Flight of the Angels



The little boy stood upright, proudly clutching his dream filled cocoon. He
opened his fist and looked at his benefactor, confident that a beautiful
butterfly would emerge from that cocoon one day. Pleased with the young chap’s
drive and confidence, the evangelist smiled indulgently and promised to nurture
his dream.

Those were the days, say entrepreneurs wistfully. But with a cocoon-infested
market crawling with caterpillars that never grew wings, benefactors too are a
shaken lot. Magnanimity has been replaced by caution. It is not that funds have
dried up. Venture capitalists still have quite a large reservoir of money, but
now, there is a close check on the viability of projects they invest in.]

Along with endless reports of dream ventures going bust, were tales of VCs
going cold on entrepreneurs. The angst of the dreamers was captured in vivid
descriptions of how the roof caved in after the second round of funding never
came in. The evangelists were suddenly viewed as hawks, pecking at dying
companies even after they were half-dead. But VCs are human too. When projects
they helped set up failed, they felt the pinch too. So what is it like to be a
VC?

Why become a VC?

Success Factors for a VC

  • Clear and objective thinking i.e. the ability to
    cut through hype

  • Operational experience, especially in a start-up

  • Firm grasp of numbers

  • People management skills

  • Ability to spot technology and market trends

  • Wide network of contacts

  • Knowledge of all facets of business–marketing, HR
    and finance

  • Judgement to evaluate them on the basis of
    integrity and ability

  • Patience to pursue the final goal

  • Drive to guide budding entrepreneurs

  • Empathy with entrepreneurs

Post liberalization, there was an increase in business opportunities in
India. A wad of currency notes in the pocket, a desire to interact with the
young and enterprising and a passion for wealth creation…is what it took to
inspire new players to enter the arena.

GVCL, formerly known as Gujarat Venture Capital Limited, is one of the oldest
VC firms in the country with an investments of Rs 445 crore, of which 40% is in
the IT sector. Says Vishnu Varshney, MD, GVCL, “I like being a VC because I
enjoy interacting with young entrepreneurs. It is very gratifying when you see
the venture that you funded succeeding.”

Paraj Kakkar started Antfactory in April 2000 with $30.5 million equity when
he sensed a real business opportunity. He says, ” The idea of investing in
a nascent project and helping it gain shape and grow was appealing.”

Sanjay Anandaram started his Bangalore-based VC firm Jumpstartup, a year ago
and has funded start-ups like Apnaloan. He attributes his decision to an
interest in entrepreneurship coupled with the IT boom at that time. Anandaram
explains, “There is a season and a reason for everything. In the last 50
years, wealth creation was unfashionable in India. That has now changed. The key
to wealth creation is entrepreneurship and that requires a VC.”

Subinder Khurana of Principal Infinity Ventures, a Delhi-based firm, which
invests mainly in IT projects says, “Coming from a technology background
and with an experience of working in start-ups, I wanted to utilise my
experience by working with different companies at a time. Becoming a VC was a
logical step in that direction.”

A VC’s biggest challenge…

The biggest challenge for a VC is to spot a bad investment
before it is made. The best way to avoid this is to select the right team and
evaluate a good business model. A creative team ensures a constant flow of novel
ideas, which is the key to the success of any venture. The same goes for
business models. A year ago, during the tech-hype, there were wannabe VCs who
jumped into the fray, funnelling money into numerous start-ups hoping to make a
quick buck. But the dot-com bust coupled with the economic slowdown has changed
the entire scene. Now, most start-ups are finding it difficult to extract the
next round of funding. VCs have begun to demand proof of their profitability, as
revenues are not flowing in as expected. VCs now make it a point to scrutinize
the revenue models and management of those ventures approaching them for funds.

While evaluating the business concept, the first question
raised would be about the viability and scalability of the business. The time
frame for the pay-offs and the associated risks are also factors that are
considered. As Arun Jethmalani of Valuenotes says, “Besides the business
model, the team is most important. A first rate team can make a second rate idea
work, while a second rate team could end up ruining even the best of
ideas!”

