Source: The Economic Times
Despite lack of support from investing community, and a high failure rate, early start- ups are increasingly looking at incubators to support their ideas Every year the quantum of investment by private equity and venture capital firms in new and mature companies in India is making a new high. This trend is likely to continue even in the coming quarters and years as there is no dearth of quality investment offering good returns. But what about ideas that are just blueprints or at the lab stage. While there is no dearth of entrepreneurs who come up with bright ideas that they believe have the potential to become the Big Boys of tomorrow, there are few investors who are willing to lay down their money on the table for such plans.
Despite lack of support from investing community, and a high failure rate, early start- ups are increasingly looking at incubators to support their ideas Every year the quantum of investment by private equity and venture capital firms in new and mature companies in India is making a new high. This trend is likely to continue even in the coming quarters and years as there is no dearth of quality investment offering good returns. But what about ideas that are just blueprints or at the lab stage. While there is no dearth of entrepreneurs who come up with bright ideas that they believe have the potential to become the Big Boys of tomorrow, there are few investors who are willing to lay down their money on the table for such plans.
The reasons are not far to see: worldwide statistics show that early stage entrepreneurial activity has a very low success rate. With almost 85% entrepreneurial ideas failing to stand the test of time it is not surprising that established funds don't come forward to support them. Thankfully such a cold reception from the investing community has not put brakes on entrepreneurial activity. In fact today there are more ideas waiting to take wing than at anytime in the past. And these entrepreneurs have the incubation centres at institutes like the IITs to thank for offering to support ideas that could become big companies of tomorrow.
Sample this: at IIT Delhi the Technology Business Incubation Unit (TBIU), under the Foundation for Innovation and Technology Transfer (FITT) started operations in 2000 and since then it has received over 75 enquiries from entrepreneurs seeking an incubator for their ideas. About 50% of these have been actual proposals for assessment while 11 companies have successfully exited the incubation centre. At present, IIT Delhi has six resident companies and two are about to move in IIT Bombay's incubation unit on the other hand has 18 companies at the present moment. These, are companies that have been vetted by IIT experts and now are trying to develop and grow before they venture out into the market.
Incubators offer valuable services besides just space to the these fledgling companies. The TBIU at IIT Delhi for example in addition to subsidised office space, offers access to IIT library, knowledge resources, faculty and even students, who can be roped in for a project. Says Anil Wali, managing director , FITT, "We look at projects which have synergy with the institute. Incubation exercise should have a mutual benefit to the entrepreneur and the institute. During screening we essentially see whether the idea makes business sense. That is, what's the chance of that idea getting incubated and reaching the market." Poyni Bhatt, chief administrative officer at IIT Bombay's incubation unit, echoes similar sentiments saying, "Being in an incubator does mean that the companies are used to hand holding. But that's not what we do here. For the first couple of years, we provide hand holding for fresh entrepreneurs within the incubator, but once they enter the third year within the incubator, we insist that they go about their own way to proceed in the business."
So how does a budding entrepreneur avail of these incubation facilities? Typically three types of entities can submit applications for incubation. These include the alumni or faculty of IITs, any techno-preneur and lastly R&D units of small and medium enterprises (SMEs). Since such companies or ideas might not get attention from established funds and do not have their own resources to support the ideas in the initial stages the incubation unit is a useful starting point.
Says Shailesh Mehta, CEO, Onyomo, a company currently being incubated at IIT Delhi, "The unit provides good access to top end research. We came here as we wanted to have a good level of credibility as far as technology was concerned. With the IIT name, people don't doubt the soundness of the technology we have to offer. Also, we do not have the big buck to give our company a sustained visibility via advertising. Here again being within the precincts of an IIT has helped." Onyomo is a 10 people company and Mehta himself is from IIT Bombay's 1995 batch. After completing engineering he did an MBA and later took up a job with an investment bank in the UK. "But, I wanted to do something closer to my heart and that's how Onyomo took shape." The company helps users provide search on mobiles or internet. Search relates to various consumer categories - say for instance you are new in Bangalore and are looking for a Cafe Coffee Day outlet closest to where you are; Onyomo (which is derived from the first two letters of 'on your move' ) could help. The company is now awaiting commercial launch.
