The largest industry is the one that’s the least disrupted: #FinTech hackathon

4 comments Written on February 13th, 2014 by
Categories: GuestPost, Startups

This is a guest post by Mukund Mohan, on an event in Bangalore that involved technology and finance. Mukund is the Director of Microsoft Ventures, which runs a fund, an accelerator and startup engagement programs globally. You can follow his blog on startups at Best Engaging Communities.

Mukund is first from the right


On Sunday I had a chance to judge the #hackafin hackathon at the NASSCOM 10K startup warehouse. While many other industries are going through immense disruption globally, (Books - Kindle, Cabs - Uber, Hospitality – AirBnB) the innovation in Finance is largely at the fringes (Second Market, Angel List and smaller companies).

The Yodlee team provided a set of API’s and training for the 100+ entrepreneurs and hackers that attended the 2 day event. There were 16 teams that participated at the hackaton. My experience has taught me that hackathons that focus on a specific vertical tend to get far fewer attendees (example the travel hackathon tHack organized by Tnooz) but the level of sophistication of the apps themselves is very high.

Overall the conversion of hackathon participation to entrepreneurial ventures is fairly low (2-4%) and in India it is much lower (0.5 -1%). Which means of the total of 60+ hackathons held in India in 2013, only 7 hackathons had startups created after the event. On average a total of 23 teams participated, so about 1400 hacks and ideas were generated. Of these 1400 hacks, only 11 ended up becoming startups, which resulted in a conversion of 0.7%. The positive news is that hackers are participating in droves, with the average attendance reaching 85 developers per hackathon.

There were some very interesting ideas that the hackers presented at #hackafin. Here the top 5 that caught my eye, in no particular order.

  1. El Pancho (FinUp). Imagine you are a startup and an investor is “interested”. The investor wants to get some initial due diligence before they decide to offer you a term sheet. One of the due diligence items is to check your finances. This online service actually automates the generation of your income and expenses based on your bank statement and gives them a pre-release (not pro forma) version of your finances. It should help speed the process of your due diligence with your investor.
  2. Thirukkural: This app provides a simple voice to text interface to your finances. Instead of logging into your credit card website to get your card limit, or log into your bank account to get your bank balance, or log into your DEMAT account to get your asset allocation, you can just ask it simple English questions by speaking to it. For example: say how much did I spend last month and it collects information from all your credit cards and debit cards and gives you one simple answer. Pretty neat. They were a crowd favorite and the winner of the hackathon as well.
  3. iCredit: Getting credit in India is hard. Managing a credit score is limited to a handful of providers. This site helps you build your credit history by looking a more granular level at your transactions (company not individual) and building your credit worthiness as a company. This tool could be used by credit assessors or loan processors to determine credit worthiness or risk.
  4. DI: With this app, you choose the type and issuer of your credit card. You don’t have to enter your credit card information. Based on the location and your cards, it will tell you what the local deals are available for your card. If you select from a list of merchants based location, it will also tell you the card to pay with so it gives you the best points / offers etc.
  5. Bullfinch: This is an offer app. You download this app to your phone. It looks at incoming SMS and other spending data from Yodlee to provide proactive offers for you. E.g. if you have spent INR 700 at Pizza hut in Benson Town one week and the next week you spend INR 800 at Pizza Corner, then you might get a coupon from Dominos for Pizza the following week.

While I think most of these won’t be actual companies, many will end up being just good ideas that are part of a product, the fact that we have so many creative folks thinking of disrupting the existing way of doing business is excellent.

Capital Mind Note: We are kicking ourselves for not attending.

SEBI Finalizes Angel Fund Regulations

No Comments » Written on September 17th, 2013 by
Categories: Startups, StartupTax

SEBI has notified final regulations for angel funds. I have noted many of these in the past, so for background:

In brief, angel funds are now only allowed as an “Alternative Investment Fund” which requires registration.

  • Angel funds must pay Rs. 200,000 to register.
  • Such funds can raise funds of at least 25 lakh (2.5 million) per investor, and a minimum corpus of Rs. 10 crores. (100 million)
  • Can you be an angel investor? As an individual, you need to have a 20 million or 2 crore “tangible” networth apart from your primary residence.
  • Also you need to either have had startup investment experience, have been a founder of more than one startup or have 10 years of experience as a senior management executive.
  • Or if you’re a company, you must have a Rs. 10 crore (100 million) net worth.
  • Angel funds cant invest in companies where control or management is with relatives of ANY angel investor. Relatives means [children, grandchildren , brothers, sisters] (and their spouses), or parents. Oh, and such people can’t be directors of any invested company either (before the investment) and cannot own more than 15% of equity.
  • Funds must be raised within three years.
  • Investments in any company must range from 50 lakh to 5 crores.
  • And money is locked in for three years. This is strange but obviously overridable in case of an acquisition. (Come on, SEBI is not a dolt, they will grant permission in case that happens)
  • You can’t have more than 49 investors in an angel fund.

Basically, the small investor is out of the ambit of these rules. Does that mean the small investor can’t invest? Of course he can!

Just get a convertible debt deal if you’re worried about startup tax. Or if you’re the real risk taking kind, at the small level (sub 50 lakh), don’t even bother about startup tax.