Adds Khurana of Infinity Ventures, “The ability of a
team would depend upon several factors such as–the competence, experience,
capability to work under pressure, cohesiveness and motivation to work through
hardships. The track record of the team members is the best indicator, but even
that is no guarantee of success”. Kakkar of Antfactory also talks about the
ability of the team to perform. Ideas and capital have both become commodities
and the key to making the idea work is the effective implementation of the
business plan.

While these factors are universal, when it comes to an
applicant’s reaction to being turned down by a VC, the difference in the
culture between the US and India is quite obvious. Shilpa Kulkarni an
ex-employee of eVentures says, “Having worked in the VC market both in
India and the US, the pressure I faced especially in India was higher. In India,
there are applicants who take rejection personally and even pass judgement on
the VCs and their abilities. We get branded as rude and arrogant. I did not have
the same experience in the US as the industry is mature enough and so are people’s
expectations.”

Angels of mercy or hawks?

The past year has seen many changes from the VC’s perspective as well.
Kulkarni adds, “I think in the past year, people have moved from playing
the market to actually being the way VCs traditionally were. Traditionally, VCs
have had a long holding period especially in case of early stage VCs. “

Vishnu Varshney of GVCL disagrees, “Truly speaking, VCs have taken a
major beating in the recent slowdown. One must realize that a VC is also a
businessman and hence has to take the necessary steps for salvaging his
investments. People view these steps as harsh and hawkish.”

Saying goodbye

Several investments could turn out to be unsuccessful and
termination, though painful, is the only viable option and needs to be done. The
time taken to terminate such a venture is very important. The longer one delays
the decision, the greater would be the loss incurred.

Kulkarni affirms, “At the end of the day it is important
not to let emotions cloud your decisions. Decisions have to be objective.
Businesses cannot be turned into philanthropy”. Sankaran P Raghunathan,
chairman, Blueshift, opines, “However attached one may become to the
business, the time to cut bait- is essential. Indians are usually slow to cut
bait”. Varshney adds,” No one is here for an altruistic reason. One
does feel sorry for failed projects but it is possible to help good people find
jobs through referrals”.

Khurana says, “It is always sad to terminate a venture.
The role of a VC is to try to anticipate trends and help create businesses where
part of the concept, the technology, market or business model has not been tried
out before. We must take calculated risks, and some projects will surely fail.
The key is to achieve a balance. Not having any failures is a sure sign that we
are investing too defensively. We have to accept some failures to ensure a few
big hits.”

Optimism still at a high?

The dramatic and fast paced events of the past year have
thrown up some interesting observations. Initially there were quite a few VCs
who sought the quick exit option cashing in on the hype over the unreasonable
valuations that these firms had got. That’s history. With the stock market
down, the quick exit option has vanished and so have the non-serious players.
VCs are now taking a long-term view of investments.

So what makes a venture tick? The criteria for evaluating a
successful venture have changed in the past year. During the e-commerce hype
there was a growing tendency to be the first mover and grab mind share hoping to
bring in revenues. But that method has proved to be a failure. Now as Khurana
points out, “The factors to ensure that a business succeeds would be a
profitable business model, domain expertise, management abilities and the
capacity to sell”.

But if you think the events of the past year have subdued the
VC buoyancy, you are wrong, There is a mood of optimism among many VCs and
financial analysts feel this is the best time to invest in new firms. Anandaram
of Jumpstartup says, “This is a great time to start a firm. For now, you
have entrepreneurs who really want to do business and not just for the greed of
stocks”.

There is also a shift in the pattern of investments. From
investments in the first stage, the trend is slowly shifting to seeking
investment in the later stages. Randhir Kochhar of Andersen confirms this,
“Most foreign VCs and private equity funds are now focussing on late stage
investment. While returns may be lower from such investments, so are the
associated risks. Most funds are keen on making larger investments and later
stage funding meets this criteria as well. However, there are still a few funds,
especially certain domestic and state specific funds that provide early stage
funding”

Anandaram adds, “If you consider two reference points,
the years 1998 and 2001, discounting the madness of 1999, there is definitely
more money available with VCs than three years ago.”

As Raghunathan of Blueshift sums up the situation, ”
Take a coke can and pour the contents in a glass, only one-third of the bottle
would actually contain liquid while the remaining would be froth. This
represents what happened last year. When one pours the drink again, it would
have more liquid than the first round”.

Amit Sarkar in New
Delhi

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