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VC Funding

Why less than 1% of incubated start-ups get VC funding

Why less than 1% of incubated start-ups get VC funding
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You're reading Entrepreneur India, an international franchise of Entrepreneur Media.

Over the last 5 years or so, India has seen the emergence of a number of private and government-supported accelerators and incubators. Many of them have run a few cycles and have now fine-tuned their models and programs. Quite a few of them have very good and solid programs.

Yet, if we were to measure the success of start-ups from all these programs in terms of them raising growth-capital, the report card is not very encouraging. If some industry numbers are to be believed, less than 1 per cent of start-ups that go through various incubation and accelerator programs in the country receive institutional funding. This number probably includes incubators in academic institutions, most of which have not been able to run meaningful programs to help entrepreneurs build fundable ventures.

Why is this number so low? Why the start-ups who join accelerator or incubator program with the hope of getting mentored for accelerating their journey towards growth are not able to get growth-capital?

Well, it is easy to say that VCs in India have a very different risk-reward outlook, and are generally risk-averse. While the VCs have a different perspective on this, even if the investors were risk-averse, should the accelerator and incubator programs not be adjusted so that the start-ups are better aligned with the perspective of the VCs

There are two schools of thoughts here. We hear some Accelerator Manager assert that they will continue to develop programs which they believe help start-ups follow the most appropriate strategy for them from a business point of view. And while that may be philosophically correct, my view is that if growth-capital is one of the critical raw materials for the business, then you have to adjust your plan in a way that raw material is appropriately available. What use is a philosophically correct strategy, if that path leads you to a situation where you are not able to grow beyond a point because capital is not available?

I am not suggesting that the perspective of VCs is the only correct direction, and other alternates are not correct. There may be better strategies for building a business than the direction that VCs want to see it go. However, if you are seeking their money, you either have to convince them with an alternate view or adjust your plans to align with their view. The choice is yours.

In my view, it takes all sides – VCs, Accelerators and Entrepreneurs – to engage and work together to see each other’s point of view. For example – Consider the Indo-China situation, where disagreement on certain areas may arise, but working together on other areas creates the space for understanding each other.

I am a strong proponent of the idea that accelerator and incubation programs have to help start-ups understand how VCs are thinking and hence, they should engage early with VCs to understand what they want to see in the start-ups. Thus, customise the program for each start-up to help them in proving the business matrices that will help them make VCs ‘write the cheque.’

What we need in this country are accelerator and incubation programs that will provide an environment in which the next round stakeholders – VCs, advisors, customers, policy makers, global intermediaries and market access participants – are engaged early on to provide inputs on what they hope to see the companies graduate into. Working in isolation, or on a divergent path from what the next round of stakeholders expect, in my view is sub-optimal.

I would like to see an India where 5-10 per cent of startups who, through incubation or accelerator programs, are able to receive institutional and growth-capital. And as VCs start seeing better-prepared start-ups, they too will start getting the confidence of being flexible with their approach. If they are currently risk-averse, hopefully they will take a few interesting bets that could create the next global leaders out of India.