Links: Potash De-Cartels, IIP Shadiness, Redbus-ted Exits

No Comments » Written on September 13th, 2013 by
Categories: IIP, Links, Startups

Pavan Srinath tells us about the breakup of the Russian-Belarusian Potash Cartel:

Two big cartels control the global potash trade: the first being BPC, a joint venture formed by the Russian company Uralkali and Belarusian Belaruskali. The second is Canpotex: an association of three Canadian mining companies. Together they controlled about two-thirds of the supply and ensured reasonably high prices in the global market. This is now under threat after BPC broke apart. Any rapprochement between Uralkali and Belaruskali was ruled out in late August when Belarus detained Uralkali's chief executive officer and charged him with abuse of office. This has since escalated into a diplomatic row and a trade war with Russia, with the latter causing disruptions in oil and milk supplies to Belarus.

On the other side of the world, the Canadian cartel Canpotex is in trouble from another source. BHP Billiton, the world's largest mining company, is looking to enter potash mining in a big way through the acquisition of a $2.6-billion undeveloped mine in Canada called the Jansen mine. BHP Billiton wants to distribute the potash independent of the Canadian cartel and thus poses a direct threat to its continued existence.

This brings prices down from $400 a tonne to $300 a tonne. India is likely to import 35 lakh tonnes (which would mean a $1.2 billion import bill, mostly subsidized). A 25% drop can save us $300 million in imports, but then it seems we have long term contracts that don’t allow this easily.

For the IIP data, Business Standard wonders about the IIP data: (Note: I’d mentioned that the garment production data was very high in July)

For a few months, even as the overall index suggested stagnation, the garments segment seemed to be performing spectacularly. It might be expected to benefit even more in the new currency scenario. While it did not grow as impressively as in months when the rupee was stronger, it was one of the fastest growing segments in July, clocking 44 per cent. However, as in previous months, there appears to be something of a contradiction between this and the performance of the textiles segment, in which production actually declined by 0.3 per cent in July. So, as before, one might wonder where the cloth to produce all those garments is coming from.

The correlation of “textiles” to “garments” was 0.44 in December 2012, and is 0.26 now, so something strange indeed has happened.

In a note about the Redbus acquisition, it becomes apparent that things weren’t all that perfect in acquisition land, as senior members prepare to exit.

A large part of this exodus may be – from what we’re hearing – because of the fact that employees aren’t pleased with the way Employee Stock Options were dealt, as most of the tangible gains from the acquisition have gone to the founding team (+ few very selected ex-employees, not more than 3 in number). That is, the core group and not employees, who must have obviously been sold the dream as well.

An acquisition of 800 cr. (the number’s not confirmed, by the way) could be through a combination of stock and cash. Since the acquirer (Ibibo) is unlisted, the VCs would have demanded a good amount of cash. If things were done fairly, everyone would have the same proportion of cash and stock.

But in many cases, things don’t work like this. Let us assume only Rs. 100 cr. in cash was paid (the rest was stock). Due to complicated agreements and participating-preferred clauses, the main investors would have taken a bulk of this cash. (A participating preferred agreement could say I get at least 3x my investment, and then I participate in the rest. The cash goes to pay for the 3x, they participate in stock)

The remaining small amount of cash goes to whoever’s already got shares (founders). The VCs, option holders and founders get the rest of the compensation in the acquiring company’s stock. Which, most likely, is vested over a longer period. This ticks off the stock option holders because they don’t get anything from the acquisition, while they perceive the founders got something.

If this is the case with the redbus story, it comes to an interesting twist. Whatever the non-founder employee's argument – I don’t agree with it because the founders took greater risks, but still – they have the option to get up and leave. And that’s what they are doing. While this is an ecosystem issue (why will people trust options in startups anymore?), this still means one simple thing: not enough people are making big money off Indian startups.

The Failure Of Financial Web Startups

16 comments Written on July 13th, 2013 by
Categories: Startups

This is going to be a long post.

Investopresto, a finance portal, shut shop a couple of days back. They follow other illustrious startups to create financial web sites and eventually run out of steam, like , moneysights, moneyvidya and many others. This is tragic, and even more to me as I co-founded and shut down Moneyoga three years ago.

Hasn’t Anyone Succeeded?

Some may say the lack of success is the no product-market-profit fit, and others will say it was the lack of funding. These are strong contenders for reasons, but let’s stop right here and look at the successes.

  • Moneycontrol has won the media battle. With decent , video from its group company CNBC-TV18 and an enormous amount of publicity. While I’ve heard that they are independently profitable, the company they are in (Web18) has been unprofitable for most of the last six years. And they can raise money at the drop of a hat.
  • Value Research Online has lasted more than 10 years as a mutual fund information site.
  • Jago Investor has a personal portfolio advisory and coaching service; Manish and his partner have build a great business, even if it’s not one of enormous scale yet.
  • Zerodha is doing well. just raised another Rs. 20 crores, which might not mean they are profitable, but at least they’re not out. Similarly, Policybazaar raised another round recently.

Other current players:.

  • Blufin has an extraordinary board and team.
  • MoneyWorks4Me is strongly pushing their subscriptions.
  • Scripbox has entered as a mutual fund intermediary that makes investing simple.
  • PPFAS – not exactly a startup, but still – has just set up a mutual fund.
  • MProfit is selling a great product (even free) to help manage portfolios.
  • Perfios intends to become your personal financial helper.

So why don’t people succeed?

There is just one reason. That they don’t make money, period. You need money to run a business (and then, profit). You can get that money by “financing” cash flow – where you raise equity or debt to pay the bills. Or you can survive on “operational” cash flow.

