerators focusing on mobile-technology, advertising technology and IoT. However, the space is still very nascent.

"There are more players investing in pre-Series A than there were 3-4 years ago but is that sufficient?" asks Seedfund's Jacob. "The answer is no, we can still absorb many more seed funds."

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• Topics
• Early-stage
• Venture
• South Asia
• Technology
• TMT
• seed
• India
• Venture
• GSF Accelerator