Why VCs and entrepreneurs need but cannot stand each other

Startup founders and venture capitalists share a complicated relationship. The former stand for brave, new ideas that seek to disrupt through innovation. The latter represent the money that fuels those ideas. Indispensable as they may seem to each other, the relationship is often an uneasy one.

Like their peers in Silicon Valley, Indian startups view venture capitalists with a degree of mistrust. "(Venture capital) is like a necessary evil," said the founder of a Mumbai-based mobile services startup that has raised multiple rounds of funding from venture capital firms.

While much of this animosity simmers below the surface, sometimes it can bubble up into the open in an ugly fashion

Much of the hostility has to do with the yawning gap in India between ideas and capital. There are about 20 venture capital firms actively investing in India, where technology startups alone numbered more than 3,000 at the close of 2014.

As more ideas chase this limited pool of risk capital, the rejection rates for startups become inordinately high. Most venture capital firms cap the number of deals every year at 10, which includes follow on funding in portfolio companies. "The quality of incoming deals has certainly improved over the years, but we still reject 98% of the deals that we evaluate," said a venture capitalist at a Mumbai-based firm that invests in early and growth stage companies. Most of the founders and venture c apit a lists ET spoke with declined to be identified for this story.

It is usually when deals are being negotiated that issues crop up. "VCs will engage very heavily with you for a month, ask for data and then decide not to invest in the company. Sometimes they will also announce investment in a competitor even while you are waiting for a response from them about the deal," said another Mumbai-based venture capital investor.

Not unlike a marriage, successful founder and venture capitalist relationships rest on a couple of factors – trust and respect. This is easier said than done. Matters are complicated by the fact that in India venture capitalists are a somewhat insular community. Most prefer to source deals through known references and will rarely take a bet on a completely unknown entrepreneur.

That has started to change in recent times. Taking a cue from their peers in Silicon Valley, venture capitalists are trying to become more f lexible in the way they interact with startups. "These days it is not unusual for me to talk deal terms with a founder at a spa or a coffee shop," said a venture capitalist who leads investments for a Silicon Valley-based firm. This is also because entrepreneurs have become more assertive with more capital available to them now. "They have realised if they are not assertive they will never get respected," said Anand Lunia, founder of seed stage.