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Alok Agrawal is founding partner at The Growth Labs.

Why startups need to understand investing in them is no privilege

09 May, 2017

A lot of startups reach out to me seeking investments. However, their attitude seems like they are doing me a favour by providing an opportunity to invest. Messages often read like this: “We would like to invite you to participate in our round of investment for X at a valuation of Y.” X can be anywhere between a few lakh rupees and a few crore. Many don’t even bother to reply if I ask for details. I have seen several instances of such arrogance, and I am certain other investors have also witnessed such behaviour.

Next, they make the investor fill out a profile so detailed, it would put home loan companies to shame. They often make you sign lengthy agreements and demand that you pay just to be on their platform. Then starts the deluge of mail, with messages that go like this: “XYZ startup, 90% funded; invest before it closes.”

The justification for investment is completely overshadowed by hyperbole. When you dig deeper, the business rationale is weak. Latest tech terms, from machine learning, artificial intelligence and blockchain to virtual and artificial reality, are thrown around liberally without any understanding whatsoever. In fact, several ideas are a simple Ctrl C/Ctrl V of Silicon Valley businesses.

Many don’t even do a basic Google search to understand who their competitors are. But the attitude is one of obligation. Not only do they expect money from the investor, but also time and connections. Many approach me to “mentor” them in areas of my expertise, but make it clear that they will take advice only after I “pay them”.

I believe it is because the Indian startup ecosystem is still in its infancy. People learn from Google search and anecdotes. They hear tales like ‘someone with this attitude got millions’, and such conversations become folklore over time. That the media has taken a fancy to some of these ‘successful’ startup stories, blown them out of proportion, and made them sound like the next gold rush hasn’t helped.

The fact is, startup investing remains an extremely risky proposition for retail investors—angel, seed or early-stage. There is more than a 90% chance you will never see the money invested in a startup. In addition, there are many complexities.

For example, not many investors understand technology or business plans. There is a lot of paperwork. There is the issue of short-term and long-term tax liabilities if you do make money. The terms of the agreement change when a professional investor, such as a venture capital fund, enters. In such cases, the interests of early-stage investors are the first to be sacrificed. In contrast, all other ‘traditional’ forms of investments carry far less risk, provide a detailed justification on important questions and have a historical performance to boot.

Couple all this with the fact that very few investors have made money from startups, sometimes despite being invested in them for a decade. There isn’t a single initial public offering in sight. There is more bad news than good coming out every day. It’s the same companies, investors and stakeholders playing a game of passing the parcel. No wonder then, startup investments have remained small and the number of such investors is still a handful. There is intrigue, but very little investment. I am not sure if there is an accurate data source for this, but my guess is that the total investment by individuals in all startups over the last 10 years is probably Rs 2,000 crore, on the higher side. In fact, realistically speaking, it could be even less than Rs 1,000 crore, which is not even a fraction of overall investments. I don’t see these investments going up until startup founders’ attitudes change.Which is both sad and alarming. The future of India and, in fact, the very survival of our society, depends on the success of startups. Let me explain. India adds over 10 million people to its work force every year, but creates merely 1 million new jobs. Which means, over the next 10 years, the country needs to produce over 100 million new jobs, a demand that the industrial sector will simply not be able to meet. What will these 100 million young people do? We are looking at a scary, large-scale social disorder. And that compounds our fundamental problems even more, whether it’s adequate food production and processing, water, alternate power, sanitation, infrastructure and transport, health or education.The only way we can generate these jobs is by creating new ideas and new companies. We need at least 1 million successful startups in the next 10 years, each employing an average of 100 people, to fulfil this demand. And no startup can be built without seed capital from early investors. Even if each successful venture needs Rs 50 lakh as seed capital, we need to raise a total of Rs 5 lakh crore in 10 years, compared to the Rs 1,000-2,000 crore we have raised in the last 10. The venture capital required would be three to four times as much. A few people alone cannot raise funds of this magnitude. And arrogance is definitely not going to help the cause.It’s time to learn from other investment sectors. In the 90s, stock markets underwent a lot of reorganisation but, since then, they have been able to attract a large base of Indian investors. That investment has led to the growth of mid-cap and small-cap companies over the last decade, which have largely outperformed the markets.

We need clear investment norms, a lot more incubators, easier paperwork, large-scale investor clinics, a slew of investment advisers and protection of early investors’ interests. We need organised mentoring programmes for startups to not fail. And the onus is on key players, the biggest stakeholders. The task is enormous, but the need is paramount. While there is a lot of noise, few comprehend the enormity of the task at hand.

Alok Agrawal, former Network18 group COO and Zee Media CEO, is founding partner at The Growth Labs, a consulting consortium of ex-CXOs.

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Sean Yalamanchi . 1 year ago

Great Article!!

Nilesh Jagdishbhai Sompura . 1 year ago

Hi I was just trying to jot down on UNEMPLOYMENT issue while reaching half way reading but on later stage each word and sentence was the replica or mirror image of my thought so I stopped thinking . But again one main component which is totally missing from the STARTUP ECO-SYSTEM is IDEA VALIDATION or SCIENTIFIC VALIDATION helped out by – DST,DSIR, IIT,IIM Design Institutes, Science & Technical Inst. DRDO etc or some Scientist should come forward to help this issue so that correction of idea can be initiated at right stage.

Why startups need to understand investing in them is no privilege

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