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Incubator Funds in India: Synthesis

Posted on Sunday, Nov 18th 2007

My first experience of technology entrepreneurship in India was in 1994 while I was still a grad student at MIT. The most vivid memory I have of that experience is that it took me 6 months to get a phone line. It was before wireless. It was, most certainly, before venture capital in India.

Things have obviously come a long way. Last summer, I did a body of research on the Indian entrepreneurship scene, as I watched huge amounts of capital finding its way to India. Through that work, I also came to the conclusion that there is way too much money, and not enough fundable deals, and that India needs more incubator funds.

A year has gone by. Not a whole lot has changed.

So I chose to revisit the topic of Incubators in India in a series of posts, on which I would like to hear from entrepreneurs, investors, incubator managers, and whomever else in the ecosystem with meaningful input.

Here are the posts:

I look forward to your comments.

This segment is a part in the series : Incubator Funds in India

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Sramana,

Your overall template for incubators in India sounds very feasible.

I am part of a group of friends planning on a similar setup, but our scale is quite small. We want to do micro venture investments focused on Indian market alone. And not all ideas we incubate may relate to technology. We are currently doing the groundwork for the same and hope to start in January/February 2008.

In addition to what you have listed, I am thinking of: 1.Common HR and Admin services for all teams (as they will be sharing the premises), 2.A few top notch technical talent that can flit between different teams/ideas – by doing this, I want to amortize the cost of the talent over 4-5 startups.

We are trying to come up with a fair model of compensation where a particular talent (technical/legal/biz dev) distributes the time between 2-3 startups. Should they get stock options in each of the startups etc.,

Even more importantly, we want to understand how much stake an incubator firm should get in the startup. We will be investing on facilities and talent for all the startups (this will be common for all 5 ideas/teams), plus we will be investing separately on the salary plus other essentials for each of the teams (will range between Rs.200,000 to Rs.1 million for each startup.

What is the best approach to determine a fair distribution of stock between the Incubator firm and the startups? As we are planning to house all startups in one facility, we want the teams to feel that we are implementing a fair model, and not taking more stock simply because one team is less adept at negotiation.

Thanks.

Kumar Narasimha Tuesday, November 20, 2007 at 6:17 AM PT

Hi Kumar,

This is not a simple equation. Deals have different dynamics. You cannot have all deals be equal. You can, however, have all deals be fair.

Also, I don’t 2-10 Lakhs per team will get you very far, given where salaries, etc. are in India right now. I think, below $25 Million per incubator, my model doesn’t work.

Sramana

Sramana Mitra Tuesday, November 20, 2007 at 10:50 AM PT

Sramana,

The funds I am talking about are in addition to the common facilities plus the funds being brought in by the startup team it self. In one case, we are committing a few lakh on buying some SW licenses. In another case, its about Rs. 10 lakh for salaries for 6-member team for 6 months.

I feel the model is feasible below Rs. 100 Cr ($25 million) if the focus in only on Indian market. Once an idea goes beyond prototype phase, we will pump in more funds as required.

My question: All deals have to be fair. So, what is a fair stake for the incubator firm where we invest $100 K over 6-9 months and the startup team invests the idea and sweat equity.

Thanks in advance.

Kumar Narasimha Tuesday, November 20, 2007 at 10:00 PM PT

I don’t agree with you, Kumar. Even if this gets the companies some distance, your fund will get diluted in subsequent rounds, because valuation uprounds only happen if you meet meaningful milestones.

My advice would be to save yourself the trouble, the heartache, and the money.

$100k = 5-10% equity, no more.

Sramana

Sramana Mitra Tuesday, November 20, 2007 at 10:20 PM PT

Kumar: Sharing technical talent is a nightmare you don’t ever want to get involved in. Firstly it doesn’t align incentives – which startup does the person really care about? Second, when you get further funding for one of the startups you will have to orphan one or the other – not a wise thing for the other side.

You can get “advice” or “consulting” shared – this can involve architecture or brainstorming or what they call hallway consulting (typically advice over cigarettes or coffee!).

Sramana: Excellent set of articles, thanks.

Deepak Shenoy Saturday, December 8, 2007 at 1:55 AM PT

Kumar: I am really curious to know, in which part of India are you able find 6 engineers working for 6 months in Rs.10Lacs, i.e. @ ~3.25L p.a. salary, you’d probably get freshers, and that too — not from a college of some repute (forget IITs). And in technology startups, the quality of software engineers goes a long way in determining the outcome, i.e. whether even a single milestone is met with any degree of succes.

Sharing ops, and pure advisors is a fair thing, and is happening quite a bit already. We even have real outsourced CFO’s, and back-office shared service providers, but core engineering, architecture etc., that’s an altogether different ball-game.

Banibrata Dutta Monday, December 17, 2007 at 3:22 AM PT

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Hi I am Bindiya from Ahmedabad. I am doing a research (ph D ) in the area of venture capital financing in India with a special reference to Gujarat. I am looking for the entrepreneurs who have already started their ventures or joined family businesses in last two to three years or more. I am surveying those people with a questionnaire. If you have an entrepreneurail venture in Gujarat. Please contact me on the e mil id bindi_pathak@yahoo.com. This would mean a great help to me.

Looking forward to networking with you.
Bindiya

Bindiya Saturday, April 19, 2008 at 6:09 AM PT

I am a reader of DNA in Pune India I find your piece or writing very inspirational.
thanking yourself

chandrashekhar anandrao ahire Friday, June 20, 2008 at 5:34 AM PT

Hello ,

I would like to know more about Incubators in India . I am working on a Business plan in a tech product domain in which Google and other big shots of the West are also in the race . What kind of Technical assistance I can get from these Incubators to realise the product in a short time .

My contact ID is kondapally.rk@gmail.com . Any comments are welcome .

RK

RK Tuesday, March 30, 2010 at 2:54 PM PT