Are Indian start-ups parting with too much equity?

Are Indian start-ups parting with too much equity too early? Rahul Sood, Partner and General Manager of Microsoft Ventures, believes so. As a result, many start-ups are failing to scale and eventually exiting.

Sood, who sold his company VoodooPC to HP before joining Microsoft, says he came across a company at the Nasscom Product Conclave that generates revenues of about $600,000 and is ready to part with 30 per cent of the company for raising half a million dollars. That is too much stake for too little money, he said.

Less stake could mean dancing to the investor's tunes rather than doing what is right for the company, such as focusing on the bigger issues and working on customer development.

The entrepreneur's dilemma on stakes reflects the immature product ecosystem in India. There is less capital available and founders may not have much choice. On the other hand, the investor takes a huge risk since there are very few successful exits in India.

Mahesh Murthy of early stage venture capital firm Seedfund says that his company usually claims stakes between 25-40 per cent. "That is because of the risk we take. There are less failures in India but hardly any exits. Once there are exits, everything will fall in place," Murthy said.