Huge divide in fund-distribution between metro and non-metro cities

The success story of the “start-up economy” that has seen a significant mark-up in the five years past also has its dark side, according to the findings of the Indian Venture Capital and Private Equity Report 2012, brought out recently by the IIT-Madras.

The report notes that the recent years have been good in terms of incubation support for aspiring entrepreneurs as well as spurring a growth in the number of angel investments backing good ideas.

Abnormalities

However, the downside is the abnormalities: though incubation centres are spread out across the country, most of the angel and advanced funding (like venture capital) are focussed heavily in the six metros; and the distribution is uneven in geographic positioning, too. The south and the west get more support than the north and the east.

The report focussing on “incubation support and angel funding for start-ups” is the fourth in the series brought out by the institute’s Department of Management Studies. The previous reports have focussed on the other aspects of venture capital and private equity. For the current report, IIT-Madras took into account 159 incubation facilities nationwide.

Gaining momentum

The report notes that though incubation centres have been working in the country since 1988, it is only since 2007 that the country has witnessed a substantial growth. In a span of 25 years so far, nearly 60 per cent of the incubatees have been supported in the past five years.

Likewise, the period from 2009 to 2012 has accounted for 64 per cent of the angel investments (the primary stage). Direct government investment support programmes have seen a significant growth since 2000.

The bulk of angel investments is concentrated in IT and IT-enabled services, non-financial and consumer services, and telecom, media and entertainment. These sectors account for 88 per cent of the investments.

Unequal distribution

Bangalore and Mumbai alone account for 62 per cent of all angel investments among the metros. The investments have stood at 47 per cent in the south, 35 per cent in the west; 17 per cent in the north and 1 per cent in the east.

A. Thillai Rajan, associate professor at the Department of Management Studies, IIT-Madras, who co-authored the report with Ankit Jain, said the inequitable distribution was not healthy and surprising even, given that the first of the incubation centres was set up in the east.

Another issue that required attention was the skewed ratio of angel investment to venture capital, especially in the metro cities. While in the classical Silicon Valley model, where such investments were pioneered, the ratio would be something like 1:4, in India it was more like 1:1.5. At the outset, this might appear to be good, but it was not.

“This means there is excessive advanced level funding available for the start-ups that manage to break through. It could potentially lead to a bubble scenario like the one we witnessed with the dotcom era,” Mr. Rajan said.