- Kaushik Gala

Note: The views & opinions expressed in these essays are strictly my own, and not those of any entity I may be associated with as an employee, consultant, promoter, investor, etc.




Technology Venture Investors in Pune


Technology Entrepreneurship in India - Teams

Entrepreneurial traits

Picking cofounders


Technology Entrepreneurship in India - Generating Revenue

Is your business model well-defined?

Your industry's value chain

What is your value proposition?

Which distribution channels will you use?

Who will drive business development?


Technology Entrepreneurship in India - Raising Capital

Venture capital & venture capitalists (VCs)

Corporate venture capital

Angels & angel networks in India

Government support for Indian startups

Proof-of-concept funding

Do you need a business plan?

How much money should you raise?

Startup valuation

Pitching to investors

Figure out the term sheet

Negotiating with investors

Due diligence - A necessary evil

Time to sign the investment agreements


Equities, ETFs, F&O

› Oct 2011: Equity Risk Premium for India

› Jun 2011: Investing in Indian equities


Technology Enterprises in India

› Nov 2010: Technology investment in India - WATER

› Aug 2010: Technology enterprises in India - 3 avatars


Risk Capital for MSMEs

› Mar 2010: Risk mitigation for investors in MSMEs

› Mar 2010: Why don't (Indian) MSMEs get risk capital?

› Feb 2010: Angel investing - Will it work for Indian MSMEs?

› Feb 2010: What's so special about innovative MSMEs?

› Feb 2010: Where do Indian/NRI (V)HNIs invest?

› Feb 2010: Funding options for innovative MSMEs in India

› Jan 2010: Innovative MSMEs in India

Innovative MSMEs in India

(Last revised 19-Feb-2010, Send comments to

(Thanks to @vj81 for feedback.)

I want to estimate the number of innovative enterprises in India, and look into their (in)ability to access risk capital.

Why? Because I'd like to know how many Indian enterprises may offer higher returns than FDs, bonds, mutual funds & stocks. But with a lower risk than a VC funded startup.

Why? Because I believe it is possible to raise & deploy a large amount of risk capital to a large set of Indian companies. $1B+.

Why? Because 95%+ of innovative enterprises lack access to risk capital. And 95% of 'rich' Indians / NRIs lack access to private equity investments in India. That's my hypothesis.

So what? Well, there's a business model in here somewhere.

Definitions & Numbers

I'm mixing up the various terms used to describe relatively young & relatively small (by revenue) companies. These include: startups, Micro, Small and Medium Enterprises (MSMEs), Small Scale Industries (SSIs), new ventures, spin-offs, spin-outs, etc.

Per the 2006-07 census, there are over 26 million MSMEs in India. ~ 97% of these won't show up in MCA statistics since they are unregistered or operate as sole proprietorships / partnerships.

A company is Micro, Small or Medium depending on the amount invested in plants & machinery. MSMEs employ ~ 60 million people (= 4 Mumbais & >70% of employees across India), contribute ~ 20% to India's GDP, and have consistent annual long-term growth rate of 15%+.

Of these, over 98% are 'Micro' enterprises. The majority are 'one-man shows' that provide services to local markets with minimal investment. They use traditional techniques, have no formal management practices and lack access to bank credit.

The numbers are huge from a micro-finance perspective. But I'm looking for candidates for risk capital. Time to narrow down the potential market.

Innovative (M)SMEs

How many MSMEs have an innovative business model or technology, that is fairly scalable? Who knows! Let's make a few random assumptions and pick numbers out of thin air. 'Micro' enterprises are less likely to be significantly innovative given their constraints. That leaves say ~ 0.5 million Small & Medium Enterprises (SMEs) to choose from.

Ignore stuff like product vs. service, urban vs. rural, geography, etc.. Let's assume that at least some % of these 5 lakh SMEs are innovative enough. To qualify, they should have products/services with some 'edge', which provides growth & profits. These SMEs were 'Micro' at birth, and since they are still around, they must be doing something right.

Maybe 2% of SMEs meet these criteria. That's 10,000 innovative (and perhaps risk capital worthy) enterprises across India.

My assumption of 2% may be wildly off, but remember that I left out 25.5 million 'Micro' enterprises. If even a fraction of those get added to the 'innovative' pool, the 10K number suddenly looks small.

Risk Capital for Innovative (M)SMEs

Most MSMEs rely on family, friends & personal networks for funding. Only a select few have access to risk capital from angels, VCs, and certain schemes from government/banks. For example:

  • On average, 100 - 200 Indian companies get VC funding every year.
  • On average, angels & angel networks (eg. Mumbai Angels) fund ~ 50 startups every year.
  • On average, government schemes for startups (eg. DSIR's TePP, TDB seed funds) fund ~ 100 enterprises every year.
  • On average, ~ 50 companies get listed (via IPOs) on our stock exchanges every year. Of the ~ 2000 companies that traded publicly, 80%+ are quite illiquid.
  • On average, bank lending to MSMEs accounts for < 10% of total commercial lending. It's usually in the form of secured, collateralized debt - not 'risk' capital. With personal guarantees from borrowers. And probably only to the 'Medium' enterprises.

By any measure, this is hugely insufficient in the context of my 10K estimate. And it gets worse:

  • The average VC deal size in India is ~ 20 crore. That puts the average pre-money valuation at 40 - 60 crore.
  • To stand a chance of an IPO on the NSE or BSE, a company must ideally have revenues of over 100 crore.
  • While governments & banks may be more open to smaller deals, they offer a different set of challenges - slower processes, risk-aversion, stringent spending terms & conditions, limited exposure to risk capital, etc.

SMEs need to invest 10 lakh - 5 crore in their businesses. In the Indian VC world, this would count as 'seed funding' or 'early stage funding'. It is supposed to be followed by Series A, B, C, ... on its way to a 100-1000 crore valuation. But not every SME is a glamorous, Silicon Valley style, tech startup. Not every SME is addressing a 1000 crore market. Or even a 100 crore market. So all this talk of 'seed funding' is irrelevant.

Bottom-line: There is a tremendous shortage of risk capital - especially in the 20 lakh to 2 crore range - for innovative (M)SMEs.

[Caveat: Then again, how many of these business owners are willing to part with equity?]

For the MBA/VC types, here is what the SAM (serviceable/sellable available market) looks like: 10K SMEs * say Rs 50 lakh per SME on average = Rs 5000 crore = $1B. Maybe much more!

Demand is not a problem. What about supply? Time for Essay #2.