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Business Incubators: The Morpheus (Part 6)

Posted on Saturday, Oct 30th 2010

By guest authors Praveen Karoshi and Prashant Sachdev

Prashant: If you have to assign a monetary number to the full range of services that incubator provides, how much would it be per company?

Nandini: Less than $100,000.

Prashant: Can you share revenue numbers of companies before and after incubation?

Nandini: While India is a large and attractive market with opportunities in almost every domain, at the same time it is a challenging market for startups to operate in:

  • On average, 60%–70% of startups that join us at idea stage get their first revenue in about three to six months, reach an annual revenue run rate of $50,000–$60,000 in 9–12 months, and reach $200,000 in revenue in around 24 months.
  • Almost all these become cash flow positive around 12 months and remain so until the point at which they raise growth capital.

Prashant: Can you share investment raised by companies before and after incubation?

Nandini: Sure, here are some details:

  • Almost all companies that join us have not raised professional money before.
  • They typically have $10,000–$20,000 of capital raised via self, family, and friends, and The Morpheus invests another $11,000.
  • Due to availability of deals in the mid to late stages that look more attractive to venture capital investors in India, investment activity in deals smaller than $250,000 is almost negligible. The activity for deals between $250,000 and $1 million is quite subdued as well.
  • Hence, we advice all our companies to focus on growing to revenue levels of $250,000 a year with the $20,000-$30,000 of capital that is available to them.
  • Three companies from our portfolio have raised venture capital so far: Instamedia, with $250,000 in seed and $4 million in Series A; Crederity, with $500,000–$600,000 in Series A; and Commonfloor with a $350,000–$400,000 Series A.
  • About five companies have raised angel capital in the range of $20,000–$40,000.

But as mentioned, we focus more on revenues and profitability for first two years, and not fund raising.

Prashant: Based on your experience, what companies are good for you – those with good exit strategies or those that generate revenues and offer dividends?

Nandini: We focus on getting companies to generate revenues and get to a stage that they are profitable. We also deal with very early stage companies, so exit strategies and such are irrelevant at this stage.

Prashant: What is the typical return you seek, and over what period?

Nandini: We look a total return of four to five times across our portfolio. But I guess eventually we will see approximately 30% companies failing and giving no returns; 35% companies giving negative returns, and 35% of companies giving positive returns. Out of the last 35%, approximately of 15% companies come out as rock stars and give fifteen to twenty-five times returns.

Prashant: Overall, that’s a great deal of information about The Morpheus. What is one particular piece of advice that you would like to give entrepreneurs looking for incubation?

Nandini: Do your research. Figure out what to expect and what you want to get out of incubation. Align yourself with an incubator that suits you best. Things like being associated with a good organization, great names as part of team, and so forth, are irrelevant.

Prashant: One last question. What is the single most important thing that incubators could do to help businesses start generating revenues or increase revenues?

Nandini: Mentors should align themselves with the business’s goals and participate actively in helping the team achieve that goal on a daily basis. They should help the team build fast and sell faster.

Thank you for providing us valuable insights, and we hope that we 1M/1M will become a reliable sources for quality entrepreneurs in years to come.

[Entrepreneurs, note that The Morpheus is currently accepting application for Batch 5 of its business accelerator program, which runs from December 2010–March 2011. Apply here.]

This segment is part 6 in the series : Business Incubators: The Morpheus
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