Clearstone Ventures: Financial Services in Focus.

Among the several cross-border funds operating across the Silicon Valley in the United States and India is Menlo Park-headquartered Clearstone Venture Partners, which has some well-known successes from its portfolio that includes Paypal and Overture. But the fund says it doesn’t follow a copycat approach and has kept its investment focus in India different from its strategy overseas. 

While oversees investments focus more on consumer internet and enterprise technologies, in India, says managing director Sumant Mandal, the fund is interested in consumer facing services covering a broad spectrum of sectors ranging from financial services and retail to telecom and entertainment. 

The Fund

Clearstone has three global funds under its management. Indian investments are being made out of the third $215 million fund raised in 2005. So far around $15 million has been invested cumulatively in three Indian firms and an equal amount set aside for follow-on investments in these firms. 

Its portfolio is pretty diverse compared to the average Silicon Valley fund, and its investee companies in India are BillDesk, a payments service provider, Digibee Microsytems, a mobile phone maker with facilities in Chennai and Bangalore, and Games2Win India, an online gaming company founded by serial entrepreneur Alok Kejriwal. Kejriwal is among the few entrepreneurs who made a success of their internet business when dotcoms were going bust in 2000. 

Clearstone has co-invested in all three companies. In Games2Win, its most recent investment made in March 2007, it has co-invested with Silicon Valley Bank which is a minority investor. In Digibee, it has co-invested with SIDBI and in Billdesk along with State Bank of India. “Where the other investors bring some complementary value, we are not against co-investing. In Digibee, we saw value in co-investing with SIDBI because it brings credibility with banks here,” says Clearstone director Rahul Khanna. 

Currently, the fund has offices in Mumbai and Bangalore in India. Khanna is based in India. Sumant, who works from California, travels to India every quarter. The fund is expanding its team in India. Apart from the US, it has operations only in India. 

The Sweet Spot 

The fund, while looking out for investment opportunities in business and entrepreneurs with potential, doesn’t confine itself to any single sector or sectors. “While we have a global fund, the themes are quite different,” says Khanna. 

The fund prefers to invest in consumer-facing industries, be it in electronics or lifestyle, because it believes they have the capacity for scale and high growth. 

One of the areas which it is currently exploring for potential investments is retail financial services. Apart from the sector, it looks at the track record of the entrepreneurs and whether they have relevant domain experience. The average period for which it stays invested in a venture is about five years although it could be longer in some instances. 

It expects to make another one or two investments out of its global fund in India. Its next fund, which it plans to raise in early 2008, will have around $100 million earmarked for India. This fund will also be global fund with a corpus of $300 million - $400 million. 

Mandal says the Clearstone is open to smaller investments as well in early stage companies and the investment size could range from half a million dollars to $20 million. In the US, its fund has helped build many companies right from the idea stage, although that has not been the case so far in India. 

Sumant Mandal Managing Director Clearstone Venture Partners 

Company Overview

Clearstone Venture Partners is a venture capital firm specializing in seed and early stage investments. It also prefers to make later round investments in highly successful companies already backed by other venture capital firms with whom it has prior relationships. The firm seeks to invest in technology markets, including software, consumer, enterprise infrastructure, enterprise computing, storage, communications, optical communications, data center, enterprise software, security, wireless, micro-processors, imaging and transformative infrastructure, semiconductors, advanced optics, and consumer and business Internet sector.

With in enterprise software it focuses on New application models & service oriented architectures (Web Services), open source solutions, web-based application delivery models including “software as functional media”, and Microsoft exchange as a platform for enterprise collaboration. In consumer sector the firm seeks to invest in mobile phone applications, wireless multimedia, social networking applied to commerce, and where there is a broad intersection of technology & consumer activity. 

Within communications it focuses on IP telephony, seamless wireless: integration of cell & WiFi, and services. In data center segment the firm seeks to invest in virtualization & utilization for scalability and performance. It prefers to invest in companies located near its offices. For earlier stage businesses, the firm seeks to invest in companies located within a one-hour plane flight of its Bay Area or Southern California offices and for later stage companies, it prefers to invest in Continental United States. 

The firm also seeks to invest outside its region, with a local partner with whom it has previously invested, if it receives a promising proposal. The firm prefers to invest between $3 million to $15 million and could go for further investments in special situations. It seeks to be the lead investor and take a board seat on its portfolio companies. Clearstone Venture Partners was founded by Bill Elkus in 1998 and is based in Santa Monica, California with additional offices in Menlo Park, California and Maharastra, India.

Questions Venture Capitalists ask an Entrepreneur.

Questions VCs ask a Successful Entrepreneur.

WHEN raising money from venture capitalists or angels, you’ll want to meet as many as possible. They won’t all invest, but each time you pitch, you get better. Each time you pitch, you get asked different questions, get different opinions and ideas. It’s worth it to pitch as many people as you can, as often as you can. Some questions will get asked over and over. And you’ll discover those patterns quickly enough and adjust your pitch accordingly. If you have a lessthan-stellar answer to a question that gets asked once or twice, it’s not a big deal. But if your weaker answers are to the most common investor questions, you’ve got a problem. With that in mind, here are some of the more common questions investors will ask:

SO WHAT’S YOUR BUSINESS ALL ABOUT?

The wording of this question will change, but this is the classic “elevator pitch” question. Translation: “In the shortest amount of time possible, grab my interest by the proverbial you-know-whats.” Sell them quick, with something simple and powerful they can remember; and keep reiterating that message throughout your presentation.

WHAT’S THE BARRIER TO ENTRY FOR COMPETITION?

For Web 2.0 startups, this can be tough. The question comes from VCs and angels that might not be as familiar with the overall industry and the ease with which many web applications can be built. They’re looking for a real technological barrier that might not exist. Some answers that might help you skirt this topic: launching big, building a devoted community, key partnerships and/or customers (before launch), we’re cooler than everyone else (this won’t work.) None of these answers are great (for a host of reasons.)