Another company, Mechartes Researchers has been at the incubation facility since 2005. At present, it has 11 people including three alumni from IIT Delhi, two professors, one engineer from Sweden and others. The team came together and started the company after reading about the potential for outsourced engineering services in the Nasscom-Booz Allen Hamilton report. The report stated the market potential for outsourced engineering was $130 billion and the team thought that there is room to create products catering to this market. Mechartes gives a 3D modelling platform to companies and offers to analyse 3D models for desired requirements. Says Saurabh Rohilla, marketing lead, Mechartes Researchers, "I am from the 2003 mechanical engineering batch of IIT Delhi. I took up a job but it did not meet my expectations. But starting the company from a commercially rented place would have been expensive. the incubation centre has given us the right atmosphere for the venture."
They have access to funds - about Rs 12 lakh a year at very low interest rates, office space for which they would have paid in excess of Rs 1 lakh a month if they were outside the TBIU, access to IIT Delhi professors and knowledge resources including the library. Says Mr Wali, "When this started there was a Rs 80 lakh one time grant from the ministry of IT. We also give a seed capital ranging from Rs 5 lakh to Rs 15 lakh to companies here. Here companies are doing pre-commercial activity in a fairly developed idea that needs to be developed further."
The IIT Bombay incubator gets funding from the Technology Development Board for about Rs 1 crore and from the Ministry of Communication and Information Technology for Rs 80 lakh, which is distributed in its incubated companies. "We only give Rs 10-12 lakh per company at a time," Ms Bhatt explains. So what do companies get from IIT-Bombay? Well, much like in IIT Delhi, in addition to the infrastructure, the incubator also provides them with advice on business plans, even helps you pitch to investors. But most importantly it helps you market your product. "IIT's name has a reputation in the market, when our incubated companies, most of whom are fresh start-ups , go to the market without any previous track record; it is this reputation that helps them get their first clients. Even our mentors (who are mostly faculty) help in this process," says Ms Bhatt.
However, the jury is still out on how well the incubation model works. Industry experts say that although this model is good so far as the economics go, the mentors being essentially academics , are not quite state-of-art in terms of hands-on industry knowledge and experience. They work to a current client's mandate and no further. Moreover, the founders being ( previous / current) students, are often 'controlled' instead of 'mentored' by the faculty with their own opinions towards risk. While this acts as a good filter, many creative young minds get demotivated. And thus many desert their projects halfway and in search of more lucrative jobs.
But Ms Bhatt defends this by pointing out that IIT-Bombay's incubator has nearly 60% success rate for companies successfully making it in the market place. Even at IIT Delhi Mr Wali says the success rate is far above the global averages. "They have initial problems, where we guide them on scaling up the process, but once they get the hand of things, most of them make it big in the industry," he says. Interestingly, IITBombay's incubator also runs a virtual incubator, where it does not provide any physical infrastructure but it guides start-ups on other aspects of business. At present it has two companies in its virtual incubator. The interesting point is that when the incubated companies do make a mark in the market the VCs are willing to invest and help them grow further. Perhaps VCs could look at some good blueprints that promise to be the big companies of tomorrow. They got to learn the age old success formula of catching them young.
Sample this: at IIT Delhi the Technology Business Incubation Unit (TBIU), under the Foundation for Innovation and Technology Transfer (FITT) started operations in 2000 and since then it has received over 75 enquiries from entrepreneurs seeking an incubator for their ideas. About 50% of these have been actual proposals for assessment while 11 companies have successfully exited the incubation centre. At present, IIT Delhi has six resident companies and two are about to move in IIT Bombay's incubation unit on the other hand has 18 companies at the present moment. These, are companies that have been vetted by IIT experts and now are trying to develop and grow before they venture out into the market.
Incubators offer valuable services besides just space to the these fledgling companies. The TBIU at IIT Delhi for example in addition to subsidised office space, offers access to IIT library, knowledge resources, faculty and even students, who can be roped in for a project. Says Anil Wali, managing director , FITT, "We look at projects which have synergy with the institute. Incubation exercise should have a mutual benefit to the entrepreneur and the institute. During screening we essentially see whether the idea makes business sense. That is, what's the chance of that idea getting incubated and reaching the market." Poyni Bhatt, chief administrative officer at IIT Bombay's incubation unit, echoes similar sentiments saying, "Being in an incubator does mean that the companies are used to hand holding. But that's not what we do here. For the first couple of years, we provide hand holding for fresh entrepreneurs within the incubator, but once they enter the third year within the incubator, we insist that they go about their own way to proceed in the business."
