May be we need some innovation and rethinking on the VC and angel financing models.

Professor David Birch, formerly at MIT, classified companies into three categories: elephants, mice and gazelles. Fortune 500 companies like General Electric are the elephants. The large number of small enterprises (6.5 Million in the US alone), which include restaurants, book shops, retail outlets, are the mice. The third category, which is of the most interest to us, is the gazelles. Gazelles start small and grow extremely rapidly through innovation. More often than not, they create huge new industries on their way to success.

The startups we wish to create are the gazelles described by Professor Birch. Not just any gazelles, but gazelles which grow into elephants; which on the way create a large number of high-quality jobs, satisfied customers, value in the overall economy, and enormous wealth for the shareholders.

Because of their very nature, starting small and then going through very rapid expansion, the “gazelles” require relatively large infusions of capital at an early stage to realize their full potential. The traditional way to bootstrap companies was to take some parts of the profit and invest them back into the company. This strategy does not work if the company is growing exponentially or if the upfront investment of capital before cash flow breakeven is large. Thus, the need arises for external sources of capital. Enter the venture capitalists.

The problem lies in the fact that people raise funding before they know whether they are really gazelles. Or as with a lot of companies, people are just trying to build a mice and flip it as a gazelle.

Venture capitalists are the gatekeepers and providers of the capital required by the “gazelles”. In addition to being the gatekeepers of capital, venture capitalists play an important role in acting as a filtering mechanism or bouncing boards to weed out the mice from the gazelles, or to shape some mice which have the potential to become gazelles with the infusion of the right DNA and capital.

Entrepreneurs find it difficult to deal with this aspect of venture capital; and to be honest, some of the venture capitalists do not have the history or institutional memory to act as good filters. But, on the whole, this filtering mechanism is a great asset and is one of the reasons, we believe, why Silicon Valley has been a hotbed for gazelle breeding.

a) If the product is B2C (social networking, online sales etc.) or a B2B product that needs global scale you need valuation/ funding and you need to scale up if your idea is great
b) For a B2B product in India alone, valuations/ VC’s remain unreal since the market is smaller. Debt/ Bootstrapping/ build long term seems better

George Vettath
Kallos Solutions
http://www.K-Serve.net

Unless you understand that, you are going to be disappointed.

Most “solid businesses” are almost not ones which “radically change rules of the game”. On the contrary they actually build on from what is already there, use improved technology, and improved services, to deliver solutions which help the customer’s of the product do their business better than before.

At the same time, certainly there are “game changing” solutions, but almost always they do not get funded by VCs in India who always seek “precedence”. This is unlike in the USA where there is a lot of risk money available – even small amounts is good – for investments in ‘ideas’ and ‘people’. This is unfortunate. Maybe proto.in offers a different set of people. Hope to experience that during this July event.

Thanks,
Rahul
–
Srijan Technologies, New Delhi