Financing wise, life is tough. We are in a different zone with startups today. Some will never make money but are in so much demand they can raise how much ever they want. Like eCommerce a few years ago, like Payment Gateways in 2013 and like dotcoms in 1999. The financial industry is not a hot one. So it will have to make itself worthwhile by making operational money instead.

Operationally, you have to find revenue. It’s not easy, and the barriers to entry are small. Revenue is anathema for most web startups, and their cost structures are so inflated it’s difficult to make revenue that is enough. Staying small and lean helps, but a hard-nosed focus on revenue is just as important.

What’s with revenues?

You can make money in multiple ways with a financial site.

  • Advertising. Print media stalwarts like Dalal Street Journal and Capital Markets, who run a lean shop, have thrived. So have the TV giants. In the online world Moneycontrol and (surprisingly) Yahoo Finance and Eco Times close for company. These are big established media players and to beat them will need more than a fancy looking product. Adsense gives you nothing.
  • Leads: Some financial product players pay for references.  Unfortunately, this model has been tried and wasted as the per-lead rates are low (as low as Rs. 10) and regulation cuts out middlemen. PolicyBazaar has an innovative offering here.
  • Transactions: Brokers like Zerodha and intermediaries like FundsIndia make money off transactions you make on their platforms. The market size here isn’t very big and customer attrition is very high.
  • Technology:  Retail trading software like Amibroker are famous and make great revenue. The big trading software giants in India are Financial Technologies and Omnesys. MProfit is .
  • Data: Reuters and Bloomberg rake it in, selling data. In India, there’s Value Research, selling data and analytics like ratings as do Global Data Feeds. Business plays like CMIE, Dion Global, Tickerplant and CM Online have stayed.
  • Subscriptions: The barrier to entry here is that unless you’re well known, no one will bother.
  • Education: Courses, certifications and placements. Since SEBI requires players to spend a part of their managed asset fees on investor education, there are opportunities here.
  • Money Management: Start a PMS, Become a fund manager, start an AIF Hedge Fund. This avenue may be lucrative if you have the right strategy, though it needs a higher amount of capital to start.

Most players want to be in the media space. The rest are sparsely populated.

But the big play guys who have gotten trampled are supposed to have:

  • Great UI/UX
  • Give you great access to data (bought in raw form from players like Dion/Tickerplant)
  • Rudimentary but great looking screeners.
  • Simple analytics like debt-equity allocation charts.

These are unfortunately, not the pain points India has, that people will pay for, or that advertisers will line up for.

I will live with horrible UX if it solves a real problem. (People using IRCTC, India’s largest ecommerce site, do that regularly) The data from Dion/Tickerplant is often outdated and sadly, wrong. The screeners don’t give you enough to actually make a trade. These don’t solve a serious problem just yet.

The Pain Points

Can anyone solve the KYC and document problem? Every darn financial instrument needs a KYC, mostly with the same documents – ID-proof, PAN Card copy, Address Proof and so on. Some need an “in-person verificiation”. Who’s tried to solve this? CAMS/Karvy have a business solution to digitize docs. Yes bank recently allowed you to upload documents to open an account. In person verification is done by users over a video link. These aren’t holistic but are at least attempts to solve a serious problem.

Cutting through the bullshit. Most financial products are badly designed, or missold. You’re never told what you need to know in simple terms. You’re never told that if you don’t bother to understand this product, you should not invest. You’re never told the negatives of the financial product you’re pitched – and there is no easy way for you to find out.

The lack of an integrated trading software. Traders are a big market – not because of numbers, but because they’re at the market every day. Abroad they get great tools to analyse, visualize and trade all at the same time. Yes, give me data, but allow me to trade as well. Current broker web and application interfaces are rudimentary. This segment can only be handled by a brokerage, because of the stranglehold on third party software by the likes of Omnesys and FT.

Mobile Market Data and Analysis are currently in a different era. If you want the “fundamentals” or any advanced charting you have to jump through hoops.  Fixed income, currency and options markets are almost absent in whatever few mobile interfaces we have. This is a pain point if you consider how much time people spend travelling and that markets now work for longer hours than ever before.  

The pain points are NOT: I want to see great looking UI. Or that I want a faster web site. It’s not the lack of a “financial social network”. These are great ideas but there are bigger problems to solve first. No one I know cares – and while anecdote is not fact, the players who focussed on these elements are getting left behind.

The Problem

Financial application companies in India need to think smaller. Because the market isn’t that big. Probably a million traders, and probably two million investors or so is the total addressable market size.

It’s fashionable nowadays to think only big. Address the 100 billion dollar market. You have a limited runway and most startups fail, so why not try to hit it big? This is sane advice but if you have a niche that you can address and they want a product, it is still worth your while.

What do you want to make out of it really? Change a few lives, make about 20 crores of your own money? You could do that if you build a company worth 50 crores – and an acquisition of this size is quite achievable. If you can think smaller, it might help; plus, all those big thinking players are running out of market size in the financial space.

But this necessarily means standard angel investors or VCs can’t be bothered. So what? Most niche industry investments happen through industry players anyhow. Most angels and VCs I know will happily admit they don’t know a darn thing about the stock market.

You might say people just aren’t interested in personal finance or stocks.

But people aren’t interested because, like Santosh of Moneysights reminded me of what I told him, people are getting 10%+ increments per year and 40%+ when they change jobs. Who cares about saving and investing when you’re getting that kind of income change? Anyhow – that is just an excuse.

India is a tiny investing demographic. It could change tomorrow, it could take 10 years. You just don’t know. No one was buying online in 2002. Suddenly everyone is today. So the financial web site that succeeds will, like ecommerce, have to stick around.