So how does a budding entrepreneur avail of these incubation facilities? Typically three types of entities can submit applications for incubation. These include the alumni or faculty of IITs, any techno-preneur and lastly R&D units of small and medium enterprises (SMEs). Since such companies or ideas might not get attention from established funds and do not have their own resources to support the ideas in the initial stages the incubation unit is a useful starting point.
Says Shailesh Mehta, CEO, Onyomo, a company currently being incubated at IIT Delhi, "The unit provides good access to top end research. We came here as we wanted to have a good level of credibility as far as technology was concerned. With the IIT name, people don't doubt the soundness of the technology we have to offer. Also, we do not have the big buck to give our company a sustained visibility via advertising. Here again being within the precincts of an IIT has helped." Onyomo is a 10 people company and Mehta himself is from IIT Bombay's 1995 batch. After completing engineering he did an MBA and later took up a job with an investment bank in the UK. "But, I wanted to do something closer to my heart and that's how Onyomo took shape." The company helps users provide search on mobiles or internet. Search relates to various consumer categories - say for instance you are new in Bangalore and are looking for a Cafe Coffee Day outlet closest to where you are; Onyomo (which is derived from the first two letters of 'on your move' ) could help. The company is now awaiting commercial launch.
Another company, Mechartes Researchers has been at the incubation facility since 2005. At present, it has 11 people including three alumni from IIT Delhi, two professors, one engineer from Sweden and others. The team came together and started the company after reading about the potential for outsourced engineering services in the Nasscom-Booz Allen Hamilton report. The report stated the market potential for outsourced engineering was $130 billion and the team thought that there is room to create products catering to this market. Mechartes gives a 3D modelling platform to companies and offers to analyse 3D models for desired requirements. Says Saurabh Rohilla, marketing lead, Mechartes Researchers, "I am from the 2003 mechanical engineering batch of IIT Delhi. I took up a job but it did not meet my expectations. But starting the company from a commercially rented place would have been expensive. the incubation centre has given us the right atmosphere for the venture."
They have access to funds - about Rs 12 lakh a year at very low interest rates, office space for which they would have paid in excess of Rs 1 lakh a month if they were outside the TBIU, access to IIT Delhi professors and knowledge resources including the library. Says Mr Wali, "When this started there was a Rs 80 lakh one time grant from the ministry of IT. We also give a seed capital ranging from Rs 5 lakh to Rs 15 lakh to companies here. Here companies are doing pre-commercial activity in a fairly developed idea that needs to be developed further."
The IIT Bombay incubator gets funding from the Technology Development Board for about Rs 1 crore and from the Ministry of Communication and Information Technology for Rs 80 lakh, which is distributed in its incubated companies. "We only give Rs 10-12 lakh per company at a time," Ms Bhatt explains. So what do companies get from IIT-Bombay? Well, much like in IIT Delhi, in addition to the infrastructure, the incubator also provides them with advice on business plans, even helps you pitch to investors. But most importantly it helps you market your product. "IIT's name has a reputation in the market, when our incubated companies, most of whom are fresh start-ups , go to the market without any previous track record; it is this reputation that helps them get their first clients. Even our mentors (who are mostly faculty) help in this process," says Ms Bhatt.
However, the jury is still out on how well the incubation model works. Industry experts say that although this model is good so far as the economics go, the mentors being essentially academics , are not quite state-of-art in terms of hands-on industry knowledge and experience. They work to a current client's mandate and no further. Moreover, the founders being ( previous / current) students, are often 'controlled' instead of 'mentored' by the faculty with their own opinions towards risk. While this acts as a good filter, many creative young minds get demotivated. And thus many desert their projects halfway and in search of more lucrative jobs.
But Ms Bhatt defends this by pointing out that IIT-Bombay's incubator has nearly 60% success rate for companies successfully making it in the market place. Even at IIT Delhi Mr Wali says the success rate is far above the global averages. "They have initial problems, where we guide them on scaling up the process, but once they get the hand of things, most of them make it big in the industry," he says. Interestingly, IITBombay's incubator also runs a virtual incubator, where it does not provide any physical infrastructure but it guides start-ups on other aspects of business. At present it has two companies in its virtual incubator. The interesting point is that when the incubated companies do make a mark in the market the VCs are willing to invest and help them grow further. Perhaps VCs could look at some good blueprints that promise to be the big companies of tomorrow. They got to learn the age old success formula of catching them young.
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