Why The Y Combinator Model Does Not Work In India

Y Combinator exists in an entirely different environment from what we have in India. For any healthy VC/seed/angel funded start-up ecosystem to exist, it requires two things as must-haves. The first is the existence of reasonably sized exits at regular intervals via the IPO route or through the M&A route. The second is the existence of large enough markets to support at least two to three profitable players in any domain.

YC exists in an environment where the two conditions are well satisfied, leading to a situation where there is a considerable premium on a quicker access to funds (for the start-ups) and good talent/concepts (for the investors) where there is often an excess in supply on both sides of the table. India, on the other hand, has a real shortage on both fronts – good start-ups and good investors.

The main problem is that the Indian market for digital goods and services is tiny. In a non-existent market, neither product finesse nor pricing can make much of a difference. There is barely enough size in the digital domain to sustain large profitable companies. At best we see companies that are small and profitable or one market leader who is struggling to grow in its domain or diversify out of it.

In such a situation you can't get into the early-stage/start-up investment scene armed only with effort on your side. For the fight in underdeveloped markets the right gun is money and you need plenty of it. If you walk into it with effort and connections as the only weapons you won't go anywhere. Sustaining a first-mover disadvantage is a costly exercise in greenfield areas. If you don't have the money to sustain your portfolio companies, the effort alone won't save it. It is a finite non-scaleable factor.

In trying to sustain the number of portfolio companies mostly through effort than funding, the incubators/seed/angel investors won't be able to give the companies the time/effort required to grown them. Thus they actually reduce the ability/probability of the portfolio companies to succeed.

At the current market size I don't see the possibility of any of the smaller-scale funds being able to do a great deal of good. Their possible exits are so small that I can't imagine too many LPs being happy with the rate of return the GPs can bring to the table. If you invest in the region of ~10 lakh per company, the domain that you are investing into is also likely to be very small. Since we don't have well developed markets, it is not possible to start small into a big product.

That said, the parties who can play big in this – the VCs – are also increasingly moving away from their traditional roles and behaving more like PE funds. This is understandable since there are not enough big success stories in the market that can come close to the kind of rate of returns required by the VCs, thus they wind up investing in established companies than early stage companies or start-ups.

This is, obviously, not a healthy state of affairs. In fact it is quite regressive and it does not bode well for the country as a whole. Everyone can see the untapped opportunity, but the overall direction we are headed in is making it extremely unlikely that we will ever tap into it.

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