Real estate is both an investment and a consumption good. If it’s your first house, you spend so much on it and take a large loan on, so you don’t have enough left to really invest. Insurance is usually hard sold as a tax free investment, and so people pile on; and that leaves a bad taste so they get wary of everything else.

Regulation could be a problem or a benefit. Strong regulation is needed; too many people are cheated in this business. Mutual fund commissions have been cut because it’s universally accepted that such commissions shouldn’t be built into the product, they should be charged for separately. The insurance industry sees huge misselling, and with their regulated expenses, rules are framed to ensure that investor money doesn’t “leak” out, say by giving big referral commissions to a bank owned by the same group. Brokerages have crippled the system before, so they’re looked at with an eagle eye. Media plays aren’t deeply regulated yet, but they are getting looked at.

The regulator is not the problem, though people like to blame them. The marketplace thrives even when there is deep regulation (the largest growing sector in India has been banks, and they are the most regulated industry in the country). 

The underlying issue is that you have to stick around for a LONG time to make money. Even in the US, Investor's Business Daily (IBD) turned profitable after 19 years.

The Problem isn’t just Indian

Worldwide, financial websites haven’t done all that well. I’ve seen tons of people startup but not make it too big; and the size of even these aren’t much.

One success story was Wallstrip, but it sold at a $5m price tag, which many people think is too small. was one of the first successes in the space, selling for $35 million in 1999 to by James Altucher was sold to TheStreet for $10 million. The most famous of them – – listed at a $1 billion valuation in 1999. Now it’s valued at $60 million, 14 years later.

Thinkorswim (a discount broker with a fabulous trading tool) and Wealth-Lab (a system trading software) were acquired by larger players recently. Motley fool ( is a private company, and supposedly reasonably profitable.

(Of course, sold at a fantastic $180 million valuation to Intuit)

However most others are either in their early stages, or struggling to find a large exit. The market for traders isn’t that big. Investment gestation periods are long. Transactional plays are expensive.

The struggles are worldwide. Human traders are being replaced by computers and large firms are taking over the action from the small trader outfits. That means it’s not a game of number of investors, it’s a game of the amount of money – and that’s not a game a financial website can play that easily.

The Answer.

I wish I knew. (But I wouldn’t tell you)

So Is This The End?

Of this post, nearly. But not of the industry. It will come back again, once we’re off the growth path and people will need to learn to invest their money rather than depend on the massive inflation/GDP growth push in the last decade.

I’m in the financial domain, so my interests are vested, but I’d like to say there is a lot more to come.

The lack of success doesn’t mean no one will succeed. It’s not that this company was too early. Or that the market isn’t great. Or that investors won’t put in money. Some of us failed in our execution, that’s all.

Manish Jain (MProfit) has it right:

A startup’s sole purpose is to figure out the market and create a product for it. The question is whether the need for such a tool exists or is it just a mirage?

Soon, one of us will succeed, and that will change the game. Till then, we’ll just have to struggle and fight.

Disclosure: Investopresto and MoneyWorks4Me have advertised on Capital Mind. I’m an advisory board member of Zerodha. Many of the companies mentioned have good friends working with or founding them.   

Angel Fund Guidelines: Helps the Superangels, Keeps Out Smaller Investors

No Comments » Written on June 26th, 2013 by
Categories: SEBI, Startups, StartupTax

SEBI has introduced new guidelines for Angel Funds. As I’ve said recently, this is an absolutely important requirement in order for startups to avoid the “Startup Tax” (, a tax regulation that classifies investment as “income” if it is at a premium to the “par” value of a share of a company.

(Read the free Startup Tax e-Book)

The tax laws allow angel funds to skirt this rule, but what an angel fund actually means was left to SEBI. And this is what SEBI has said, in simple terms:

Angel funds a sub-category of SEBI AIF Cat-1, Like Venture Capital Funds with Only 25 Lakh Minimums

The SEBI Alternative Investment Fund (AIF) regulation is what allows pools of capital to be used in India to invest in anything. AIFs include Venture Capital Funds (VCFs) as a Category 1 player. An Angel fund will be a sub-category under the definition of VCFs. This sounds complicated, but we’ll get to that.

Other AIF investors, including those in VCFs, need to put in at least Rs. 1 crore (10 million) each.

But for Angel funds, the requirement per investor is only Rs. 25 lakh. (2.5 million) This amount can be amortized over three years, so the investor can spread the money over a period.

My view: AIF Cat-1 regulations are a pain. You can’t get new investors once you’ve launched a fund. (Close-ended) Risk and portfolio reporting requirements are detailed, with items like foreign exchange risk, detailed valuation methodology etc. Investments must be “revalued” every six months. There needs to be an office and detailed record keeping, that SEBI can inspect on demand.

However, there’s no other alternative, so the regulatory cost must be paid.

Angel Investors Must Meet Criteria for the Badge

Want to be an angel investor? You gotta have

  • Early stage investment experience, or
  • Been a serial entrepreneur, or
  • Had 10 years experience as a senior management executive


  • Have Rs. 2 crore (20 million, or $350,000 ) in tangible assets.
  • Companies that want to become Angel investors would need Rs. 10 cr. (100 million) net worth

My View: The entry criteria would have qualified me (I’m a serial entrepreneur) but I don’t have the Rs. 2 crore tangible net worth. That means I can’t be an investor in an angel fund, which makes total sense: The Rs. 25 lakh minimum, with a net worth of less than Rs. 2 crore, is probably a good idea.

