Get behind the small guy with the big idea

Mon, Nov 2 02:01 AM

If you are young and are burning with an idea for a new business, think again. If you don't come from a business family, not endowed with family wealth, or lack political backing, it is a near impossible preposition to set up a new business in our country. As a columnist in The Sunday Express pointed out, after China's 1978 economic reforms and policy change in 1987 that opened up private enterprise, the number of individual new businesses grew 11.04 million from 1989 to 2004. According to our ministry of corporate affairs, from 1992 to 2006, the average number of companies formed per year in our country was 33,835, thus taking the 15-year total figure to just half a million new companies.

Why is it so? Indians do not lack ideas, enterprise, or the capacity for hard work. What they lack is access to proper guidance and funding. Take Silicon Valley, for example. As R Ramaraj, senior advisor with Sequoia Capital India (the man who cofounded Sify, the first Indian Internet company to list on NASDAQ) points out; universities like Stanford and Berkeley are closely associated with the companies in the Valley. The professors mentor the students and get them a lot of exposure to the entrepreneurs. Seed capital is made available for the budding businessman. After the incubation period, VCs step in. Companies like Google, Youtube, why even Apple all had their origins in college. "College related mentoring is lacking for entrepreneurship in our country," says Ramaraj.

Indians have this big fear of failure. Most young people worry about whether they will get a job if their business goes belly up. That is a major deterrent for them. People around them are also not particularly encouraging about taking risks. Ironically, it was easier to start something new 25 years ago. As an investor explains, "There were only manufacturing companies then. The new economy hadn't happened. Suppose somebody needed Rs 5 crore to start a unit, the debt equity was 1:2; he would be required to raise Rs 1.66 crore. He would inflate the cost of his machinery, which actually cost Rs 3 crore, to 4.5 crore. The balance Rs 1.5 crore would cover his equity. Most entrepreneurs put that back in the business." Of course some didn't. Today that kind of manufacturing activity has come down. It is difficult to name an SME success story in manufacturing in recent times. Most new enterprises have been Web-based, which do not require major investment. Young Indians have developed many applications on Facebook, or Orkut. But no Facebook or Orkut has come from India yet.

Even today to start an asset-based business is relatively simple. But if you want to start other kinds of business like financial services, insurance, merchant banking and so on, the capital requirement from the banks, is off-putting for a young entrepreneur who is chasing a dream with no godfather to back him. To start an asset management company, the capital requirement is Rs 10 crore. Only people with money and experience like the Kotaks, Kotharis or the Ambanis can venture into these areas.

Our banks are not particularly entrepreneur friendly. If somebody manages to get funds and start something new, and that unfortunately fails, it is almost the end of the road for the ambitious young person. The banks want you to make money from day one, which is not likely. If your balance sheet is red, then everything is closed for you. There is no sympathy for concepts like gestation period. Only successful people are encouraged. "If you do a project and fail, you are finished," says a young entrepreneur who is running from pillar to post trying to get off the ground. Banks want repayment in five months. Serial entrepreneurship is not encouraged in the country.

Most aspiring entrepreneurs resent that banks require a security of Rs 3 crore. If they had that kind of collateral, they can simply sell their assets and put it in the business. They do not have to run to the banks. Getting a loan from the bank is not an easy thing to do as they never lend based on an idea. Banks chase big groups like the Ambanis, Tatas, Birlas, the TVS, offering them loans which they do not want! The OTC Exchange of India, which was set up for this purpose, hardly seems active these days. It was specifically targeted to those who needed to raise around a crore. In the earlier days, going for an IPO used to be possible. There used to be issues to raise Rs 1 crore. With the listing threshold increasing in the last few years, it is not possible to enter the market to raise anything less than Rs 50 crore.

Although things are looking up a bit now, there are very few avenues to help early stage entrepreneurship in the country. Everybody is looking at huge projects in infrastructure, power, steel refineries and such like. In these areas, unless you are somebody's son or daughter, how do you make a breakthrough? If you have inherited a land bank then you can enter real estate. Money seems to beget money.

Angel investors are the risk takers. They are investors keen to help early stage businesses that have the potential to create value. They understand that money alone doesn't help people starting with the big idea. The angel investors provide seed funding, closely monitor the project, and give inputs on strategy as well as execution. They act as the mentor of the first time entrepreneur. Based on the viability of the project, they give them marketing ideas. Usually successful entrepreneurs set themselves up as angel investors to help the young aspirants. Angel investing is still evolving in the country.

Venture capital enters when a prototype is ready. VCs come in around 18 months after a promising launch, and help scale up the business, and take the business to profitability. VCs have to put in a lot of effort in these early stage companies and be prepared to mentor and hand hold. PE (private equity) firms enter much later, for acquisitions, buyouts and so on. They come in with a minimum investment of $5 million. A small start-up may not be big enough to take that kind of funding.

So unless the mindset of financial institutions in the country changes, it is not going to be easy for small guys with big ideas.

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