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.
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.
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.
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.
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?
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?
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?
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.