If people like me want to invest in a company and can’t meet the above criteria, they should just go in on their own and not create a SEBI regulated AIF entity called a venture fund. Yes, the tax issue can be skirted – if you invest using a convertible debt instrument, it’s just a loan convertible to debt later at a certain valuation.

If you co-invest along with an “Angel Fund” at the same valuation but an amount less than 25 lakhs, you can quite easily prove to income tax authorities why the “premium” was justified – after all, a SEBI registered AIF Category 1 fund did the valuation, and they know best. Income tax problems solved.

Angel Funds Need Minimum Rs. 10 crore

Oh yes. You need Rs. 10 crore (100 million) in “corpus”. At the minimum, you need 40 investors with the 25 lakh commitment each. (Regular AIFs need 20 crore)

My view: This might sound like a big deal, but it’s not. Remember, like I’ve said in the last point, you don’t need to be an investor in an angel fund to actually do angel investments. If you do, and you qualify, it’s not such a bad idea to get a corpus of $2 million (Rs. 10 crore) together.

The Angel Fund “Manager” Must have 2.5% Skin In The Game, or 50 lakh

In the spirit of AIF regulations, all managers need to have their skin in the game, meaning they own a part of the fund. For regular AIFs the limit is Rs. 5 crore (50 million) or 2.5%, whichever is lower.

However, for angel funds, the manager needs to invest Rs. 50 lakh (5 million) or 2.5%, whichever is lower.

My view: It’s very important to have skin in the game. You lose when the fund loses. There’s no greater motivation to succeed. However, for people who don’t have enough money to invest, but can manage a fund, this is a fairly hard barrier.

Restrictions on Angel Investment

To avoid the abuse of angel investment as a vehicle to give bribes or avoid taxes, there are some specific rules that invested companies need to meet:

  • Indian incorporation, and less than 3 years old
  • Have a turnover of less than Rs. 25 crores
  • Are not listed
  • Have no relation to any industrial group whose turnover is 300 cr. or more
  • Has no family in the Angel fund

My View: It’s very unlikely that an early stage company wouldn’t meet this criteria. The industrial group connection and family issue are to prevent abuse.

The family regulation is funny. Venture Capital funds can invest in their own family-own companies!

Each Invested Company Must Get 0.5 to 5 Crore, Locked in for 3 years

Angel funds have to buy in at least Rs. 50 lakh (5 million) and a maximum of Rs. 5 crore (50 million) of any company.

They also have to stay invested for at least 3 years.

My View: Nothing less than Rs. 50 lakh? On principle, I think that’s a good restriction. Companies need more money than that nowadays, and this is an organized fund, honestly, so most investments would meet this criteria anyhow. If someone really wants lesser the deal can be to invest Rs. 50 lakh in multiple “tranches” based on some forward looking milestones that need to be met.

Nothing more than 5 crore? That’s strangely limiting when an investor needs to continue to invest in subsequent rounds to maintain its shareholding percentage. This amount could exceed the 5 crore required

The Three year lock-in is also strange. The waterfall model of investment means an early investor will be bought out by a subsequent investor (a VC fund or such), who might want to deploy more money than the company needs. In which case, it needs to offer existing investors a partial or complete exit.

What About the Fees?

Currently AIFs have heavy fees.

  • Rs. 100,000 to apply
  • Rs. 500,000 to register
  • Rs. 100,000 per individual fund.

There’s no indication of whether these will be relaxed for Angel funds. These fees are difficult to justify at an angel level of investment.

The Judgement: Startup Tax Is Still A Problem

I think the regulations allow a wannabe-VC-fund to now invest in companies. But it’s just a mini-venture-capital-fund, and not really something that serves the purpose for angel investment.

When I complained about the “Startup Tax”, it was about a specific use-case that is probably the most common in early startups. When a company gets early stage investment by angel investors, at a valuation that is a premium because that’s how the market works, it will have to pay tax if it can’t justify the premium.

The tax department said they’d solve it by allowing SEBI to define what an “angel” means, to keep them out of that regulation. (The regulation was created because politically connected companies were being invested into, by corporates, at a massive premium, and there was no taxability involved)

SEBI has now defined Angels as rich investors who pool in capital, but aren’t rich enough to be venture capital investors. Essentially what SEBI is saying is that if you want to invest in an early stage startup, you have to find a fund that has gone through the SEBI hoopla, invest in it, and convince that fund’s manager that the “pool” needs to invest in that company.

This might not fly with many of the angels that currently invest, and they might still go their own way directly investing, even if it means dealing with the Startup Tax issue.

However, nowadays there is more interest in “superangels”. Funds that buy stakes in 500 companies. Funds that have a lot of money and spread it around. Funds that invest in the whole ecosystem, including incubating companies. Funds where money is collected from investors, pooled and invested by managers. For them, this regulation is a brilliant deal, but with a little more money they could register as venture capital AIFs in the first place.

Speculation: SEBI Angel Fund Rules Could Help Ease Startup Tax

No Comments » Written on June 20th, 2013 by
Categories: SEBI, StartupTax

The Finance Minister had in his budget speech mentioned that:

SEBI will prescribe requirements for angel investor pools by which they can be registered as Category 1 AIF venture capital funds.