WHAT’S GOING TO STOP BIG MONSTER COMPANY IN YOUR SPACE FROM COPYING YOU?

This is almost identical to Question No. 2 but it’s more commonly asked because there’s always competition. And, it’s usually from the “big bad wolf” company that’s got tons of money, lots of market share, a huge staff and years of experience. For starters, don’t say, “What competition? We don’t have any.” There’s always competition. Secondly, this is a tough question to answer. What is stopping “big bad wolf” company from copying you instantly and smashing you like a bug? Generally, you can argue: We can move more quickly. Big bad wolf is too busy managing what it’s doing to innovate. They’ll acquire us rather than copy us (if you have examples, use them.)

HOW FAR DOES THAT MONEY GET YOU?

Have a good answer to this question. Couch this in product and financial terms, i.e. “It gets us six months past launch, when we expect to be cash flow positive.” The best way to think about this is to calculate how long the money will last if you earn zero revenue. Count backwards by four-six months and that will tell you when you need to start the process of raising more money. If the money is only going to last you four-six months, you need to start looking for more money almost immediately (which isn’t a pleasant thought.)

WHY ARE YOU RAISING THE MONEY YOU WANT TO RAISE?

The amount you’re asking for is critical. Make sure you’ve done your financial homework. Don’t tell them your numbers are conservative, just explain to them how you arrived at them.

DO YOU HAVE ANY CUSTOMERS? HAVE YOU SPOKEN TO POTENTIAL CUSTOMERS?

Investors are looking for traction, or at least the inkling of traction. As soon as possible, try and get a few potential customers to say, “Sounds interesting.” You might even use them as references. This raises the comfort level for investors and helps answer the question, “What’s the market?”

WHAT’S YOUR MARKETING STRATEGY?

For early stage companies this is a very tough question. Chances are “just getting to freaking launch” is what you’re thinking, but that’s not good enough. And “launch big” is equally uninspiring. Think about presenting a timeline of events and customer acquisition numbers that you’re anticipating, tied to marketing. Throw in a variety of strategies that you’re going to do or researching. Marketing will be critical to your success, so you better plan for it sooner rather than later.

WHAT ARE YOU CODING IN?

Investors do want technical details. This is an easy question to answer at least (assuming you know!)

HOW ARE YOU HANDLING TECHNOLOGICAL INFRASTRUCTURE FOR SCALING?

Investors want technical details. They want to know that you’ve thought about the behindthe-scenes technology to support your system. When customers are signing up faster than you can process their credit cards (don’t let that happen!), will the system stay running at a reasonable speed? The further you get along in the process with investors, the more technical details they’ll want.

WHAT’S THE TEAM LOOK LIKE? WHAT ARE YOUR BACKGROUNDS?

Investors want to know the backgrounds of the founders. If you’ve got people on staff, they’ll want to know who, why you hired those people, and who else (and how many) you need to bring on board. They’ll want to know how quickly you expect to grow the team over time as well. Although there are common questions you’ll get from venture capitalists and angel investors, what’s more fascinating is that each investor will ask different questions. You can’t be prepared for every question, but even if you get new ones, the more comfortable you are pitching (because you’ve done it so many times), the better.

Reference:
(From entrepreneurship site Instigator Blog)

Where angels don’t fear to tread.

When A Rookie Entrepreneur Is Not Yet Ready For Venture Capital Funding,It Is The Angel Investor Who Gives That Person Wings.

BUSINESS aspirant Madan Pandit quit his job in 2004 and roamed Bangalore’s cyber cafes to build the prototype of an online search analytics tool, which he later converted into his first venture. When he needed funds for the start-up, he didn’t consider venture capital (VC) firms but approached well-known angel investor Kanwaljit Singh. With an unproven technology and hardly a business model to speak of, he still succeeded in getting the funding.

On the other hand, Phaninder Sama, cofounder of Redbus.in, an online bus ticketing site, ran his new business for around three months before making a venture capital pitch. He and his partners skipped the angel step altogether. They, too, got the money. In fact, the new image acquired by the VC connection helped them hire high-class talent.
Two entrepreneurs. Two radically opposite strategies. And both are happy with their respective choices today. So, how does one tell whether a new business should go in for angel investment or venture capital funding? It is indeed a crucial choice for a small company, because if an entrepreneur is not yet ready for venture capital, it is pointless to waste time pitching the business to VCs and more profitable to approach an angel.

Angel investors, often, are successful entrepreneurs themselves, fondly reliving their early struggles and wanting to mentor young minds. Some think of investments in start-ups as a way to give back to society. Others, who left India and made it big in the West, want to shrink the country’s economic growth curve with the stimulus their money would bring to entrepreneurship. Thus, they are driven first by the beauty of new ideas and only then, by return on investment. They can put in as little as a few lakhs of rupees to as much as several crores.

Venture capital funds, on the contrary, are professionally-driven enterprises which pool in resources from their investors and channel them into ideas that are more likely to succeed. They often look for a proven, or at least a well thought-out business model, cash flow, management bandwidth and so on. They also look to invest a sizeable amount of money, say a few million dollars.

“By default, you would always want to go in for VC,” Suvir Sujan, a venture capitalist with Nexus India Capital and a former angel investor, said. “VCs can get you further with capital. With an angel, you could get stuck, because there is only so much funding an angel can provide. After all, he is just one individual. The VC offers the stability of an institution.” However, an angel would be the option when VCs are telling you it is too early to invest in your company, he added.

Venture capital funds can be of immense help in building a company to maturity, after the business has cleared the initial hurdle of getting on the track. In an increasingly globalised world, marketing and hiring the best talent can be expensive and large investments are called for in the growth stage. Angel investors don’t have the financial muscle to shepherd their investee companies beyond a point. So, in reality, the two investors play for stakes in different stages of entrepreneurship, but their roles often overlap. To choose between the two, a thumb rule for an entrepreneur could be the stage at which a start-up finds itself. The earlier the stage, the more inexperienced the entrepreneur, higher is the need for angel investment support. Remember, the angel is likely to take more personal interest in the business than a VC could possibly do.

