For Indian startups, it's not just about getting funds

Chennai: The Indian startup ecosystem is getting wealthier. Slowly but steadily, it is heating up with funds flowing from domestic as well as foreign investors. While most entrepreneurs and investors seem to favour the burgeoning ticket sizes of startup funds, there are also those who believe that excessive VC funding could do more harm than good to companies.

For investors such as R Ramaraj, senior advisor at Sequoia Capital India, the country is nowhere near the ideal startup-funding paradigm. The more the better and the fittest will survive, he says.

 “If you look at the angel list (a website for startups and investors) in the US, it has 15,000 startup companies listed against 17,000 investors. That is the environment needed to boost entrepreneurship - more investors than companies. In 2013-14, over 160 companies got angel investments in India. That number is increasing but we should be focusing on improving the base (number) upon which it is growing,” adds Ramaraj.

IT product companies are the current VC favourites, attracting most of the investments. The growth of the software product industry in recent years has signaled a transformation in India and across the globe. With increasing numbers of online active users becoming consumers of e-commerce solutions and related marketplaces, Indian startups today are building global digital solutions to capitalise on this rapid growth. Hyper-growth, capital availability and acquisitions are the leading drivers of the growing startup ecosystem in this country.

This has led to startup valuations skyrocketing beyond imagination – even some pre-revenue stage startups have attracted millions of dollars of funding in recent times. “There is nothing to worry about overvaluations. It reflects the potential in the market and the interest that foreign investors show in India,” Ratan Tata, chairman emeritus of Tata Sons, told Financial Chronicle in a recent interview.

However, there are detractors, who believe excessive funding changes the course of companies and does more harm than good. One such backer is Sridhar Vembu, chief executive officer of Zoho Corp. The company has been avoiding external funding to stay independent and well on course, he adds, for good effect.

For Vembu, “There seems to be no end to raising VC money in the market. Product companies wait till their product gains some traction in the market and then raise funds to market it. They end up spending about five to 10 times more on marketing than what was spent on product development. Essentially, the company becomes a marketing firm as opposed to a product development one as marketing people begin to run it.”

What it does then is to change the company’s culture from nurturing hackers to suit-clad professionals. There are several examples in the market where successful product companies that raised funds never had a promising second product, he says. “To keep the growth going, you must have the second, third and the fourth product. You will hardly recollect the name of a VC-backed company’s second product because in most cases it does not exist. Salesforce.com is a poster child of this fund-raising model. They have now put themselves up for sale,” Vembu points out. He has got a point.