rkhanna wrote:I work for a VC Firm that has done DD on 3 Indian Drone Start ups. Rejected 2 and am currently finalizing a termsheet for a third.
- Why did we reject the first 2?-
Tech was basic. Primarily COTS and assembly. (Tech Expertise was limited to Aerodynamic Fiberglass body building, COTS Software / Hardware integration). Minimal Encryption and Durability for Military Ops. Or way too many "influential people" on their advisory boards". Such as Ex bureaucrats. etc.
Nothing going to get into things like quality of founding team, track record, experience, etc etc
Few Points/ Observations.
NO VC will fund a company with a 100% revenue exposure to the Indian Armed Forces. / Government. Way too much corruption in the tendering process etc etc. Everybody loves drones today. The Commercial / Industrial market is way more juicy. and thats whats most people are angling at. Regulation ambiguity has made this avenue a big question mark for now?
JayS is correct to a degree. No Start-up founding team will let a strategic acquire them 100%. Most founders want to build businesses and dont want quick monetization or exits.
Strategics will buy a start-up with the enough legal and monetary clauses to ensure that the Founders have enough "skin in the Game" and the IP will remain in house for a substantial period of time. No Strategic is going to let a "founding team" leave that quickly. Have seen it happen number of times.
Secondly: Getting these "Big Players" such a Tata and Mahindra in invest/take over drone startups has not always proven to be the be the best experiment. 2 Case in point are Tata and Mahindra. Both have very large and substantial Cash Cow business and defence is simply NOT a priority for them. They simply (irrespective of the press releases) have bigger fish to fry and concentrate their resources. One of the drone start-ups even entered a tender with a large conglomerate Name (whitelabling themselves) and the tender failed because the conglomerate refused to bribe.
TATA bought a Drone Tech Start up after the Founders were unable to raise funding for additional prototypes. They have done ZIP with that tech and whatever they have is pretty substandard. L&T also bought a tech team - They are still struggling with their Fixed Wing last I heard.
Which are the companies that are succeeding in private Def Manufacturing? Companies where military production is an extension of core business competency (Kalyani, L&T, Shipyards). and Companies that have deep rooted Political ties (Ambani/pipavav).
Lastly - When it comes to Drones. The Israelis and Germans are willing to sell their previous gen Mini/Micro UAV drone tech to Indian manufacturers(for royalties) at throw away prices. The Cost advantage of Indian grown company is getting eroded. The Israelis and Germans come with their brand stamp that further de-risks the big guys atleast in perception
one other point. regarding SME's entering Def Manuf / Govt Tendering. First these companies put in money of their own (usually bootstrapped) to put build a prototype. IIM/IIT alum have the benefit of their incubation centers. Once they have prototypes built they then need money for testing / Demo to various Mil Commands.
Lets say after spending all this money they apply and WIN a tender. And lets say the tender is for 60 Drones. They have to put an x% of money with the Government as a Bank Guarantee (BG) so that to adhere to delivery timelines. This money they DO NOT HAVE. VC will not fund this money. Let say they even have the money for this BG they then need money for a production line. - VC will fund this (against a guaranteed order /cashflows) but a VC takes about 4-9 months to part with its money. Time the Winner of the tender doesnt have because his first batch of Drones is due to be delivered within 6 months. So its a catch 22. A Start up needs to be well funded to win a tender and deliver. But a VC will not fund a Startup till its won a tender
None the less I have seen some amazing tech and People in the space - Specially in Software, Payload and Back end Data/Image Analytics
that will blow your mind. The future of this country is in good hands
Great post. Always a pleasure to hear from people actually working on the ground.
Those ex-bureaucrats or Ex-service person, or "White Elephant" as we used to call them are essential if one wants get any govt contract. And as you pointed out due to ambiguity in regulations, commercial market is a non-starter.
MIl compatibility is an issue with most start-ups. But they do not have money (typically on a few lakh with bootstrapping) to fund development for mil-grade stuff as the HW is quite costly, and sometimes difficult to source. This is again a catch 22 situation. The way I see it is, such start ups could only take off if someone with deep pockets and some passion for tech, who is ready to invest in the Idea and would support for initial few years without much of an emphasize for revenue plan. Of coarse for big companies its not a big deal to invest few crores but they lack the temperament. Even for acquiring, they would more often than not look for a company which has already figured out the tech. That's why govt funding through reaserch grants are so much crucial for tech start-ups.
And the situation you explained in second post in bang on target. The company needs enough financial cushion to absorb all these shocks.
About the bolded part - have you came across any company from Pune, by any chance??