ALTERNATE ROUTE

Growing Sans VC Money

Radhika P Nair and Biswarup Gooptu take a look at some of the most popular strategies that startups have used to conserve and effectively use funds when the supply of venture capital is scarce

That it takes more than money to build a business is a well-known truism. But the fact is that money is a crucial input for an entrepreneur. When all indications point to a restricted supply of venture capitalin 2012 funds invested about $700 million (about 3,820 crore), a little over half of the previous yearstartups will need to make the rupee stretch. ET takes a look at some of the most popular strategies that a clutch of startups have used to conserve and effectively use capital. BOOTSTRAP Being frugal can impress both bankers and prospective investors. Phanindra Sama, cofounder and CEO of six-year-old online bus ticket booking venture redBus, runs a spartan business despite raising $1 million from Seed Fund and other investors early on. The first office for the venture was the living room of the flat Sama shared with his two co-founders and the first three employees of the firm. We saved a lot of money, says the engineer who graduated from the Birla Institute of Technology in Pilani. redBus uses open source software instead of Microsoft Office and Windows operating system, leading to savings of around 20,000 per computer. It is this hardscrabble approach that has helped the startup grow by 250 % year-on-year and notch up sales of over one crore bus seats. An entrepreneur who has bootstrapped his venture before going to a VC shows he is committed, says Bharati Jacob, cofounder at Seedfund. We like entrepreneurs who are frugal and who know where to cut costs and where to spend money. There is much to gain from a tight-fisted approach, as entrepreneurs can delay dilution of equity and gain better valuations when they eventually seek outside capital. Asha Satapathy, founder of 14-month-old social media marketing startup Fresco Social, uses social media sites and blogs to spread the word about her firm. She bagged her first client without spending any marketing dollars and now helps organise Bootstrap Bangalore, a support group of city-based startups who do not want or are yet to receive venture funding. GO FOR SMART MONEY The colour of money is as important as the amount raised. The right angel investors who give time, money and expertise can be just the protein boost for a young venture. Nidhi Saxena, founder of Mumbai-based contract research organisation Karmic Lifesciences, has raised multiple angel rounds of funding amounting to $2.5 million from Indian Angel Network, Mumbai Angels, Small Industries Development Bank of

India (SIDBI) and BasilGrowth Corporation. Saxena, who is targeting over $10 million in revenue in fiscal 2013, says formal venture funds would not have given her the small amounts she needed.Four-year-old Capillary Networks also relied on individual angels like Naresh Malhotra and Rajan Anandan before raising $15.5 million in venture capital last year. For each of our two rounds of angel funding we got an anchor investor, who would in turn bring in other angels, says Aneesh Reddy, CEO of the firm. Business plan competitions organised by companies like Qualcomm Ventures, Microsoft and Intel are also a good source of capital, as they offer a few lakhs of equity-free prize money to winners. DEBT OPTION For entrepreneurs who have raised at least one round of funding and who do not want to dilute their stake too soon, venture debt is a viable option. This new option comes as a term loan provided solely to venture capital-back startups. SVB India Finance, a subsidiary of Silicon Valley Bank, disburses loans of $1-$5 million for a term of six months to three years and has completed over 40 transactions since 2008. This type of collateral free debt is highly useful for new-age startups as most of them will not qualify for a traditional bank loan, says Sunny Balijepalli, founder of Zoomin, who got a 8 crore term loan from SVB in December 2012. Apart from SVB India Finance, SIDBI also provides subordinated loans, which are loans that need to be repaid only after repayment of all other loans in case of closure of a company. GET PAYING CUSTOMERS FAST Customers are a firms ultimate investors. It is happy customers who spread the word around, says Rohith Bhat, founder of mobile application developer Robosoft, that is yet to raise a first round of venture capital and is targeting 50 crore in revenue in FY2013. An entrepreneur must focus on cash flows right from the beginning and not just on product development. We made the mistake of not breaking up a large platform into smaller units that would have earned revenue for us faster, says Sanjay Goel, founder of Srishti TechNet, which sold its mobile marketing platform MobiVite to One97 in December last year. MONETISE TECHNOLOGY Product startups can also sell or license out some of their products to bring in cash. If you are a patent-holding innovator, you can license out your Intellectual Property to companies who will use it in their products. Bangalores Ittiam Systems has IP related to processing power and audio of smart phones and tablets, which it licenses out to mobile and tablet manufacturers. In 2012, the company crossed $20 million in revenues with royalty income accounting for 35%. Another Bangalore-based venture Mango Technologies sold two of its software products, a mobile handset user interface (UI) software and a PC-based UI

customisation tool kit, to wireless semiconductor major Qualcomm in 2010. Goels company is also due to earn royalties from One97 for revenues earned through MobiVite. However, ensuring the best deal is critical while parting with IP. Focus on cash flows and the VCs will follow, says Goel. Smart Tips Rent a house that doubles up as the office, saving money Hire interns, as stipends are much lower than employee salaries Reach out to your alma mater, incubation cells might offer loans, grants or funds and even offi ce space Use public transport and car pool with co-founders Open source can help startups cut technology cost by 50-70% Use Skype and video conferencing to talk to partners, clients based outside your home city Use free social network sites, blogs to market your product and reach out to clients Staying Ahead by Staying VC-Free The Robosoft Story Develops mobile applications for itself as well as for clients FOUNDER Rohith Bhat FOUNDED IN 1996 EMPLOYEES over 400 OUTSIDE FUNDING None TARGET REVENUE FY 2013 50 crore REASONS FOR SCALING UP WITHOUT VENTURE FUNDING Found a niche that did not have much competition. Got customers right from the beginning; received support from Apple Took bank loans when funds were required Minus venture funding 1 Zoho Corporation (India) 1996 Provides tools for business productivity FOUNDERS Sridhar, Kumar & Sekar Vembu (Kumar & Sekar have since exited) SIZE OF COMPANY 7 million users Vembu hopes to make Zoho a billion-dollar venture in the next few years 2 Nimbus Data (USA) 2006 Provides flash memory storage to enterprise customers FOUNDER Thomas Isakovich SIZE OF COMPANY 200 + Enterprise customers in 18 countries 3 Eat24hours.com (USA) 2008

Web and mobile food delivery and takeout platform FOUNDER Nadav Sharon and Haim Erez SIZE OF COMPANY $150 million Target turnover

We used open source technology wherever we could as it helped save money. Initially the team resisted, but they got used to it and we still use open source quite a lot PHANINDRA SAMA Co-founder, redBus

Banks give loans if you show them traction and entrepreneurs should not get intimidated by all the questions bankers ask ROHITH BHAT Founder, Robosoft Technologies