(Read: Startups in Budget 2013, a Mixed Bag)

CNBC has the news that SEBI might announce the requirements on July 25 (speculation):

In an exclusive to CNBC-TV18, sources say the Sebi board may announce rules for angel funds on June 25. Some of these rules may include angel fund investment to be limited to Rs 50 lakh- Rs 5 crore; angel funds to be invested in a company for at least three years; angel investors to invest in companies not older than three years; investee company to be unlisted and with a maximum turnover of Rs 25 crore; the investee company may not be related to a group with a revenue of greater than Rs 300 crore.

Sources add that the Sebi may also stipulate that the fund must not have any family connection with the investee company and that no angel fund scheme may have more than 49 investors.

Note: Cat 1 AIFs already have three sub-categories:

  • Venture Capital Funds
  • Social Funds
  • SME Funds

The Angel fund will have to be a separate sub-category.

Welcome, Tax-Pass Through

Note that AIF regulations means Category 1 funds, VC Sub-Category get a tax pass through, that is, any income made by fund investors will be their income, not that of the fund, which is beneficial for entities based in mauritius or singapore, who don’t pay any capital gains taxes. Cat-1 AIFs had certain restrictions, like Rs. 1 crore per investor,  which might be relaxed.

While this is a useful thing, it’s no different from the angel investing directly, which is what currently happens. 

An angel fund can help in the sense that it allows people to pool in cash and invest as one entity (for instance, 10 investors in one company can get a single represenation) but with the tax pass through each investor gets the tax benefits that he normally would if he invested on his own.

Fixing the Startup Tax, Somewhat

However some of the rules are designed to help avoid the Startup Tax problem. (Read the free Startup Tax e-Book) Angel investments in companies at a “premium” have been classified as “income” rather than an investment, unless the startup can explain to the tax authorities how such a premium is justified.

This has been brought in because it seems politicians are being bribed by corporates using the investment route. The corporate would invest a large sum of money into a small company owned by a politician, and take a very tiny stake in return. This is effectively a bribe since the money is not expected to be returned (no equity investment is), and the company will pay no tax on the investment (since it’s a capital flow, not income). See the Jagan-Srinivasan enquiry, or the Dasari Rao-Naveen Jindal allegations.

The tax authorities have plugged this loophole. A large investment at a premium will be called income unless the premium is justifiable, and if it’s income, the money will be taxed. In the process they make it very inconvenient for small startups who need capital and much of their value is based on future prospects not easily quantifiable.

In Budget 2012, the above problem was partially addressed; if a SEBI regulated AIF invested in a startup, it wouldn’t get hit with this Startup Tax. But the SEBI AIF rules made it difficult for small angels to start a fund – each fund needs at least 1 crore rupees per investor.

The above rules, I think, are designed to thwart the creation of entities by corporates to, again, bribe politicians. (If rules are lax, a corporate will create an AIF and then pay big money to a startup?) The AIF rules are already stringent – not more than 25% in one entity, minimum lock in, and so on. These rules can further contain the abuse.

The rule that the “group” of the company invested in should not have a turnover of Rs. 300 cr. or more, and there should be no family connection between the fund and the company; this help prevent one layer of abuse. And then, limiting the angel investment to Rs. 5 crore creates less chances of bribes (which would mostly exceed that amount by a multiple of 10).

AIFs currently can have upto 1,000 investors, but the limiting to 49 for angel funds is peculiar. However, the logic may still be related to abuse, to avoid the creation of a pool like Sahara or such.

Still Not Enough

Till the regulations come out, we’re not sure what will happen but many regulations need to be relaxed. For instance, one AIF regulation is that a fund should have a “key person” who has five years of experience in fund management with a professional qualification etc. Angels are typically not this profile, and this requirement must be relaxed.

The current requirement of Rs. 1 crore per investor is sure to be relaxed, but how much? I believe it should be taken down to Rs. 10 lakh, but I doubt that will happen – it is likely to be Rs. 50 lakh or something. Knowing how much angels pool in (5-10 lakhs each, typically) a large minimum would restrict their ability to create an AIF fund together.

June 25 will tell us more. CNBC’s sources haven’t always been accurate so the end-result may be quite different.

Flipkart Won’t Deliver Orders More than 10K to Uttar Pradesh

12 comments Written on June 9th, 2013 by
Categories: Startups

The online retailer Flipkart has, it seems, decided to stop delivering goods to the state of Uttar Pradesh above Rs. 10,000, including the National Capital Regions of Ghaziabad and Noida, says TOI.

While Flipkart said the decision was "purely business oriented", insiders said there were numerous instances of customers ordering expensive goods on the cash on delivery scheme and refusing to accept their orders. There have also been cases of fraud in which lost or stolen credit cards were used to book orders online.

The portal's shipment delivery staff in Lucknow, however, gave insight, saying there were incidents in which customers ordered expensive goods and then refused to accept them. Sources said many people logged on to Flipkart and ordered "just for fun".

"It takes a minimum of 10 days to ship a product to a customer and back to the company if it's not purchased. It causes loss to sellers, selling through Flipkart, as their products get blocked in transit," a senior Flipkart executive told TOI.

You know I’m the skeptical sort, so the questions that plague me are:

Why wouldn’t they just ban cash-on-delivery in UP? Sure, you can make prank calls with a cash-on-delivery order and then refuse to accept the package with nothing lost – but to remove all orders sounds a little harsh. If I’ve already paid – with, say, netbanking, I might not be a risk at all. I don’t buy the “stolen credit card” line either – because you can delay shipping for two-three days on credit card orders (by that time a card will be reported stolen or lost). And if stolen, there is enough information within Flipkart to perhaps nail the perpetrators.

