MSMEs And Tech Startups: What Makes Investors Confident

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With the call for ‘Aatmanirbhar Bharat’ and ‘Make in India’ initiatives, electronics design and manufacturing services have once again become a hotspot for startups. While it might be easy to venture into this arena, is it easy to secure funding as well?

Research by Semico points out that semiconductor chips startups have raised close to $1.3 billion in funding during the last five years. However, there is a stark contrast between the amount raised by North America-based startups and ones situated in Asia (barring China).

The majority 55 per cent of this $1.3 billion funding was raised by the ones located in North America and only six per cent was raised by those in Asia. The China region was not included in the study. Why we kept semiconductor chip startups in focus is because these make a perfect example of startups in the vertical of electronics manufacturing and design.

“The design cycles in the semiconductor as well as the high-tech industry are very long. Typically, this is around 18 to 24 months. If you’re starting to design a chip today, it might see daylight only after two years or more. Keeping this in mind an investor will surely look at the design cycle time, and the key differentiator is the top thing to decide whether you are eligible for the funding or not,” notes Sanjeev Keskar, managing director, Arrow Electronics India.

Investors have a keen eye for startups that are into design-led manufacturing than just manufacturing. Poornima Shenoy, CEO, Hummingbird, explains that a startup relying on its own design team makes investors confident about the future of a company and hence investments made.

“Startups led by their design houses give much more than just assembling or, as we call it, manufacturing services to clients. But a lot of clients opt for design-led manufacturing as the same helps them save money by not having to pay to different vendors. Moreover, the prototype to final stage testing before mass production can take place at one point itself,” explains Shenoy.

It is to be noted here that India has become a global hub for electronics design. Different startups in the country design close to 2,000 chips in the country every year. While these numbers have been on a rise during the last ten years, the number of startups entering this arena is low when compared to countries like China and Taiwan.

“Don’t just look at VCs for funding. Reaching out to corporate houses can prove to be a game-changing strategy. On close analysis you will find that a lot of big names can benefit from your solutions and align them with their business goals,” says C. Muthukrishnan, CEO, Semiconductor Fabless Accelerator Lab (SFAL).

What makes investors confident and not so confident

The first key towards gaining an investor’s confidence lies in differentiation. Venture capitalists (VCs), as per Keskar, do not usually prefer companies following the rat race. Next comes the number of founders in a company. Investors, as per Keskar, are more confident in investing into startups that have multiple founders rather than an individual founder.

“For a minute, think of yourself as the investor and your startup as somebody else’s venture; would you now invest? Tailoring the pitch can make a lot of difference to your chances of securing the funding round. What you are going to do with funding, what differentiates you from others and what are your plans to scale up should always be a part of the pitch,” advises Dr P.K. Sundararajan, founder and CEO, BluArmor.

 

Next in line comes the plan around potential customers or, in simple words, how well does a startup know its customers. Tarun Verma, managing partner, Silicon Catalyst explains that while it has become easy to create products that are packed with technology and features, creating what customers want still remains difficult. Customers will not pay for features that are not useful to them. Investors, as per Tarun Verma, can easily differentiate between startups that know their target audience and the ones that do not.

“Getting to know what the customers want should be a startup’s top priority. Many tend to be tech-savvy and neglect the real pain points. The investor appetite has always been there. Startups need to remember that technology investors have been doing this for years and they have the ability to sniff out extraordinary from good products,” points out Verma.
The right architecture for becoming techno-commercially successful, as per Verma, is a must. A wonderful product, as per him, is the one that creates value both for the customers as well as for the creators. Everything else, he thinks, is either a white elephant or a product not fit commercially at all.

This is exactly where startups make or break the line. Verma elaborates that reading the market for a startup should be of utmost importance. Teams, as per him, should possess the analytical ability to assess the market and present a detailed report to investors as part of the pitch they are making. Verma also recommends formation of teams as a critical step. Like Keskar, he thinks there should be more than a single founder in a startup. “More co-founders help investors assess risk in a better manner,” notes Verma.

Checklist before venturing into the space

Once not so popular vertical of electronics design and manufacturing in India has been made popular by initiatives like ‘Make in India’. The recent call for ‘Aatmanirbhar Bharat’ has also made the vertical more enticing. The recent announcement of PLI schemes worth 500 billion rupees is a clear indicator of opportunities that will be created by big players like the Samsungs and Foxconns for MSMEs and startups in the near future.

“While a lot of big names are supporting these initiatives, it is critical to note that these big names support startups that have India as well as their global plans ready to be implemented,” opines Shenoy.

The space also includes a lot of competition from within and outside India. In fact, the competition may be in its nascent stage inside the country; outside it is humongous. Countries like China are known for facilitating electronics manufacturing and design services at competitive prices. Similarly, when it comes to high-end electronics like semiconductor chips, countries like Taiwan lead the race.

“A great product can outdo any competition. The features of a great product include its ability to be developed into standards that are prevalent in different parts of the world,” explains Verma.

Atomberg Technologies makes for a perfect example of a startup in the electronics design and manufacturing startup space in the country. The company recently raised 700 million rupees in funding during round B. Into designing and manufacturing BLDC-powered ceiling fans in India, the startup is now looking to venture into new consumer electronic verticals. Its strength lies in inhouse designing and manufacturing.

Saankhya Labs is another example of a successful startup when it comes to high-tech startups in the field of electronics design, It designs semiconductors for high-end applications. Though its end products are usually manufactured outside India, it has also found most of its clients outside the country.

“Success in the high-tech business is a mix of three things—the value of your idea; your ability to build it; and your ability to sell it. If not ten-on-ten, each of these must be able to score a decent value in the startup report card,” says Hemant Mallapur, co-founder and executive VP, Engineering, Saankhya Labs.


This article is based on inputs shared by industry leaders during panel discussions held at recent India Technology Week sessions

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