When angels fear to tread

Budding entrepreneurs never have it easy. While the start-up sector has witnessed decent funding deals in 2018, raising money in the seed stage and early stage is still a big hurdle.

Estimates by IT/ITeS industry body Nasscom show that seed stage funding in India fell 21% year on year to $151 million in 2018. Early stage funding remained flat at $1 billion. However, late-stage funding jumped multi-fold to $3 billion.

Seed and early stage funding is paramount to the sector and to entrepreneurs, in particular, say experts.

“Increased funding can foster creativity, enterprise and corporations of tomorrow that are world-leading, as has happened in the last decade with the likes of Ola, Zomato, OYO, Flipkart, etc,” says Pankaj Karna, founder and managing director, Maple Capital Advisors.

Experts believe there exist multiple reasons why investors overlook upcoming start-ups. First is the complex taxation issues. Even though the government announced that start-ups can avail tax concessions on investments up to Rs10 crore that they have received from angels and other funders, the underlying clauses pretty much nullify any benefits of this rebate. This tax relief is only for start-ups that have been approved/certified by an inter-ministerial panel or have been listed with an approved incubator, experts say. Angel investors, meanwhile, need to report an annual income of Rs 25 lakh for the last three years to qualify for the rebate criteria.

According to Sunil Goyal, managing director of YourNest, an early-stage fund house, the angel tax and related issues are holding back investors from making investments. “Another reason for the low rate of seed and early-stage funding could be that angels are not able to see their companies enter series A and B rounds.” 

Karna explains a third reason on the low investments in early and seed stage start-ups. “The probability of success is low, there are no assured returns; while the risk of losing money is high, especially when benchmarked against other investment avenues like the stock market.’’ There being no assured returns should pose zero deterrence to investors, feel entrepreneurs. Gaurav Gupta, co-founder of Navia Life Care, feels that since start-ups try to solve everyday problems, there are instances when they might not succeed. “It is important for investors and the ecosystem to embrace failure as well.”

Karna feels the ecosystem needs better institutionalised early-stage funds instead of loose angel networks. “The ability of an individual investor to assess the best start-up is limited, hence structured platforms and angel networks or crowd-funding platforms can help expedite the process of assessing start-ups and ultimately investing in them,” adds Goyal.

Emerging entrepreneurs can do a lot to enhance their appeal in investors' eyes. The key factors that investors look for in start-ups are the “originality of idea, unique customer insights, potential to scale up, and a cohesive team”, says Goyal.

Thus, aspiring entrepreneurs should undertake credible market research, besides making a credible business pitch and build a team of passionate people, feels Nipun Goyal, co-founder, Curofy, a mobile platform for doctors.

Gupta says entrepreneurs should focus heavily on developing the right product and on customer acquisition. “There are various start-up events and competitions that entrepreneurs could go to, network and pitch their business plans. It is important to keep potential investors updated on your business progress.”

IN NEED OF OF MORE

• 21% – Seed stage funding in India fell to $151 million in 2018
   
• $3 bn – late-stage funding