Why are prank calls only a problem with UP? In India nearly everyone must be privy to the concept, and I’m fairly sure their prank call situation occurs all over the country.

One reason could simply be that there is a competitor who’s burning them. This is not unheard of as a strategy. In one story, a large soft drink manufacturer put a competitor out of business by buying out his entire stock of bottled drinks and destroying them – the cost of manufacturing the glass bottles is recouped by recycling them many times, and the newcomer ran out of capital to manufacture more bottles.

Even if that were the case, banning deliveries to the whole state is not a solution. And the competitor can order things worth 9,000 rupees multiple times.

Why Noida and Ghaziabad? Even if I understood why UP is a problem, the cost of delivery or return is not a problem in Noida and Ghaziabad (any more than it is in Gurgaon and Faridabad where there are no restrictions). These cities are literally next to Delhi – the Delhi Metro runs to Noida, for instance.

The only answer that might make some sense is there some sort of political angle to this – that the powers to be in UP have something to do with it. That would answer all my above questions – however, then why would they even delivery up to Rs. 10,000 in the state?

Update: While it may not be political the issue may be specific state regulations. Commenter Anon says:

UP has atrocious sales tax regulation. Each of the goods for sale to UP has to have a Form -38 issued for it by a very corrupt sales department. Each Form – 38 costs money. I guess the physical sellers just bear this cost but to an e-commerce company the margins get hit drastically on each shipment and even more when the goods can’t be delivered.

This observation fills all the gaps – any shipment to an individual needs a Form 39 (and to registered dealers, a Form 38), and this form has to be signed by the commercial tax department. These rules are different from state to state (see Blue Dart Courier’s list!) and it could just be that Flipkart doesn’t get refunded for the VAT it has to pay for unfulfilled orders, and they decided to take that risk upto Rs. 10,000 per order.

Flipkart is in the news recently for having cut many product categories including Flyte (their online music download store) and for having fired many employees. In the light of difficult FDI regulations, the conversion to a marketplace instead of owning inventory, and an increasingly itchy investor set, this news just adds fuel to the “E-Commerce is in trouble” story.

OT: Are Non-Competes Legal in India? Mostly, No.

1 Comment » Written on May 10th, 2013 by
Categories: Startups

Employers routinely hand out pre-drafted agreements that contain clauses like: You will not be employed in a firm that competes with [Company] for a period of two years after the termination of this agreement.” These clauses are supposed to deter employees from joining competition and taking away years of effort in training and what not.

Some startups are trying to get over this by creating non-compete agreements their employees have to sign.

Not Enforceable?

While this may be legal in some parts of the US, such contracts are almost definitely not enforceable in India. There is an “Indian Contract Act” in which there is a Section 27, which states that you can’t deny a person the right to livelihood. Restricting a person from working, even with a competing firm, for a few years, is a restriction on that right, as many judges have ruled.

You can read these two links to see case history on what other people have tried:

Case history shows how the courts have frowned about restrictions after the termination of a contract. Courts understand that employees have little bargaining power at the time of signing a contract and will sign what they are given, or stand to lose a job. In one case in 2009 where the company said they wanted to protect their trade secrets, the court said:

the High Court ruled that in the clash between the attempt of employers to protect themselves from competition and the right of employees to seek employment wherever they choose, the right of livelihood of employees must prevail.

Employees should resist signing non-competes, but in the choice of that or no-job, might as well sign knowing that the contract is illegal and unenforceable. (And you can say it as much over an email to have it on record)

Yet, I’m not a lawyer. So my opinion should be taken as such.

The Fear Factor

One reason for an employer to offer a non-compete is that employees are afraid they’ll get sued, so they won’t go join competition.

After going through a long civil case recently (eviction of a non-rent-paying tenant) I have realized that much about the fear of the law and courts is overrated. The fear that someone will take you to court is a misguided one.

People, and educated folk, are afraid they will have to spend years going to court, even if they are likely to win. And that it will cost so much money. An understanding of the legal process is probably way off-topic for this blog (and I’m not the right person to explain) but it’s not as bad as it sounds. Even if a company does sue, the cost isn’t much. Lawyer costs at lower courts aren’t too high. Your new employer might even bear it for you! (If you’re worth suing, you’re worth defending)

What about the future?

One fear is that the law can be changed, and such contracts suddenly become enforceable. However, laws don’t generally change to disadvantage people that much – after all, the right to livelihood is a solid argument. At the very least I expect that an employer will have to pay your market salary or more, even in the off-chance that they allow non-competes against employees enforced (highly unlikely in my opinion).

What do startups do?

Don’t bother with non-competes, unless some investor kicks up a fuss. Then do non-competes but tell your employees how it is.

Then how do you protect your company? Answer: keep secrets when you must. People will leave. People you trust. You have to let them go if they will, or make them want to stay.

They will demand obscene salaries. Raise the money. This is why you exist, as an entrepreneur. If you think they deserve the pay – if their obscene demands would have been met if only you had the money – then it’s your job to raise it. I know I will face this problem, because people are motivated by money or by the belief that they are contributing to something that will change the world. If you truly are changing the world, you will easily raise money. Either ways, you need that money.

Secondly, put reasonable redundancy and security. Make sure employees take holidays – that way you know what happens if they’re not around. Put up proxy servers and track traffic, even if you aren’t likely to use it (I once found a massive issue with a couple guys through chat transcripts – they were planning to steal our code and such.) You gotta trust people until someone betrays you, and then you need to have that audit trail to figure out everything that person did!