Madan Pandit recalls how he stumbled on Kanwaljit Singh at a social gathering. Talking to him, Pandit realised the investor was passionate and hungry for ideas such as his own and that he would be willing to bet on a horse that was yet to run a race. They continued to remain in touch after their first meeting. Eventually, Mr Singh took Mr Pandit under his wings. “I didn’t completely understand what he did. All I had was the framework of understanding as to why it would work. I also knew for sure that he had the relevant experience and that he had his sense of direction clear in his mind,” Mr Singh said. Pandit’s offering, which he calls a ‘post-Google solution’, is aimed at enabling analysis of information thrown up in a search so that the results could be used more effectively. This new thought was put on a firmer business footing with the help of Mr Singh’s association.

His business, just an idea at that time, could have been rejected by venture capital funds as too small and unattractive. They might have been discouraged by his lack of experience or doubted the viability of the product.

The community of angel investors is expanding rapidly in India and it is time entrepreneurs benefited from this class of patrons, experts said.

Raising venture capital is often a difficult task even for companies with a proof of concept. For the rookie, it can be a frustrating experience to get rejected repeatedly. Just the fire-inthe-belly won’t light up a VC’s imagination and the funding agency may reject an application on the slightest doubt. After all, VC panelists have to refer back to hard-nosed investment committees for approvals.

On the other hand, angel investors often work on a hunch. “They can take more risks as they are spending their own money. Angels invest in entrepreneurs because they like to do it. So it is okay if the entrepreneur does not have a revenue model,” said The Indus Entrepreneurs-Delhi president Saurabh Srivastava. Processes, balance sheet and market share, the staple diet of venture capitalists, are not so central to an angel investor’s strategy. Bharati Jacob, partner with SeedFund and also a former angel, said she invests in people who have the capacity to build a business, rather than on their revenue models and marketing strategy. “As an angel, I did invest in companies because I trusted the people. I didn’t necessarily know the sector as well.”

There are a number of ways to seek out an angel. The National Entrepreneurial Network’s (NEN) Online Resource presents a list of angel investors in India and simplifies the search process down to three points: 1) Ask everyone you know. This could include friends, family, acquaintances and even ex-bosses. 2) Research, and then cold call. You might find a potential angel from his blog or a news article or maybe someone who has had experience in a related industry. 3) Make use of existing forums: It is easier than ever before to be an entrepreneur in India. There are specific groups like NEN and TiE that have brought together experienced entrepreneurs to mentor and network freshers. These organisations can help hook up a young entrepreneur with potential angels. There are also numerous events conducted by organisations like CII and Ficci.

But each external investment comes at a price. You fork out a chunk of your company to the investor, angel or VC. An entrepreneur must be careful in how much stake he or she is ready to give away. Mohit Dubey of Bhopal learnt it only much later. His idea was to set up a website that would simplify the procedure of buying a car, new or used. His firm, carwale.com, started rolling with Rs 4 lakh given to him by a former boss and mentor, and raised Rs 12 lakh soon after.

Back then, he ended up surrendering a large chunk of his company for the initial investment. In retrospect, he thinks it may have been too much. Nevertheless, he looks at the brighter side and calls it a learning process. “If I were to do it all over again, I would have given out a lot less stake to the investors and consultants. If at all I would give out such a large stake, I would give it on the condition of performance.”

Article Resource:
Author: Jacob Cherian is the Chief Editor in the The Economic Times, Mumbai and the article appeared in one of their successful columns on Entrepreneurship/Start-ups called "Starship Enterprise".

Changing Tech-tonics of VC land

Changing Tech-tonics of VC land

Venture capital funds are shedding their single-minded focus on technology startups and looking at non-tech sectors such as food & retail.

THE dotcom boom had a lasting impact on the fund-raising scene in India. While bank loans were the primary source of capital earlier and venture capital an increasingly attractive option later, it was during the time of the internet bubble that the rules of the game changed forever. It was not uncommon for venture capitalists to decide funding over lunch with an entrepreneur, sometimes before the plates had been cleared. This led to a mushrooming of tech ventures and the eventual failures, but it also nurtured some very innovative businesses. The losers in this race, some say, were the entrepreneurs looking to start businesses in conventional sectors without the allure of the World Wide Web. Only a small proportion of these business aspirants got funding and others had to make to do with money from friends and banks.

Not any more. Funding for technology startups has reached a more mature stage and venture capital houses now take a much more discerning view of business models. A mere website will not get money now. Old world concepts such as cash flow are back in the reckoning. And early stage investors are also beginning to attach more importance to non-tech ventures, especially the evergreen ones such as food and sectors gaining from the country’s economic rise such as retail. Other sectors including alternative energy, whose importance will be understood in the coming years, are also finding favour.

Arun Natarajan of Venture Intelligence, which tracking the funding industry, says that there has been a very clear shift among the investing community in the last three years with 20% of the VC funds going into the non-tech entrepreneurs. “Three years ago if somebody talked about funding an non-tech entrepreneur, one would find it strange,” but now it is increasingly becoming part of the strategy of a fund provider, he says.

Retail chain Subhiksha was an early bird, winning capital support from ICICI Venture seven years ago. It has obviously been a successful bet for the investor. This sort of strategy could help VCs mitigate some of the risks involved in excessive reliance on technology businesses. It also opens up vistas to sectors that will rule the next decade, just as tech businesses did in the current one.

India’s growing cities are bustling with examples of the new investment paradigm. The Shanghai-like skyline of Gurgaon is peppered with the name boards of Yo China, a Chinese fast food chain that claims to offer affordable eating. Its success in raising capital from Matrix will enthuse fast food entrepreneurs (or wannabes?) to try their hand at their own ventures too.

