July 28, 2011

"Startup Financing in India: Then & Now" - Article by Sanjay Anadaram

A sound financial system is the bed rock on which entrepreneurial dreams can be built – within companies as well as without. Access to investment capital and credit financing are critical aspects for any business. Interestingly, in the 100th year of such access in India, it is worth looking back and realizing that it took the efforts of many entrepreneurial, philanthropic and visionary people to achieve all this.

Providing organized professional access to commercial finance in India is at least as old as 21st December 1911 when Sir Sorabji Pochkhanawala set up the Central Bank of India which claims to be the first commercial Indian bank completely owned and managed by Indians. The “Cradle of Indian Banking” - Dakshina Kannada and Udipi districts in Karnataka – saw the setting up of Canara Bank, Syndicate Bank, Corporation Bank, Vijaya Bank, Karnataka Bank, Vysya Bank, State Bank of Mysore among others, thanks in large part to the Swadeshi movement which aimed to cater to the needs of the Indian community. These banks were set up by entrepreneurial and philanthropic individuals with the interests of the community at heart. For example, Ammenbai Subba Rao Pai collected handfuls of rice from each household, pooled it, sold it and used the money as the capital to start Canara Bank in 1906! Syndicate Bank was started in 1925 to cater to the needs of the local weavers after a handloom crisis; Vijaya Bank was started by A B Shetty and others in 1931 to help the farming community. In 1908, Bank of Baroda was established by the Maharaja to serve the people of Baroda with money lending, savings, transmission, and for the encouragement of arts, science, commerce and trade for the people. There are many examples of similar efforts from other parts of India as well.

All these banks were nationalized in 1969 and they started getting again liberated from 1991 onwards.

India has been a capital starved economy for as long as anyone can remember. In the last decade or so, availability of capital has increased for entrepreneurs and businesses. Yet most of this capital has come from outside the country whether be they in the form of private equity and venture capital or from Foreign Institutional Investors in public markets. Domestic banks, government and financial institutions are either inadequately capitalized for funding large projects or are so hamstrung by bureaucracy and regulation that they aren’t able to meet the rising needs of the rapidly growing entrepreneur class.

It is a sign of the maturing of the financing ecosystem that various segments are getting professionally organized and are clearly emerging with distinctive focus areas– angel, early stage and growth. The heartening thing to note is that angel (ie money provided by high net worth individuals who in addition to money provide mentorship and expertise) and early stage capital have, over the past few years, become more widely known and are increasingly becoming the first ports of call for innovative entrepreneurs.

It is therefore important that the efforts of angels and early stage funds that take risk, share the vision of the entrepreneur, mentor and help build companies be rewarded by their investments performing well. It is also important for concerned policy makers and commentators to encourage, by policy and otherwise, fund raising and simplify bureaucracy so that more and more angels and more early stage funds emerge. Media must celebrate the rise of this new category of investors and risk takers and help disseminate learnings and experiences from entrepreneurs, angels and funds across the country. This will set off a virtuous cycle – more angels and early stage funds leads to more entrepreneurs (or is it the other way around?!) which leads to more angels and early stage funds.

It is said that India is a rich country with poor people. It will become a rich country with rich people if all of us who can participate in any way, through any ethical means - by using any of our experiences, expertise, capabilities, resources - actually do so to assist those less fortunate or able but with dreams.

Sanjay Anandaram is a passionate advocate of entrepreneurship in India; He brings close to two decades of experience as an entrepreneur, corporate executive, venture investor, faculty member, advisor and mentor. He’s involved with Nasscom, TiE, IIM-Bangalore, and INSEAD business school in driving entrepreneurship. He can be reached at sanjay@jumpstartup.net. The views expressed here are his own.