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Crossing the Rubicon

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DQI Bureau
New Update

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 questions, hoping to strike a responsive chord somewhere in the

minds of the 70-odd prospective and already-in-business entrepreneurs.




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Before I launch into these

questions, it is important to state that I do believe that the Indian entrepreneur can now

choose to partner with a host of venture capital (VC) investors. Granted, the ranks of

such VC investors 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. Even better, IT is the flavor of the season with many of these money

managers. The numerous investment deals that were completed in the last 12 months and the

fancy prices that investors paid are proof of the emerging, albeit nascent, phenomenon of

competition among VC investors in India. Why is it critical to choose your VC partner? Why

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



It is important to choose the right

VC fund because raising equity from a VC investor has long-term implications that could

change the destiny of the entrepreneur's business. And that destiny depends pretty much

upon the relationship between investor and entrepreneur. Each VC fund has its own

individual investment philosophy and its own individual style of relating to its investee

companies. 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.



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 promote use of a certain technology or product. Intel's investments in

India, for instance, appear to be driven by a 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 such privileges as preferred or exclusive rights to market the

investee's products, captive access to the manufacturing facilities and dedicated use of

the engineering resources. These could limit the entrepreneur's operating freedom and

sometimes deny the prospects of doing business with other lucrative customers.




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What is the VC

fund's investment focus?




Does the VC fund's investment activity focus on the IT industry? Or will your firm be the
VC fund's first IT investment? Investing in technology 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 brought grief to both investors and

investees.




What is the

firm's investment horizon?




Is the VC fund investing for long-term returns? 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 to 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 harm to the company. They

can then sell their shares at an early public offering or, worse, some times force an ill

advised and ill-timed sale of the company.




What is the VC

fund's organization?




There are VC funds and VC funds. Some of them are offshoots of large financial
institutions. Their executives may have advanced 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 secure loan approach to make and manage

small entrepreneurial equity investments.




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What is the VC

fund's source? How deep are their pockets?
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Let me warn you-not many VC funds will take very kindly to this question. After all, they
are the ones with the money. And you would not have been talking to them if they did not

have the funds. Right? Well, not necessarily. There was a time in our market, not long

ago, when eager twenty-somethings, who had raised public fixed deposits, aspired to make

long-term investments of over three years. What happens to you if, as an entrepreneur, you

raise money from one of them?




The investor will start howling at

you to have you 'buy back' his shares in less than two years if he cannot force you to

make a public offering. So, you as an entrepreneur, have the right to ensure that the VC

fund has back-to-back long term funding. This is yet another common situation. Many a time

an investor will be happy to give you the first Rs50 lakh that you badly need. But come

next round, 18 months down the line, the VC fund will not have the Rs3 crore that you need

to jump to the next level of growth. Or the VC fund's 'investment policies' do not allow

it to 'take further exposure in your company'. Nor does the fund have the credibility to

get someone else to provide you the Rs3 crore. But should that bother you? My answer is,

yes. Because when you go to another investor without the backing of a credible existing

investor, you will have to start all over again.



Does the VC fund

have money in the bank? Or, is it still raising the money?
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I know of an instance where a foreign fund, which went on to become a successful IT
industry investor in India eventually, did not have funds in place to 'write the cheque'

for an investment after months of intense negotiation and due diligence.




How old is the

fund?




Most funds have a limited life of seven to ten years at the end of which they have to sell
their investments and return the money to the people they raised it from. If you are

raising money in the fourth year of a seven-year fund, you know that the fund will try and

force you to make a public offering or sale, like it or not, within two years of raising

the money.




Does the VC fund

have an international connection?
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I suggest this question at the risk of appearing to be pushing an agenda. But look at it
this way-The IT industry has been, and will, continue to derive a bulk of its revenue from

outside India, especially, the Western Hemisphere. A VC fund, which is part of a reputed

international network, can definitely help in developing a market for the entrepreneur's

products, services and technologies. It can help develop powerful international strategic

partnerships.

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