In the southern city of Bangalore, where technology start-ups are not far behind autorickshaws and flower vendors in number, fast food chain KaatiZone is rolling chappatis for the rushhour commuter. It packs the common Indian bread varieties with tasty stuffings and sells them under a stand-eat-and-run model. Erasmic Investment Ventures, which provided early capital for this chain, is helping it scale up the number not just in Bangalore but in other cities as well. KaatiZone’s founder Kiran Nadkarni says he wants to set up a nation-wide network with international standards.He says a pleasant ambience, good quality food and hygiene should be able to attract the increasingly discerning Indian customer. “Food business is a low entry barrier segment but with high mortality,” he says.

Mom and pop stores have been the mainstay for the Indian household for decades, but this is the age of organised retailing. With big names such as Reliance and Bharti becoming shopkeepers, an ecosystem of vendors serving them has also been created. Like retail outfit firm Dovetail which is riding on the burgeoning demand for quality shopping space. Erasmic has backed this venture also.

Things are just beginning to hot up for Dovetails, says managing director S Sundar. The company had a turnover of Rs 15 crore in 2005-06 and Rs 25 crore in 2006-07. The
heady pace of growth currently sustains a staff of 150, but the orders are growing the day, putting pressure on him to expand faster. “Sometimes our customer asks us
to provide the fitouts for 50,000 sq ft in a week’s time.” Further, the company is also looking to diversify into designer furniture.

Erasmic’s Prashant Prakash says venture capital support has been important to Kaati-Zone and Dovetail not only for the money but also the rigour of corporate discipline that the relationship brought to the managements.

So what kind of non-tech companies attract venture capital funding?
Right now, the hottest thing going around is the India story. The economic upsurge, the loose cash that middle class households want to be seen burning and a furious expansion of consumption are all the underlying themes that VCs want to take advantage of. Businesses built around the domestic market, identifying a niche pain point to address and having the ability to scale up are likely to get the cheque. While investors may look at any business model worth pursuing, service oriented businesses with less capital needs are the chosen flavour.
In technology start-ups, the exit is often an acquisition or a public offer of shares. This could happen in several years or just in a few months. But in non-tech ventures, the rules are slightly different. Venture capital funds play for the medium term here. A three to five year horizon is common. So, it is not enough just to have a cool idea (like a video uploading site or a social networking service). The entrepreneur also has to make that cool idea work, build size and consolidate revenues and take the business mainstream.
These are still early days for non-technology businesses in the age of venture capital funding and the key bridge to be crossed is true corporatisation in terms of processes and systems, says Kanwaljit Singh of Helion Ventures. Many of these businesses are not new to the country, but have been run in the traditional, unorganised manner for years. To develop modern business models for these businesses and bringing in innovation and higher quality would be a challenge. There are many steps that these new businesses will have to go through before being gaining full acceptance among the VC community.Singh says education and health sectors, besides food and retail, could be the areas that VCs would be watching out for great ideas to come from.

As the world’s liplock with technology and internet easing a bit, both entrepreneurs and investors are taking more notice of other sectors. The time was never as ripe as it is now, with the economy booming and rules liberalised. From now on, all it takes is a flurry of ideas that will change the way we eat, shop, learn and live.

Article Resource:
Author: Thimmaya Poojary is the Chief Editor in the The Economic Times, Mumbai and the article appeared in one of their successful columns on Entrepreneurship/Start-ups called "Starship Enterprise".

If Wishes were VCs..

IF WISHES WERE VCS...

A Young and successful entrepreneur can be a charmer or a bungler. It is easy to tell when the person faces venture capitalists. Jacob Cherian sits through a mock deal flow session.

YES. I do.” Those three little magic words that embark a person on the matrimonial pulpit on a journey full of uncertainties and hopefully big rewards. In the world of business, they are very occasionally uttered by venture capitalists to an entrepreneur who had fallen in love with their money. But when they nod, they walk into a relationship as complex as marriage, only with a higher failure rate.

It is quite natural that they relish saying “No, Forget It” much more frequently.
Making a neat, quick pitch to potential investors is one of the key skills that an entrepreneur must cultivate. The future of one bright idea or an early stage marvel may very well depend on those few minutes. Venture capitalists will refuse a proposal even if they have a slight doubt about its viability or the business leader’s ability to execute it. In many cases, the refusal may not amount to the rejection of the idea itself, but a safe option for want of conviction.

It is in this context that the event the other day in Mumbai was keenly watched. It had the tone of a high-profile conference or the mood of a law school moot court. It was Red Herring Atre 2007’s final event — Meet the Money — where entrepreneurs faced a panel of three venture capitalists, arguing why they must invest in their businesses.

The learnings were typical of what it takes a startup to succeed in attracting other people’s money and how easy it is to botch it all up. At the ballroom in Taj Land’s End Hotel, the air was thick with the talk of money. Except that none was involved. It was an event where the VC pitches would be heard and decided, but no money exchanged at the end of the day. It was just a game after all, we were told.

But the three entrepreneurs and the venture capitalists were real. Ajay Kumar Kapur, CEO of Sidbi Venture, Promod Haque, managing partner at Norwest Venture Partners and Harshal J Shah, CEO of Reliance Technology Ventures played the potential investors, judging whether the entrepreneurs deserved funding to scale up their operations.

Alex Vieux, CEO of Red Herring, spelt out the rules of the game and acted as the moderator for the evening. Each aspirant had to make a 60-second presentation and answer queries over a fourminute session.

First on stage was KP Vinod, director of BigTec. He sauntered on to stage, probably rehearsing his pitch but wasting some of his 60 seconds. He had a faint smile on his face, almost betraying a casual approach that this is only a game.

Describing his company as a diverse portfolio company, Vinod said, “We fund products ourselves,” and asked for VC funding so his company, in turn, could put the money behind innovative ideas. He went on listing the areas the company was interested in, from software engineering to biochemistry.

The short presentation over, Vieux asked, “How much money are you looking for?” Vinod popped out, “Ten million dollars.”

