These days I find myself talking a lot more to people who ask me about starting up and raising money, and I often repeat the same stories about the lessons Sharat and I learned and how we navigated what was a pretty bleak funding landscape, back in 2009, at the time we were just getting started with MobStac.
Venture Hacks, a popular blog for startups, has a wealth of information on how to raise money in the Valley, but most of it really doesn’t apply in India because our startup ecosystem is still in its infancy. But this ecosystem does exist, and what we did is apply some of the same principles advocated by the VH guys here in Bangalore. Much of what follows is how our thought process unfolded as we raised angel funding for MobStac last year.
Raising Angel Funding
In my mind, there are really three questions an entrepreneur needs to answer at the outset.
The first question is: when is the right time to start talking to investors?
I think the right time is after you’ve done the following:
- Found a motivated partner to start the company with
- Invested your own money first (whatever amount)
- Put together some prototype of your product, if your idea involves one
- Quit your day job and started working on your startup full-time
If you’re serious about starting a company that will seek external funding, you really should be demonstrating your commitment to this new venture through your actions. If you think about the message you’re trying to convey, you’re essentially saying, “I’m doing this whether you buy my fancy new idea or not.”
The second question is: whom do you raise a seed round from? The answer is that the small amount of capital for a company to get off the ground invariably comes from angel investors, because angels are the only ones who invest in people when all they have is an idea and maybe a crude prototype of their product. Angels don’t usually care about scalable business models and they don’t obsess over all the minute details of technology risk, business model risk, and barriers to entry. An angel’s motivation to invest in startups typically comes from a strong desire to give back and help mentor the next generation of entrepreneurs.
So if it’s angels you need to seek, where do you find these rich people who’re willing to part with substantial sums of money (with a very little chance of ever seeing it again) to put into a risky venture? And where do you find these people if you aren’t planning to startup in the Valley but in Bangalore?
When you’re really just starting out and have very little to show, these “angels” are usually friends and family. The only ones who probably believe in your wild idea and your ability to pull it off. I guess that’s why this round is often called the “friends, family, and fools” round 
At MobStac, two of our angel investors are really dear friends and classmates of ours from college and graduate school. They wanted in even before we asked! Their faith in us quite frankly astonished me, but I guess somebody needs to believe in you when the world is trying to talk you out of the insanity of chucking your stable job
One angel investor in MobStac is a fellow alumnus of IIT Madras, a successful entrepreneur from the Valley, and a true-blooded angel investor if you ask me. We got an introduction to him, made a pitch with our slide deck and prototype demo. We got an answer in less than 24 hours and the money in less than 2 weeks! Wouldn’t we all love to be able to pitch to such awesome angels?
To get in front of such angels, you have to have what the Venture Hacks guys call social proof. Find a way of getting introduced to these angels from people they know well and respect. A cold call or email is certainly not the way I recommend you do it. It’s just as annoying and ineffective as the bulk SMS spam we all get and hate
Another way is to reach out is via alumni of your university, in a way that will help you establish credibility and build a connection up front. In general, the more people you talk to, the more you’ll find that people are ready to help you out and in ways that you would never ever expect. Too many people think of networking as something that happens only at organized events. It does not. You network as part of your daily life, and the best networkers are those who don’t do it consciously, but have made it part of the way they connect with people in general.
The third question an entrepreneur must answer is: how much should you raise? While the answer really depends, for a tech start-up in India that does not have any significant capital expenses up front (say, to acquire a govt. license), the amount is usually somewhere between $50k and $200k. If your plan needs a million dollars up front and you happen to be a first-time entrepreneur with no connections to the Ambanis, I strongly urge you revise your plan in a way that lets you start off with $200k. That’s an amount you can raise right here in Bangalore.
At MobStac we raised our seed funding from angels and closed the round in about 4 months. While it took us longer to close the round than it probably took some others, a 3-month time frame is definitely reasonable (and perhaps what you should expect).
Alternatives: Startup Accelerators
While angel investors in India are these days doing a lot for us entrepreneurs, there are also a number of startup accelerator programs that are doing their bit to support startups in India. Two such noteworthy programs are The Morpheus (run by Sameer Guglani, Nandini Hirianniah, and Indus Khaitan), and iAccelerator (run by Freeman Murray). In addition, there are a number of incubators in the country, including one at my alma mater, IIT Madras. I am not yet convinced of the efficacy of these incubators and believe that a start-up should survive in the real world on its own. This may not apply, though, to start-ups that have a heavy research bend and are typically born out of cutting-edge work done only in universities.
My inspiration for this post comes from a desire to encourage more knowledge-sharing amongst entrepreneurs within the startup community here in India. Sharat and I are in the midst of raising our next round of funding for MobStac, and when that closes I hope to have a lot more to share on matters such as valuation in seed rounds, stock options, common terms seen in term sheets, etc.
