Thursday, September 4, 2008

Managing your Finances: The Money Man.

Managing The Money Men
Money, it’s a crime. Share it fairly but don’t take a slice of my piePink Floyd.

They might as well have been singing this song for professional investors who invest seed capital in businesses that are now ready to bloom. But to bloom, these businesses need more capital and these investors are not excited about it as they do not want to get diluted and lose control. They also don’t want professional investors into the business as it dilutes their stakes. This affects the business models and many times companies with good business models simply fold up.

RK Reddy, when he moved out of Fractal Analytics blamed the fallout on this phenomenon. “It is happening everywhere in India. Getting funding for new ventures for young businessmen is not easy in this country. It is not like the US where even venture capitalist help you in your funding requirements before you are even a graduate. India in this respect still has a long way to go,” he says. Mr Reddy is the co-founder of Fractal Analytics who moved out to start on his own along with another partner due to the difference with the investor in Fractal Analytics.

When Mr Reddy passed out of IIM-A, he and his friends thought getting professional investors to invest in their ideas will be easy. They were from the same batch of IIM-A and had enough work experience to get seed capital. But that was easier said than done. He and his friends had a tough time talking to investors and then finally ended up with a professional investor who invested the initial seed capital to start Fractal Analytics. No venture capital or institutional investor was interested in putting the seed capital.

Another services firm founded by a group of professionalsturned-entrepreneurs thought they had solved their one of the most pressing problems when they finally found a business group willing to fund their start-up. But like any relationship that goes through different phases, this one hit a rough patch a couple of years into its existence. On one hand the entrepreneurs had everything they asked for — investors who were on the board but did not interfere in the daily functioning and the strategic decisions were taken by the management team. “This is one of the biggest nightmare for an entrepreneur. But we were very lucky in this,” recollects one of the founder-promoters.

However, on the other hand, a passive investor was not the ideal recipe for growth. As the entrepreneurs soon found out as they grew bigger. Now they needed more management bandwidth and from professionals who could bring in more than money to the table.

The choice was a difficult one. Either the founders or the investors had to dilute their stake and make a compromise. Expectedly, the investors were unwilling to dilute their holdings. At this stage, the company could’ve gone the Fractal way with the founding team and the investors going different ways, and one of the members of the founding team chose to do exactly that. Frustrated by the slow pace of growth when its peers where growing much faster through acquisitions, one of the members moved out.

A solution was reached a year and many months later when the investors finally agreed to sell part of their stake and the company was able to get in an investor who would take the firm to the next level. “Had we done this earlier, we could’ve probably grown much faster. But sometimes you simply have no choice but to be patient. Indian culture is different from the American culture,” says one of the founders who stayed on.

Venture capital firms face these problems on a regular basis where they see a clear conflict between the promoter and the investor. These firms though invest in companies at the seed capital levels, they do it only if that sector is in vogue. In many cases these firms do not want to take a contrarian view and prefer to go with the trend. “Many venture capital firms will not have issues investing into a firm that is into social networking but will not invest into a business that is based on knowledge or hard skills,” says an entrepreneur who has moved out of a firm to join the competitor.

VCs on the other hand do not like to be tagged based on trends or any other parameters. Each and every venture capital firm operates differently and works in terms of domain expertise. If they do not understand the business they simply want to avoid the investment. In general they prefer businesses that are already on a growth path than be the seed investor.

“Individual investors work well when it comes to seed capital or absolute start-ups. Their requirements and expectations are different.

But when the company is on a growth path, institutional investors work better for the firm. These new investors are in a better position to help and guide the firm as compared to individual investors,” says Alok Mittal of Cannan partners, a firm that provides venture capital. When there is a VC there is a healthy board process which is absent in the case of an individual professional investor. Getting the VC funding at initial levels or seed levels is not easy in a country like India. Good business models will suffer in the hands of individual investors and this may kill entrepreneurship in India. Though VCs are saying that they are looking at good business models which require seed capital, these firms are more interested in how fast a company can be taken public and latch on to market capitalisations while the trend is hot.

Like Mr Reddy says: “Before I start something on my own, I will first look at the quality of investor. Everything else comes later.”
Article Resource:
The article appeared in The Economic Times, Mumbai in one of their successful columns on Entrepreneurship/Start-ups called "Starship Enterprise".

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