On being asked about the team, Vinod related the names of all the people involved in the company and who headed which department. “But you’ve said only the names of the team member. That doesn’t tell us anything,” protested a panellist. Then, Vinod went on to relate the names of departments attached to each name. “But what is their background?” an impatient Vieux asked. Vinod was obviously nervous and could muster enough of an answer.

“You’re basically an incubator,” Norwest’s Haque said.

“We wouldn’t call ourselves an incubator. We are a product innovation company,” countered Vinod.

“But you are basically an incubator,” Haque insisted. “For a startup incubator, why are you spreading yourself across three different sectors?”

“We have the option to shut down all the other technologies and focus only on one thing. I think that innovation is a fundamental part of our DNA. And that means we have a pipeline.”

Not much impressed, the panel quizzed him on cash flow and he said his company would go on incubating early stage and late stage innovations. Eventually, the technology would be spun off as a product and money would, one day, surely come in.

Vieux asked the three-member panel to vote. “NO,” “NO” and “NO”.

“Here is the issue,” said Vieux, taking charge of the floor. “When you communicate your value proposition, you make your company seem more unfocused than it is in reality. You are in the bio-tech sector. You are in a very good niche. You want to make it look bigger than it is, and because of that it, seems like you are doing something very fuzzy. And there’s another thing VCs don’t like. VCs don’t like people who do their job with others’ money. It is their job to fund companies and fund innovation. And you are then telling them that you want to take their money so that you can fund innovation. So you are in a genre that they don’t like.”

One of the VCs then took over. “I know someone who relocated from the UK for his company. He said this is all I’m going to focus on. He was like ‘I am either going to make it or break it’. That is the kind of passion and dedication we want to see. If you’ve got that, then you’ve got it. You want to diversify your portfolio for us, remember that we are already good at diversifying. It is better for you to focus on one thing and gain that market.”
Vieux continued: “If you are an entrepreneur, burn all your ships.

Don’t worry. If you are going to sink you are going to sink. But burn all your ships. Go for it and go for that one thing that you are good at it. Don’t hedge yourself. If you hedge yourself, it means you are not sure that you are going to succeed. If you want someone to invest in you, you have to be that sure.”

Up next was Netalter. Its vice president for communications, Gurudatt Shennoy, unveiled his wooing plan. “We have some very innovative solutions for the internet. We are developing the Netalter browser. Our mission is to have the Netalter browser on every computing device in the world. We are also looking at having our solutions for the enterprise market. We are talking to a couple of major players in Europe who are interested in our P2P technology. Their clients are interested in this. We will get our revenues from this by licensing our technologies. But we need funding so that we can get the human resources and set up the infrastructure there.”

Sidbi Venture’s Kapur asked, “What pain point are you dealing with? Why would people want your product?”

“With current browsers there are security issues, spam, cookies and privacy. We have a secure P2P technology that we have invented and patented. This will create an opportunity for a more organised network than the current network.” This was Shennoy.
“Do you have beta customers?”
“No. That is why we are seeking funding. Because we believe that we can come out with our product within three months. The key thing would be to get them to shift over to this. It could be for e-commerce or social networking or other such things.”
“Who will be your beta customer?” the panellists wanted to know.
“People who are not satisfied with the internet. People who feel that their time is wasted on the Net. For instance, I get a lot of spam in my mail and it wastes my time. It would be for both individuals as well corporates. The basic browser would be free. For the corporate to work on the browser, it can be customised.”

Then came the inevitable question: “How will you get your revenue if you offer it for free?”

And then the familiar answer. “We want to create the market first. We are already tied up with content providers. When we launch we will tie up with job-portals, travel sites and such like.”

“Who are your competitors?” asked the VCs. “There are no specific competitors currently. However, as we develop up all the big companies will develop similar technologies. We will have a search engine, a browser. The P2P platform can be converted into a grid. We call it a democratic grid. If you participate in the grid, you can use it to search for information using other computers as well. The results can also be outputted on your mobile phone.”

Clang, and it was time up. Again, all the three said No. However, Kapur did seem a bit interested and said “No as of now, but possibly with another round of discussion. I still do not have clarity on what this is about.”

Shennoy attempted a quick exit with a “Thank you” but Vieux cut him off and said, “Don’t go. Time to debrief. Don’t be too intelligent for your own good. You are trying to hedge. You have a first product and a second product and a whole lot of other things. My advice to you is to do one thing and do it well. People don’t understand why you have different things. This communicates a lack of focus and VCs don’t want to see that. This makes you too intelligent for your own good. You ought to focus on creating differentiated value.”

The final aspirant was from MAIA Intelligence. “You have had companies before you and the VCs are used to saying no,” Vieux said welcoming CEO Sanjay Mehta. A confident Mehta was unruffled. “Let’s see if we can change that.” Meanwhile, pamphlets describing MAIA’s product were being distributed among the VCs.

“We are in the intelligence space. My background: I am a serial entrepreneur with four startups behind me,” Mehta said. “We entered this space as we saw that people have issues in reporting their progress on the operational front. We saw that they typically use excel or people are writing queries. So we decided to target this space. We already have this product out and some of our clients are Reliance Capital, Edelweiss Capital. With one of our clients, we have 1,200 users. We are looking at becoming the largest BI user base in India. We have just got our first customer in the US,” he says.

“Are you looking for money?”
“We are looking for $15 million as we are looking at marketing and branding, not product development.”

Reliance Tech Ventures’ Shah asked, “How much of your revenues comes form Reliance?”
“We have 37 customers and one of them is Reliance. And every deal is around (Rupees) 9 lakh each,” Mehta replied.
“Can you tell me about your team?”
“We are six people. Totally we are two chartered accountants, three on the technical side and one on the alliance side.”
“What are your plans for the $15 million? How are you going to take it?” the VCs asked.

