Funding and fundraising activities are the two major accelerators for budding startups. Experts are of the belief that it is more challenging for electronics and IoT startups to convince angel investors to fund them. What is the reason behind it and how can they turn the tables?
— By Baishakhi Dutta
In the past decade, we have seen the rebirth of the startup ecosystem with a more sustainable business model in the form of angel funding and venture capital. This is now taking strong root in the tech-related areas, especially in the ESDM and IoT and we are now gradually seeing the results of this in every nook and corner of the country. India’s economic future lies in encouraging startups which will bring dynamism, new thinking and create jobs.
However, convincing angel investors to take the risk by putting their money on them has been quite a challenging task for startups – especially in the newer domains of electronics and IoT. So what do startups need to do?
The real angels
The Indian ESDM and IoT startup story has had many highs as well as lows. While the boom truly began in 2013, it was only over the past two years that investors started pouring money into entrepreneurs, products and ideas.
Angel investors are the support pillars on which a startup ecosystem is built. They are the ones who usually make the first bet on emerging startups where others hesitate. While it is a risk for an angel investor, the investments come as much-needed third-party validation for startups. Angels thus play a crucial role in fuelling their journey and building successful startups of the future.
Angel investors are also a preferred source of equity over Venture Capital (VC), as they support a wider range of innovations in comparison to VCs. Moreover, angel investors do not shy away from investing in a broad range of sectors and geographies, and do not overlook local startups too. Even though angel investing is taken up by experienced business owners and entrepreneurs, it differs greatly from being a financial investor or building a company in a particular sector. It requires a combination of both skill sets and specific technical skills regarding conducting due diligence and determining company valuations.
Despite being part of one of the largest ecosystems in the world, Indian startups have always struggled to attract angel investments as compared to other leading ecosystems. It is until recently that we have witnessed a boom in angel investment which will likely change the angel funding scenario in the country.
The stepping stone – Wooing the investors
The biggest question that runs in the mind of tech startups while approaching for funds is – what will it take to convince investors to put their money on them? According to Sushanto Mitra, founder and CEO of Lead Angels, the golden rules for convincing investors include:
Being able to demonstrate confidence and persuasiveness well through a well-rehearsed presentation
Having a clear go-to-market strategy with early validation of the solution
Being able to explain the problem they want to address, why it persists and how their solution will solve it
Validating the benefits their solution can provide over the competition
Dr. Omkar Rai, director general of Software Technology Parks of India (STPI), is of the opinion that many startups can get closer to investors through incubators. These incubators have linkages to the investors. After all, investors are people who are not just found in the crowd – and hence calls for channels to reach up to them.
What do investors look for?
Dearth of funds at seed level – A hoax?
Startups fight tooth and nail to come up with innovations that can solve major practical challenges in the most efficient ways – and yet come short of achieving sufficient funds. So, is there a lack of funds that is causing this stringency?
If we look at banking and financial institutions as a source of funds, they are very hesitant in providing angel funding for they do not want to take risks in the early stage. Risk can only be taken by people who can envision the direction that startups will head. So, ideally the risk takers are those who have insights into the core business and have an understanding of a new concept that is going to take shape in the future. Indian banking and financial institutions currently lack the capacity to understand these types of scenarios and that is why people who have futuristic insight are the ones taking the risks for higher returns.
On the other hand, India has been more of a software and IT-focused ecosystem. It is easier to build a business in this domain because, at the end of the day, a startup’s idea and coding skills are what that will enable it. Moreover, these business cases are already established, making it an easy bet for investors as well.
Whereas electronics startups need a lot more capital upfront and a unique business case to be able to build a business. There is much more risk involved, which makes both the entrepreneur and the investor think before plunging into it. Moreover, experts believe it also becomes a matter of question whether the investors who do fund in these businesses provide the same amount of support in a timeline of 5-8 years. The electronics industry has a certain timeline and growth metrics, whereas the investor’s world has its own metrics. This creates hindrance in funding.
Meanwhile, to make things a little easier for startups, newer opportunities are coming up. For technology startups, The IndUS Entrepreneurs (TIE), the largest entrepreneur organization in the world, is very active all across the country. They have created the Indian Angel Network (IAN), the biggest angel funding organisation that supports pre-incubation kind of funding. Currently, a major chunk of angel funding is coming through IAN and the incubator themselves. On the sideline, funding is also provided by the private stakeholders who are making initial funding available to the ESDM and IoT startups.
All the incubators that are coming through Atal Innovation Mission are being funded by the Niti Aayog and they are being given funding by the government, a portion of which they can use towards angel funding, informs Rai.
Talking on the same line as Rai, Mitra also opined that there is enough money among angel networks and micro VC funds for good ESDM and IoT projects. “We do see competition among them to invest in the top tier companies,” says Mitra. No doubt such a flourishing scenario clearly depicts that there is a lot of supply of funds in the angel funding arena when it comes to the technology startup ecosystem.
Existing challenges in the tech startup space
Indian tech startup space has really revolutionised over the last couple of years. It has seen disruptive growth. Rai decodes the primary challenge that a tech startup encounters in the country. “Most of the startups want to have a domestic market of their products and would like to access both the market and the capital. They also want to have some preferential procurement by the government,” says Rai.
Speaking about this, we have witnessed such changes picking up pace in the country. To support startups gain access to the domestic market, the government is also coming forward with various support programs to help startups with such procurement. An optimistic Rai believes that if startups get market access, it would give them great strength in terms of growth and scalability for this is something startups are looking up to.
On the other hand, while speaking about challenges, he highlights the lack of business experience of most founders. On top of that, the lack of success stories until now is also acting as a major hindrance in this entire situation. Coupled with these existing challenges, Mitra views the level of infrastructure as a serious problem. This includes the lack of a proper hardware production ecosystem in India. Dependency on imports for components and production services result in higher costs and sub-optimal turnaround time for entrepreneurs.“It is a little bit of chicken and egg problem. The infrastructure gets created when there is a demand and when there is infrastructure, demand gets filled up,” says Mitra.
ESDM and IoT – A dense enough startup ecosystem?
Coming to the question of a culture of innovation, does India have enough ESDM and IoT startups today? We tried to decode this query by talking to Bharat Innovation Fund (BIF), one of the leading early-stage venture funds with a mission to invest in IP driven Indian startups.
Shyam Menon, partner and co-founder of BIF states that from an IoT perspective, there is no shortage of startups in India. From the perspective of ESDM, we see more companies getting into the field, but the lack of the ability to build to chips or hardware domestically eventually results to a much lesser number of innovative startups coming from the country. However, over time, as more hardware capabilities, hardware accelerators and improvements to existing hardware infrastructure come in, situations will move towards the better.
Though electronics design works have started happening in the country, the majority of the electronic components are still being procured from outside. As an immediate preventive measure, Menon suggests decreasing India’s high dependence on imports and speed up R&D work at the ground level. Given the investments in the ESDM and IoT sector, Mitra too believes that the ESDM and IoT startup is still at a very nascent stage compared to countries like Taiwan, China, Israel and parts of Europe.
The way forward – holding hands
Startups do not operate in a vacuum – they can only breathe in a healthy entrepreneurial ecosystem in which many stakeholders play a critical role, including entrepreneurs, investors, large companies, universities, governments, service providers, etc. Incubators are already quite instrumental in providing the basic amenities to young startups and help them grow. Governments can help by making sure the appropriate legal and financial framework conditions are in place, and policies are encouraging for new businesses to start-up and operate profitably. Experts from established businesses can coach and mentor them towards the path of success. And of course, as these networks strengthen, angel investors will also find more reasons to put their bets on electronics and IoT startups!