Smart Hunt For Money

Entrepreneurship

has finally come of age. Not only have people shed inhibitions about starting a

business on their own, the ‘E’ word has also suddenly caught the fancy of

everybody–from generation X to veterans of the corporate world. Stories of

Sabeer Bhatia of Hotmail, Rajesh Jain of IndiaWorld and Siva Kumar of Onebox.com

are by now part of entrepreneurial folklore. Apart from these well-known names,

there are scores of others who have come up with flying colors.

The sudden spurt in start-ups has

been prompted by many related developments in the marketplace. Two of the most

prominent developments in this regard has been the rapid growth in the IT

industry and internet, and the almost exponential growth in the availability of

venture capital (VC) funds. The virtual explosion of the VC industry in the last

few months, apart from increasing the quantum of funds, has also increased the

choices of sourcing capital for the entrepreneur. The rapid growth of the IT and

the VC industry have reduced entry barriers for the prospective entrepreneur.

The results of these developments

are clearly evident in many areas in the country today. Adrenaline flow has

increased, particularly among students and early stage professionals, who have

been attracted either by the thrill of starting their own business or by the

prospect of raking in millions at the click of a mouse. Most of the entries in

the recently organized India Venture 2000, an initiative sponsored by McKinsey

and Company, had been from students and young professionals.

Finding the funds

The first step

for the prospective entrepreneur in starting a business venture is to identify

the funding sources, which would enable transforming the idea into a viable

business proposition. Before approaching a VC investor, the entrepreneur should

have done the homework thoroughly. Half baked ideas, unless it is very

convincing, do not arouse the interest of the investor.

Doing the homework

While approaching

the VC investor, the entrepreneur should highlight key features that the

investor looks for while making the decision to invest. Some of the key features

that a VC investor looks at before making a funding decision are listed below:

STRENGTH OF THE IDEA:

The promoter should clearly indicate the business potential of the idea,

highlighting the need for the service or product in the market. It should also

highlight superior features of the product, if there are competing products

available. The technology that is being used to deliver the service should also

be identified.

REVENUE MODEL:

The model should indicate the source of revenue. It should indicate whether the

revenues would be through advertising, ecommerce, licensing, or by selling

exhibition space on the site–if it is a web related venture. It should

highlight the sales and pricing strategy, and sales forecasts.

PROMOTERS’ BACKGROUND:

In the absence of a track record, this is the key area that a VC investor looks

at. The background should provide the educational and professional history of

the promoters. It should highlight the contribution and strength of the

promoters and their commitment to the venture.

BUSINESS PLAN:

The plan section should indicate projections of income for the next three to

five years, ratio analysis and the proposed investment plan. It should also

provide an industry analysis, the different participants, a study of theÂ

competitors and the proposed promotion and marketing strategy.

EXIT FOR THE VC:

The final aspect that VCs look at is how they can exit from the investment. The

exit section should highlight the possible exit options for the VC, whether it

can be through a strategic sale, or through an IPO.

Choosing the right VC

Once the

homework is done, the next stage is to identify a suitable VC investor to

fund the project. While deciding on the source of capital, remember that VCs

bring more than just funds to the table. This concept of bringing along a bundle

of capabilities along with funding is called ‘smart’ money. The VC can

contribute in any of the following areas:

MANAGEMENT CAPABILITIES:

VCs can bring in management expertise, which the technocrat entrepreneur may

lack. Angel investors and other VCs can play a prominent role in taking the

start-up from conception through operation till expansion in the market. VCs can

nominate senior people on the board to provide direction or they can themselves

be involved in day to day operations–an approach called hand-holding. They can

also help investee companies to identify proper people for key positions in the

organization. Therefore, depending on the expertise required, the entrepreneur

can look for angel investors, seed capital investors or institutional investors.

MARKET ACCESS:

VCs, by their extensive networks in the industry, can help start-ups get their

initial business. Providing such initial breakthroughs can be critical for the

start-up in its struggle to gain credibility and a foothold in the market.

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DURING IPO OR SALE:

Before deciding on the VC

investor, the entrepreneur should also decide on the nature of funding required

for the venture, whether it is seed capital, start-up capital or later-stage

funding. Seed capital is the initial funding required to validate the idea and

finance the initial feasibility studies. Start-up funding is required for

product development and initial marketing. Later-stage funding is required for

working capital finance and business expansion. As different business stages

would demand different business capabilities, the nature of the VC investment

would depend on the type of funding sought. While seed capital and start-up

funding can be obtained from angel investors, incubators and start up venture

capital funds, later stage funding can be obtained from institutional venture

funds and mutual funds.

The future is now

Several new

initiatives have been started like the India Venture 2000 and the e-mahamillionaire

project of NIIT to nurture and guide prospective entrepreneurs to obtain VC

funding. Notwithstanding the recent developments, the VC industry is in a

nascent stage in India today. With the prospect of more growth in the IT

sector, a lot more activity can be expected in the VC industry with the

availability of more investible funds. Some of the recently launched technology

mutual funds have earmarked a portion of their funds in unlisted companies,

which make them more like VC funds. All this is happy news for the entrepreneur.

Venture funds have been an engine for economic growth for over a decade in

countries like USA, Israel and Taiwan. The situation is now ripe to be

replicated in India.

Dr Thillai Rajan