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Crossing the VC Rubicon - Ten questions for your prospective VC investor

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CIOL Bureau
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 At the same time, Venture Capital

(VC) investors must be feeling encouraged by the success of some of the

earlier investments, now generating handsome returns. The positive outcome

of all this excitement is the numerous investments that have been reported

in the past twelve months or so. In the days to come, one could expect

many more such entrepreneurs to seek out VCs and VCs to go after promising

IT companies.

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In a four-part series, the author sets out some of the points that

entrepreneurs aspiring to raise VC may find helpful to bear in mind.

Some time back, as a reluctant eleventh hour speaker at a seminar, I

had to come up with something to catch my hapless audience's fancy. I came

up with this rather publicist sounding list of ten questions, hoping to

strike a responsive chord somewhere in the minds of the seventy odd

prospective and already-in-business entrepreneurs. The interest they

evinced, however, surprised me a great deal and encouraged me to reproduce

them in this article.

Before I launch into these questions it is important to state that I do

believe that the Indian entrepreneur indeed has an emerging choice of VC

investors with whom he can partner. Granted, the ranks of such VCs are not

swelling in any great hurry yet, but their numbers and enthusiasm are

enough to cheer an aspiring entrepreneur who has an interesting investment

story to present.

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And the even better news is that IT is the flavour of the season with

many of these money managers. The numerous investment deals that got

completed in the last twelve months and the fancy prices that investors

paid evidence the emerging, albeit nascent, phenomenon of competition

among VC investors in India. (I promise to produce a crude catalogue of VC

funds and some recent transactions that are reported to have been

concluded. Just watch this space…)

A related important question : Why is it critical to choose your VC

partner? Why not let the highest bidder (in times of price) be the

partner?

It is important to choose the VC fund because raising equity from a VC

investor has long term implications that could change the destiny of the

investee's business. And that destiny depends pretty much upon the

relationship between investor and investee.

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Each VC fund has its own individual investment philosophy and its own

individual style of relating to its investee companies. (Matters get

murkier when you realise that within a fund each manager may have his own

individualistic style of functioning. I know of several funds where some

of the most unlike of individuals work together as partners). It is

therefore important to align the style and interests of the fund with that

of the entrepreneur and his business so that a successful and happy

relationship may develop between investor and investee.

Now on to those ten questions.

What is the VC’s investment philosophy ?



Most VC funds invest for a financial return. Some VC funds, however,
invest for strategic reasons, such as gaining assess to technology,

markets or a resource base like a pool of engineers or to promoting use of

a certain technology / product. Intel’s investments in India, for eg.,

appears to be driven by the stated objective of promoting applications

that will run on Intel platforms. Canon is believed to have made an

investment in a document / imaging technology company, purportedly with

the idea of gaining access to the investee company's technology and cost

competitive engineering resources.

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Strategic investors could potentially bring value by providing access

to their worldwide resources and network, apart from being relatively long

term investors. On the flip side, though, they could potentially seek

privileges such as preferred or exclusive rights to market the

investee's products or captive access to the manufacturing facilities or

dedicated use of the engineering / development resources. These could

limit the entrepreneur's operating freedom and sometimes deny the

prospects of doing business with other lucrative customers.

What is the VC's investment focus?



Does the VC’s investment activity focus on the IT industry? Or will
your firm be the VC fund's first IT investment? Technology investing

requires a different mindset from that of investing in traditional

businesses. There have been instances of managers with successful track

records in investing in manufacturing businesses straying into IT, not

wanting to be left out of the 'action'. The result has been pure grief for

both investor and investee that could well have been avoided.

What is the firm's investment horizon?



Is the VC fund investing for long term return? Or, is it investing for
short term gains in less than 24 months?

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Young IT companies would need the comfort of an investor who can afford

to wait for three-five years so that they can build the business based on

fundamental and sustainable business and ethical values. In a world of

growing uncertainty, and rapid changes, such investors are a vanishing

tribe. But if you can hunt one down, it is well worth the effort.

Investors who have a short horizon can attempt to accelerate the growth

at unhealthy rates that spell long term detriment to the company, just so

they can sell their shares at an early public offering. Worse, they may

some times force an ill advised / ill timed sale of the company.

What is the VC fund's investment strategy?



Does the firm believe in adding value to the investee after the
investment has been made? If so, how they do they propose to provide the

value addition? What are the specific areas in which they can contribute?

Do they have the organisation / people with appropriate background to

deliver such value? How much time do they spend with their investee in a

month? Do they believe in a participatory approach or just ram views down

the investee management' throat on the strength of a draconian shareholder

agreements?

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What is the VC fund's organisation?



There are VC funds and VC funds. Some of them are offshoots of large
financial institutions. Their executives may have been advancing large,

secure loans to financially robust companies before they set out to ply VC

as a trade. For no fault of theirs, they could be disastrous VC partners

as they bring their large secured loan approach to making and managing

small entrepreneurial equity investments. As an officer in one such

institution I have lived through these transition pangs. Looking back at

those days my heart goes out to those unsuspecting entrepreneurs with whom

as I masqueraded as a VC fund manager. A full decade since then, the VC

company in question continues to carry its hoary institutional tradition

to its private equity trade.

Questions of relevance are here:

Can the VC fund respond to your requirements speedily? Or do they have

to "go back to the (VC's) board" which meets once in six weeks

whenever its "overworked" chairman can find a weekend off to

preside over the Board meetings?

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Can they approve the various decisions at the investee's board? Or,

does the investee management write to the mandarins at the "Regional

Office" and wait for them to "forward the papers to the HO"

and then follow it up with personal appearances to "explain" the

business case for taking a car on the lowest possible lease for the newly

appointed CFO?

Do they have personnel who bring an understanding of the investee's

business, if not expertise, as nominee director on the investee board?

Will there be continuity of relationship? Or, will you spend your

energy educating the steady procession of nominees on your board, as they

change once every six months with unfailing frequency? And worse still,

keep adjusting to their varied and whimsical styles of relating to you and

your board of directors? These problems are particularly acute in the case

of institutional VC funds, such as the one alluded to earlier.

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