The Brownian Movement

The Indian IT scene is witnessing a Brownian movement. A
mind boggling 600 to 800 new companies are born in the IT sector every year. A huge
movement! Walden-Nikko India Management Ltd, a venture capital (VC) company, alone
receives at least one business plan per day from prospective investors. As Sudhir Sethi,
Director, Walden-Nikko, says, “With over 50 venture capitalists and private equity
funds in the market, institutional investors alone fund close to 300 companies every year.
Each VC, on a conservative estimate, funds nearly five investments a year. It is the
Brownian movement in entrepreneurship that India is witnessing.” No doubt about it.
With such huge investments taking place, what is the value addition that the VCs can do to
these companies?

Bringing Value Addition: “The VCs provided with
higher norms of corporate governance, bring in financial value addition and a team which
is far superior to those companies that are not funded by the VCs. Brand also plays an
important part. Venture capital is risk capital and it is through management, business and
corporate governance that value is built. The valuations are definitely high for such
companies and when it hits the market with a public issue, it will have a great impact on
the economy and the stock markets. The quality of the companies will be much higher and as
such, the retail investors will not be hit,” says Sethi. The companies that have
strong management-built values, intellectual property, methodologies and process in place,
and good brand are going to be the rule of the day. Sales and marketing will be an
important issue. “It all depends on whether the chemistry matches or not. One may
have a great project and great funding, but unless there is chemistry between the VC and
the entrepreneur, it will not work out. It is very important to know how the entrepreneur
behaves when the times are not good. It is just like marriage,” says Sethi on the
relationship between the VC and the entrepreneur.

Creating Quality Companies: With Indian IT companies
going global, Sethi is of the opinion that ‘rupee funds’ should be allowed to
invest outside India seamlessly. “The VCs will get capital gains out of it and India
will definitely gain by means of foreign exchange,” says Sethi. He also feels that
foreign employees should be given employee stock options in Indian companies. It is
important that the VCs create quality companies and the recipe for this is the combination
of financial services and knowledge. As Sethi says, “It is only the knowledge-based
companies that are going to survive—companies which could have gone for funding from
VCs rather than the capital market, thereby increasing the risks to retail investors.
There are failures, obstacles and hurdles, but that is how life is.”