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Venture Without Capitalists

The lack of early stage venture capital funds in India is not a roadblock to building successful companies. Entrepreneurs have built their companies the old-fashioned way, making personal sacrifices and growing the business organically while maintaining financial discipline.

"Mitu Jayashankar and N Shivapriya - The Economic Times"

When Saurabh Sinha left his job at Wipro Technologies to start emids along with his college friends he had no idea what he was getting into. It was 1999, and the startup fever was at its peak. Sinha and the other five founders had pooled in their savings to start an online portal offering services like news, cricket scores, dating services and so on. The initial money invested by the founders was good only for the first six months. Sinha met several venture capital firms but none were willing to fund the company. emids was burning cash and to keep it afloat, the promoters took on web applications projects from other dotcoms. The tech meltdown in the year 2000 hit the company hard. By 2002, emids had shrunk from 55 employees to just 17.

But Sinha wasn't ready to throw in the towel as yet. When it was clear that institutional investors would not fund his company he started looking at individual investors. emids was finally bailed out by a US-based angel investor and two wealthy garment exporters from Bangalore. In 2002 Sinha changed emids' business model into a software services company. emids managed to stay afloat for the next three years by taking projects through sub-contractors. In 2003, the company opened its US office and landed its first customer. Today emids has 12 customers and 180 employees, of which 12 are in the US. Business is growing at 100%, says Sinha.

The flow of risk capital in India has increased substantially since 2000. According to a study by Venture Intelligence and US-India Venture Capital Association, venture capital firms have invested $130 million across 20 deals in India in the first quarter of 2007, up from only $37 million for the same period in 2005. However 90% of the money is invested in late stage initiatives in mature firms. According to a study by Stanford University and TiE, only 6.9% of risk capital in India was invested in seed and early stage, as compared to 12.5% in China. The study also shows that after the Internet bubble burst in 2001, the amount of money invested in early stage companies came down from $ 657 million in 1998-2001 to $250 million in 2002-2005.

As the emids example shows, the lack of early stage venture capital funds in India is not a roadblock to building a successful company. Despite lack of funds, smart and willing entrepreneurs have found ways to bankroll their companies. They have built their companies the old-fashioned way, making personal sacrifices and growing the business organically while maintaining tight financial discipline.

In fact, some entrepreneurs have even decided not to raise money in the early stage. In 2003, B Jayashankar and Arnab Chatterjee started a chain of three restaurants in Bangalore that folded up within six months. The business wiped out their life savings and put them in severe personal debt. Despite that when they started Karnab Web Marketing, an Internet services company in 2005, they decided to bootstrap it again. Says Jayashankar, "We need to be confident that business is substantial and scalable before we raise money". Jayashankar says that Karnab is trying out several things. "Unless each turns profitable at a reasonable scale, what is the point of raising money?".

So, if you are an entrepreneur who is finding it difficult to raise money for a new venture, don't lose hope. If you take care of a few basic things and have the willpower to stay in the game, here's how you too can build a successful business.

Run a tight ship

Each of the companies we spoke to for this article believes that running a tight ship is absolutely essential for survival. At iVista the company did not have an air-conditioned office till 2004. Employees paid for their own meals, tea and coffee. Karnab Web Marketing stretched its office space right till the last square feet. "At one time there were at least 15 of us sitting in a tiny 350 sq ft space. We had people sitting even in the balcony," says Jayashankar. Only when the business was ready to pay, the company moved to a larger office.

Getting a quality certification is essential in the software business. But Infrasoft knew that doing a quality audit would result in huge overheads. It postponed the decision to go for a certification. In 1999, when revenues from the retail banking product kicked in and cash flows were more comfortable, it started the ISO certification process. When Career Launcher, an education and training firm, started its first coaching classes in 1995, it rented the premises at Shri Ram College of Commerce. Since it did not have money to spend on advertising and marketing, it used the Mock CAT exams it held at colleges to build its brand. "There were no advertising costs. We went directly to the customer," says Gautam Puri, managing director and co-founder, Career Launcher. (In 2000, Intel Capital took a stake in Career Launcher).

Make personal sacrifices

No successful company has ever been built without personal sacrifices by its founders. Satyanarayana R, an IIM graduate who started Career Launcher, took a steep salary cut from the Rs 2 lakh a month he was drawing from Ranbaxy, to Rs 5,000 a month. While on business trips to the US, Sinha of emids says he traveled only on Greyhound buses, never took a flight or stayed in a hotel room. "I discovered all sorts of friends and family in the US," he says. When he finally shifted to the US in '03, he relocated on an Indian salary. "I was earning Rs 50,000 in India, so I took home $1,200 a month, and lived in a tiny one-room apartment," he says. It is the only way these companies survived the hard days.

"In the venture capital model, only one out of 10 companies succeed, which means that failure is an accepted outcome. However, in our case we can't let the company die, our livelihoods depend on it" says Jayashankar.

Raise money at the right time

Without venture capital some of the biggest names of this century, Apple, Yahoo, Cisco, Google and Oracle would not have reached these heights. None of the promoters that we met for the article are saying no to venture capital. But what these companies have proved is that while funds are critical, the more important factors for success is entrepreneurial zeal and good financial discipline. Take the case of Career Launcher, which despite VC money funded its five acquisitions entirely through its own cash flows. The company paid an upfront payment of 40% of the acquisition cost and the rest through earn-outs.

linked to future revenues. Although the Intel investment was intended to provide funds for inorganic growth, the corpus was eventually not used "I belong to that category of entrepreneurs who believes that getting too much money too early tends to make you extravagant. If the company was VC funded at the early stage we may not have had the same control over our costs," says Puri. Career Launcher approached Intel Capital only when the firm was about five-years old. In 2006, the promoters bought out Intel Capital's shares when it wanted to exit the company. By that time Career Launcher had created enough wealth for the entrepreneurs to allow them to do it — unlike when they had first started out in the company.

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emids Technologies Inc. is a leading offshore and onshore outsourcing solutions company to Fortune 2000 companies.  Based in Nashville, Tenn., with support offices in Bangalore, India, emids is an SEI CMMi Level 3 Company with a proven Global Delivery Model.  emids offers its customers world-class information technology and business process outsourcing services, including application development and maintenance, package support, independent testing, quality assurance, health-care claims adjudication, and revenue cycle management.  For more information about emids, please visit www.emids.com.