Government isn't playing its role when it comes to entrepreneurs, says Seedfund's Gandhi

One of India’s first early-stage funders, Seedfund Advisors, is getting ready to launch its third fund towards the end of 2014. After two prior, successful funds that raised over $60 million and bred the likes of redBus, Carwale and mydentist, Seedfund Advisors is ready to start all over again.

Co-founder Pravin Gandhi spoke to Firstbiz about the new fund, what Seedfund Advisors looks for in companies and the ideas he thinks will dominate the entrepreneurial space for the next few years.

Please share some details about the new fund…

**Pravin Gandhi:**The investment period for the current fund ends in December, so the new one will come after that. Depends on when there is the right climate. We feel confident the money will come, it’s just there is a lot of gloom and doom about India. It’s best to wait till the political scenario settles and we figure out the best strategy to raise the fund. . .so September-December is perhaps the time frame we will hit the road again.

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How did the idea to start an incubator come about? What has the experience been like?

****PG:****We changed our strategy in our second fund a bit - we took a two-pronged approach. While we do mature deals we also ran an incubator. We took space (in Mumbai) to house four companies and work with them. We do very early stage investing, $100,000 or less, and if they graduate, then the fund would put in more. So we figured out how to create a proprietary deal flow. Some will pass, some will not pass. If they don’t pass they go out.

Our experience with the incubator has been mixed. We’ve had some successes in that they graduated - like mydentist. I think the challenge that we face in India is that the majority of businesses are not IP-driven; they are execution-driven and hence your success depends on how well you execute. The minute you talk about execution of heavy businesses, the team size goes up and that’s not where incubators come in. Incubators are meant to be 5 guys thinking of an idea and then going out and testing it and make something out of it. An execution business has to very quickly ramp up its size - even if you have 20 people you can’t put it in an incubator.

To that extent I think that first, Mumbai isn’t a good place. May be in the next fund we’ll look at Delhi or Bangalore. Real estate is less expensive. Second, there are product ideas you can actually back with 2-3 people teams.

What is the company philosophy when it comes to investing?

**PG:**You have to be careful that the DNA of the fund is focused on helping and mentoring entrepreneurs. If you’re a large fund and you spend 90 percent of your time doing $10 million deals and then go and do $500,000 deals, the organisation will not allow you to do much for that company (the smaller ones). You hope that something will happen. You have to be careful that the guys who are the $100,000 fellows also get the same attention in their early days, just like companies where you invest $2 million.

What do you look for when deciding to invest in a company?

PG: There is no fixed formula. Different markets will have different challenges. We are a developing market. There are many sectors no one even thinks of. One key thing we try to do is that we are not by nature followers of the US. We don’t say that if it works there it must work here. We don’t ignore it but that isn’t the reason to invest.

Second, a company like redBus…most of the funds that were formed by people who came back from the US didn’t think that that was a good idea. To us, redBus was an example of a sector that didn’t exist, you went and did something in it. When you look at the dental chain, you can argue that Indians are not very fussed about our teeth, like the US is. Therein lies the opportunity, that if you could take the dentist near the consumer, then there is a chance that they will come and if you create a transparent, inexpensive but efficient clinic it could work. That is not to say that I wouldn’t do an internet business but there are opportunities in India that require you to do some out-of-the-box thinking.

Is there a particular reason you don’t focus on heavy marketing with companies?

PG: We have all built companies. We don’t believe in spending millions of dollars to acquire customers who are non-monetizable. That isn’t our DNA. Our fundamental thing is when you tell an entrepreneur life is tough, you have to make the money work, you can’t say let’s blow up Rs 5 crore in advertising and get customers and then hope like hell that the customers will draw in more investors. That’s a risk we don’t deal with.

What factors do you consider when deciding how much to put into a company?

**PG:**What we do is we sit with them and figure out how much money they need. Then you want to maximise your ownership but at the same time make sure that the entrepreneurial team has sufficient motivation. So we go through steps of potential fundraising in the lifecycle of the company. We are also very open to rewarding good performance so we will part with equity if they do better than promised. There is no science - just give and take with the entrepreneur so that everyone is motivated. We have to be motivated as well because we have to return money to our LPs.

**What role does Seedfund Advisors take on in the new business?
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PG: We try very hard to behave like we aren’t running the company. VCs must support the entrepreneur to perform. You can’t run the company.

**What changes have you observed in the Indian start-up scene since you began?
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PG: I always complain about India that it doesn’t change as fast as we expect it to or it should. But obviously, the entrepreneurial quality has changed. The whole acquisition of Little Eye Labs is a good sign - someone made something that caught the attention of Facebook. Microsoft is spending money here, looking at incubating companies. A lot that is happening in the ecosystem is good.But the government hasn’t understood the role they can, should and should not play.

Three things have to change sooner than later. You need about more funds over the angels. Second, there needs to be diversity in geography, too much focus on Delhi, Mumbai, and Bangalore. Third, we have to make the country attractive for exits.

**What trends do you see for the next year or two in the entrepreneurial space?
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**PG:**I think analytics, big data will continue to be in vogue; internet and ecommerce with products and services around that. There are lots of unserviced sectors like logistics and healthcare that need a lot of help. I would like to believe education is a space to invest in but we still don’t pay for content.Digital world will be the order of the day. Also, if there is political stability, I think there is a huge market in e-governance.