All of them are raising anywhere between $5 million and $20 million for their fund and will invest between $100,000 and $500,000 in startups, which is where the gap really exists today. "The whole segment is being ignored because VCs (venture capitalists) want to only invest in companies that have reached a certain level and would potentially offer superior returns at lower risk," says Blume ventures' Reddy. The economics of managing a $100-200 million fund do not allow VCs to invest smaller amounts. For them, the time and energy spent on a $500,000 deal and a $10 million deal is the same.
The venture capital industry went through a strange phase in 2006 and 2007. VC firms were awash in cash and were literally forced to deploy capital. In effect, startups were raising an average of $3-5 million at that time. "This was probably much more than they wanted or could absorb," says Mirchandani.
Raising too much capital at the initial stage might turn into a case of misspending on what is not required for the startup even before the business has been properly validated. "In India , you need to put in a small amount of money at the initial stage to see if the model is working," says Sachin Maheshwari, director at Zephyr Peacock, an investment firm with a focus on India. Let the company fail early before spending too much money, he says. And if it does make the mark, it could be ready for bigger investments, he adds.
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