“We can take it $5 million at a time . The product is already ready. We need the funding to take it to market.” At this point, Vieux interrupted.
“Twenty years ago I used to work with enterprise software. My first company went public. From that experience, I know you don’t need that much capital.”
Then, Kapur asked the entrepreneur what was the market size for a product like the one being described. To which, Mehta began citing a Gartner study but Kapur cut him off and asked, “What is your number?”

Mehta conceded that he didn’t have a number, but “by 2009 March, we should have 400 customers with an average deal size of Rs 15 lakh.”
Time for the final vote of the day. And at last, those magic words of approval were heard. Shah of Reliance Tech Ventures said. “Yes, but I want to qualify my ‘yes’ because I would always like to look at a company that has managed to sell to Reliance. I know how strict Reliance is when deciding a purchase. Also, I’ve seen a domino-effect happen with other companies in the past. Get Reliance as a customer and their competitors want to have a look at you.’

“Yes, this is true,” said an obviously relieved Mehta.
Haque then gave his verdict. “No. I would not invest in a company that is built around a reporting product. I have experience in this field myself.”
And thus ended a session that saw virtually every trick in the book that wouldn’t work while talking to venture capitalists. As a parting advice to Mehta, Vieux said: “When you go and talk to a venture capitalist, do your homework. For God’s sake, do your homework. Come out with market size, numbers, percentages, your plan of action, your team. Be crystal clear and crisp. You aren’t prepared even though you knew that you had to make this presentation for the past few days. When you talk to those people, you need to be prepared with your numbers. You have three things going for you: You are a repeat entrepreneur. The second thing is that you have a proof of concept that is selling and you sold to one of the most difficult companies. Finally, you are at the right place at the right time in business intelligence space.”

Article Resource:
The article appeared in The Economic Times, Mumbai in one of their successful columns on Entrepreneurship/Start-ups called "Starship Enterprise".

Financial well-being.

Financial well-being

IS YOUR startup spending unwisely, taking on orders it cannot execute or sitting on underutilised assets? Monitor the following ten parameters continuously to ensure the financial health of your company.

1. What are your assets?

Yes, yes, we all know that assets are the things that a business owns. Tracking your equipment, furniture, real estate and other holdings should be easy. But to have a true idea of the value of your business, you also have to track changes in the value of those assets. More than one small business has found itself located on a piece of land that’s worth more than the business itself. Similarly, you also will want to track the declining value of assets such as computers and office furniture.

2. What are your liabilities?

Again, on the face of it, this is easy — liabilities are what you owe. But what you owe isn’t always as obvious as a bill from your landlord. Payroll taxes are a liability that you might be able to put off on a monthly or quarterly basis, depending on the size of your payroll. Loans are a clear liability, but in repaying them you’ll want to be able to track how much of a payment is applied against principal and interest.

3. What’s it costing you to produce what you sell?

If you’re buying a finished item for resale, this is relatively easy. It’s trickier if you have to calculate all the factors, such as labour, that go into manufacturing a product.

4. What’s it costing you to sell what you sell?

Advertising, marketing, labour, storage and the catchall category of overhead — it’s useful to know how much it costs you getting a product out the door as well as what it costs you in creating it.

5. What’s your gross profit margin?

This is calculated by dividing your total sales into your gross profit. If your gross profit margin is staying consistent or trending upward, you’re probably on track in terms of adjusting your prices appropriately to reflect changes in what you pay for what you sell or produce. Being able to track a declining margin can give you a headsup that you must adjust your prices or your costs. In the worst cases, of course, your gross profit and your profit margin disappear altogether. At that point, you’ll be like the fellow who lost money on every sale but figured he could make it up in volume. Don’t go there.

6. What’s your debt-to-asset ratio?

This ratio can let you know how much of the stuff you have in your company is actually owned by someone else — your lender. Having this ratio climb can be a bad sign — it can happen as part of a major expansion, but it can also indicate that you’re getting in over your head.

7. What’s the value of your accounts receivable?

This is the money that you are owed. Value of being able to track it: If accounts receivable are on the rise, you may be getting a warning that the folks you sell to are starting to stumble. That’s especially true if your accounts receivable, as a percentage of total sales, are increasing.

8. What’s your average collection time on accounts receivable?

This is probably one of the most aggravating pieces of information for cashstrapped businesses, because it tells you how many days you’re acting as “banker” for the people who owe you money. To calculate it, you’ll need to know your average daily sales and then divide that number into your accounts receivable.

9. What are your accounts payable?

The flip side of accounts receivable. An increase in your accounts payable may merely reflect a policy of taking a little longer to pay bills, or of a larger amount of purchases overall. But an increase that hasn’t been planned or managed can be an internal warning that your company’s financial strength is waning.

10. What’s happening with your inventory?

There are occasions, even in this just-in-time business world, when building up a significant inventory can be a good thing. If prices for items you sell or use in production are relatively low, putting some of your money into inventory may make sense. Being able to track your inventory, and how long it takes to be sold or turn over, can tell you whether business is increasing or slowing down. It also tells you how much money that might be used for other payments or investments is tied up in this unproductive asset.

Reference:
(Adapted from Microsoft’s Small Business Centre website)

Dealing with investors on the board.

Dealing with investors on the board.

SOME tips to help you make the most of your board when your investors become directors. Advisors are not directors, and directors are not advisors. As an entrepreneur, if you’re looking for an advisor, get a consultant. Don’t rely on your board to give you advice. Their job is to hold you accountable for goals that drive your business’ success. Most entrepreneurs like the idea of recruiting an advisory board. Often, it provides instant credibility. For first-time entrepreneurs, it also gives them confidence that smart people believe in their business concept and are willing to lend their reputations to help the company grow. In reality, it takes a lot of work to make advisory boards give advice that’s helpful to your company.

GIVE YOUR INITIAL DIRECTORS A TERM LIMIT

During the founding stage of your business, some attorneys will encourage you to expand your board to include more people than just the founders. If you’re like most entrepreneurs, you may be tempted to ask your closest advisors to join your board even if they aren’t investors in the enterprise. This isn’t a horrible idea, despite the guidance provided above about keeping advisors and directors separate.