Finally, work on making people want to stay. At a service company, my ex-boss would do this – everyone gets a one-year salary as a bonus if they stuck around for three years. That way, after two years, when the employee was at his productive best, he wouldn’t leave for another year at least – the prospect of getting a large amount for just another 12 months was too attractive. This may not work for you, but you can do other things – remember though that how you motivate people ensures they will stay or leave. (People usually leave their managers, not their companies)

This is off-topic, but it came to mind today. Back to regular programming after this.

The Earth is Shaking for E-Commerce in India

7 comments Written on May 6th, 2013 by
Categories: Startups

Is there something really bad happening with e-commerce companies? Recent developments indicate that the space is now going through a massive correction, and a crisis of confidence.

In Trouble

Arindam Bose, founder of has been arrested along with the company’s CEO, Harish Ahluwalia, for supposedly defrauding customers who paid for orders through their credit cards, but didn’t receive goods. The scale of the fraud isn’t very big – just Rs. 82 lakh from one source. (It has appalling English, but you’ll get the point)

The curtains have begun to close on SeventyMM, the online retailer that started off as a movie rental service and ended up selling pretty much everything they could. It’s raised over $21 million till date, but with the lack of further funds, might shut down soon, reports a site.

One of the oldest players in India, Indiaplaza, seems to be in trouble and needs $5 million to stay alive. I used to buy from it over 10 years back when it was called FabMall; and this is not the first time they’ve seen serious signs of trouble. Yet, the funding environment for such startups is weak, so their future depends on their ability to make someone other than customers pay.


In lesser known cases, merged with so they could secure funding – a case, it seems, of either die separate deaths or live to fight another year.

LetsBuy merged with Flipkart, and because they shared common investors (Tiger Global and Accel) the theory was that the investors made them do it.

Naspers-owned Tradus bought Naspers-funded earlier this year, Myntra bought,  FashionAndYou bought and then shut it down. The list is getting larger.

TechCircle even has a list of potential mergers in 2013 based on common investors.

A larger single player is better in a capital intensive model like online retail, so no matter what you might say of investors calling the shots, the idea of a merger is sound. In a time of crisis, it’s better to concentrate your bets and focus on being the last man standing. In good times, you can spray and pray.

Another big challenge is regulation. With foreign investment in multi-brand retail e-commerce being illegal, companies have created complex mechanisms to skirt the law. Some act purely as marketplaces, not actually selling goods but just handling customer acquisition and payment intermediation. Others put the foreign investment into a wholesale company which then sells to a “retailer” that is only a shell company in the Indian promoters’ name – which then sells the goods to the end-users. All these are quasi-legal, and attempt to stymie regulation.

My Thoughts

The fear of fraud – that is, a company taking your money and then not delivering the goods – is now more real than ever. Trust is essential to e-commerce. E-Bay’s India portal even offers to keep money in escrow until you receive your goods. Retailers fear that customers will order and not-pay – that’s one of the biggest problems with the “cash-on-delivery” model – you incur the cost, but goods get returned. However this two-way-fear is what will hinder even the biggest of companies in the space.

The fear of fraud is greater in India: recovery can take years. And, if court cases drag out that long, it will also mean that founders and other directors will have cases on them for that much time as well – something e-commerce VC funds (who put directors on e-com company boards) will want to consider (Imagine checking a box saying you’re facing a criminal case in India in your visa application).

E-Com players have started to cut discounts, and most think they have brand loyalty because of “convenience” or some such thing. While availability helps because you can’t get goods from local retailers that you can online, that assumptions is largely theoretical because I’ve recently looked for a number of different things from toys to mobile phone to bake-dishes to swimming caps, and in all cases, offline retailers seem to have the variety.

Price beats the crap out of convenience for the masses, in my opinion. There are only two exceptions – where service is exceptionally fast (like your kirana store for buying one or two small items) or where the difference in cost is marginal. E-Commerce shops by definition have a huge service disadvantage compared to offline shops, and in my opinion they haven’t really tried to arm twist manufacturers into letting them discount products much more. Unfortunately, their bloated cost structures and continued mad-growth focus doesn’t allow them to get that much more efficient, which is key to making any profit in this business.

Regulation arbitrage is stupid. All of these players want to be either India’s next or get acquired by it. Yet, once regulation eases up, these companies will set up their own portals since they have way better supply chain capability.

With the Indian government banning FDI in e-Commerce specifically, companies like Flipkart are getting investigated. (which resulted in their selling off the promoter owned front-end retail company to an outsider so they can comply with the rules) Investors are worried because the negative impact of the investigation means they are toast, and the positive is only that they can continue being what they are – the downside is huge, the upside is very small. Given this, the expected action is to tighten the purse strings and say “later”, exactly when the capital intensive business needs continued money to last out a long-drawn battle.

If there is an e-com crash – no, “when” there is one – the impact to jobs will be felt, but remain small. While many have large numbers of technical staff, the biggest numbers of hires is in things like delivery, or elsewhere in the supply chain. However, while this might sound very big to the media, it pales in comparison with losses in, say, the textile export sector a few years back.

While there is a large market in India, I think there have been simply too many e-commerce companies, and this is just the start of the end-game. Eventually the landscape will change, new companies will arrive and the old ones will die. I believe the situation was “bubbly” – I had called the Indian internet a bubble in 2011, when Flipkart was supposedly valued at $1 bn. More thoughts on that meme after being on a TV panel last year. We’re now getting to see the real picture; what are your horror stories in the e-com landscape?