However, if you do invite advisors to join your board, be sure to set a term limit. This is simply a matter of setting expectations through an e-mail or letter. Also, ensure that your attorney has drafted your bylaws and financing documents with the appropriate governance rules giving stockholders and founders the ability to change the composition of the board.
You very likely will want the ability to change directors as you get close to a round of financing. Even if you don’t plan to seek future financing, you may find that the advisor-director is no longer very helpful after a few months, and it will be much easier to have the conversation about parting ways if it’s associated with a pre-planned end of term.

ENSURE DIRECTORS ARE WELL-EQUIPPED

A large part of a director’s job in a start-up is to sign legal paperwork. If you plan to raise money from angel investors without changing the make-up of your board, then your directors will need to approve option plans, capitalisation tables and stock charters, and various corporate resolutions. Avoid directors who are inexperienced and too cautious. It is good to have at least one process-oriented director, who likes to follow the rules of good governance. It will instill good habits at your company, which in the long run will save you legal bills and avoid administrative costs.

INVESTMENT IS THE KEY

When you invite an investor to join your board, the dynamic of board meetings is likely to change from an advisory, problem-solving environment to a performance, accountability-driven environment. However, this only happens when you invite larger investors with more at stake. Angel investors, who have contributed $25,000, tend to behave more like advisors even if they’re on the board.

LEARN TO BECOME A CHAIRPERSON

One of the hardest lessons for entrepreneurs is to learn to balance the roles of a CEO and chairperson of the board. Since you spend 99% of your time serving as CEO and chief bottlewasher in your enterprise, the ability to act like a board chair for a few hours every quarter is not easy. To do the job well, you have to remember that most directors who attend board meetings aren’t thinking about your business between meetings, so you need to remind them of the corporate objectives regularly and take full ownership. During the start-up stage, the essential administrative roles of a board chair are to run the meetings, set the agendas and oversee the fiduciary responsibilities of the board. One way to get some insight is to attend board meetings as a guest at other companies — or by joining a non-profit or charitable board.

Reference:
Adapted from entrepreneur.com

Beginning Of A New Financial Year.

IT’S THAT TIME OF THE YEAR TO PAUSE & MARCH ON

Start-Ups Need To Realise The Potential The Beginning Of A New Financial Year Brings And Gear Up To Tap It.

THE passing of March is the death of weariness and the birth of April the start of hope all over the world. Centuries ago, Geoffrey Chaucer opened his Canterbury Tales expressing his love for the sweet showers of April and the drought of March that pierce to the roots. For businesses, it is the end of the financial year, time to close old books and open new ones. It is when one squares off pending transactions, be they receipts or payments, evaluates performance, takes stock of inventory, realigns talent pools and makes strategic corrections. While big corporations have evolved time-tested models to take advantage of the changing of the fiscal baton, first-time entrepreneurs often tend to overlook the opportunity that March-April present to renew themselves.

Running a start-up from her basement in Bangalore, Rashmi, the 26-year-old founder of Rage Chocolatier, is one such entrepreneur. Her company, which is run by an eight-member team, is about to see its first year-end. She, like almost every entrepreneur that ET spoke to, was not fully prepared for the event. Fortunately for her, she had the mentorship of her father to guide her through her first year. “What we did was simple. All the bills we paid were put in one file and all the sales receipts were put in another. Now we are gathering them and running them through Tally, an accounting software. We have just got a CA to look into it, but I’ve realised that I need to hire a permanent CA to look into this all year round.” Keeping track of stocks and money is a full-time job by itself.

Keeping your tax record updated is important, not only to be taken seriously by potential business partners, but also to keep regulatory headaches away. The IIMA team that founded Ten-ADay has also just hired a CA. The Mumbai-based company is also set to see its first financial year draw to a close. The company produces preparation material for the Common Admission Test. The company is looking at collecting income and professional taxes from its employees as it hasn’t been done yet, says co-founder Vishal Prabhukhanolkar.

Calling in the CA only at the year-end seems to be a common practice. This is usually because of oversight. Apart from this, a start-up that’s strapped for cash is working on a lean team. The team is usually just meant to focus on the company’s offerings. But unless systems are put in place for corporate governance early on, things might just get unwieldy when the business grows to the mature phase.

Ideally, start-ups need to focus on governance from day one and not just at the year-end. This includes keeping the books in order. “A system of governance does not generate revenue and, therefore, people don’t focus on it. Putting everything on paper is essential as it will give you credibility. This is a year-long process,” says Bharati Jacob of Seedfund. She has invested in a couple of start-ups and says she noticed that at the nascent stages, the focus tends to be on here-and-now and not on long-term things like orderly books.

Not all first-time entrepreneurs are looking at last minute book-keeping. “On the accounting front, there isn’t much to do if you’ve kept your accounts in order since day one,” says Sriram Vaidyanathan. He and his partner run a coffee shop that seems to cater to the techie crowd in Bangalore. They are about to see their first year-end as well. For his coffee shop, BrewHaHa, he says this time of the year is good to review and refine their offerings.

Veteran entrepreneur and founder of Ferns ‘N’ Petals, Vikas Gutgutia, recalls the days he set sail with his venture 12 years ago. He says he neglected simple things like collecting bills during the venture’s initial years. This made book-keeping difficult. “When you start a business and success is coming your way, it is very easy to lose sight of keeping accounts. Two to three years down the line you begin to see that you need to pay as much attention to the accounts as the business itself.” Things have come a long way since this company started out with just Rs 5,000. Today, a consultant ensures transparency in its Rs 60-crore business.

National Entrepreneurship Network (NEN) executive director Laura Parkin says, “This time of the year is a really good time to pull out the weeds, as it is usually the time for year-end financials. It’s a good habit to have an end-of-year meeting to review performance. You can look at your key-performance indicators and resources based on this cycle.” NEN helps facilitate entrepreneurial-related programmes in over 200 education institutions across the country. Key performance indicators for the organisation are active members, activity levels and dropout feedback.

During the past three months Mohit Dubey, the founder of CarWale, looks at whether his company has met the milestones that he set 12 months ago. He then goes to his clients to check whether they have any left-over budget that could be utilised. This is his first yearend as well. With the Budget speech around the corner he has his ears peeled for auto-related recommendations from the finance minister.

Experts say March is the time that entrepreneurs must take a step back from their business and look at the overall form and structure of their organisation. The business must be a clean financial entity, getting payments on time, paying out its own liabilities on time and developing a system to do this throughout the year. Tax evasion may be appealing in the short-run, but can keep a company from growing into a major force over the long term. Spending a few extra bucks on organising the financials will pay over time, they say.

Next, it is also the time to reward top performers and weed out the bottom of the pile. Companies must evolve objective systems for performance appraisals so that when a two-person team becomes a 200-people company, the management does not lose sight of who is doing what and how well.

It is also a chance to work out new tactics. Tax rates may change, taking away one benefit but bringing in another. The government may announce schemes to support economic activity and a start-up must lie in waiting for business opportunity in them. This period is more like the periodic servicing that a car might undergo, when jerky parts are fine-tuned and essential systems topped up. The onward journey can be that much smoother.

Article Resource:
Author: Jacob Cherian is the Chief Editor in the The Economic Times, Mumbai and the article appeared in one of their successful columns on Entrepreneurship/Start-ups called "Starship Enterprise".

Start-ups Seek an Enabling Environment.

START-UPS SEEK AN ENABLING ENVIRONMENT

What does the forthcoming Union Budget mean to an entrepreneur and how do this year’s wishlists look like.

FOR long, union finance ministers have been presenting budgets to stimulate government revenue flow or exports or consumption or revival of sick industries. But increasingly, they face one more priority. It is no longer enough to announce a few concessions, rejig taxes and leave the rest to god and a compliant citizenry. The primary objective of a modern day budget is not just to balance state revenues and expenditure, but to nurture an ecosystem for economic activity. It is natural that entrepreneurs expect the budget to ease conditions for business, so they can go ahead and give expression to their ideas. This year, finance minister P Chidambaram’s budget will be keenly watched for what stimulus it provides to entrepreneurship. The ecosystem for entrepreneurs has always been challenging in India and should ideally have improved with economic growth and increasing interest among the salaried class to start on their own. A lot of bottlenecks have been removed over time, but the basic complaints remain. Difficulties in raising capital, tax burden, inability to tackle currency fluctuations, wage costs, lack of impetus to research and a framework that favours big business.

For instance, selective tax benefits are a contentious issue when the government puts out a positive list of eligible industries, business mentor Pravin Gandhi, who is also the president of The Indus Entrepreneurs (TiE), Mumbai says. “There is a lot left to interpretation, which eventually leads to complexities, discussions and even litigation,” he says. Small businesses are often unable to benefit from such concessions if their business idea strays from the strict definitions of what qualifies. “A negative list makes a lot more sense than a positive list. Sector specific allocations should not be encouraged,” Mr Gandhi suggests. Also, when these tax benefits expire, it might hurt the new, smaller players more than the large, established ones and actually work as an entry barrier.

But industry experts say an entrepreneur, while looking to benefit from budget proposals or trying to protect one’s business from a new clause, should not fashion the business model around concessions. Many small businesses stop growing after a point, either because the entrepreneur becomes too comfortable with the concessions available only to small players or is afraid of the enhanced risks growth will bring. At the end of the day, entrepreneurs must follow what they want to do on their own and not depend on government’s crutches.

One crucial limiting factor is the lack of tax compliance. Some early stage businesses may believe in saving the money that otherwise would go to the income tax department and indulge in a range of practices to conceal revenues. This not only exposes them to penal action by authorities, but also rules out the potential for partnerships and participation in bigger business opportunities, because mature organisations will not do business with tax evaders. The government has been investing heavily in technology to improve tax policing and remaining on fringes is not going to be possible much longer, in any case. There are a few things that the government can do to reward tax-compliant start-ups in various sectors, experts say.

A lot is said about innovation, and finance ministers have set aside varying amounts to foster research in the country. But, the country remains a research-poor economy, where the potential for volume multiplication is often the driving factor for investment. The government, industry and venture capital houses all work separately, pursuing their own logic and there is little to show on the ground.

For instance, in the pharmaceutical sector, entrepreneur-driven ventures are not even recognised by the Department of Science and Technology. “The department should have a scheme to support these start-ups,” says Indian Pharmaceutical Alliance (IPA) secretary general DG Shah. The funding needs of such units are typically small and the government should be able to give them as grants, of course taking precautions to ensure it goes only to serious ventures. “An institute should be set up, which can evaluate the process, vet the applications and make grants accordingly. These steps are essential to be a player in the knowledge economy,” says Mr Shah. But, “when it comes to providing support, the government develops cold feet,” he adds. It is imperative that these startups are given a free hand along with easy access to funds.

India’s drug firms have gone overwhelmingly the way of generic drugs. They are more interested in making cheap copies of drugs whose patents have expired. While mastering reverse engineering, even the largest of them have not come out with an entirely new drug that the likes of Pfizer and Sanofi-Aventis are able to churn out. The government must push-start research in pharma sector to attract ambitious entrepreneurs, say experts. “If this was to happen Indian pharma research will grow manifold in no time,” says Novalead Pharma CEO Supreet Deshpande.

Venture capital funds typically avoid business ideas that have a long gestation period and highly research-oriented ventures are often a casualty to that approach. “Venture capital funds in the pharmaceutical sector are few and far in between,” adds Mr Deshpande. It makes sense for a venture capitalist to invest in an outsourcing firm, which generates cash registers quickly rather, than in a pharmaceutical research company, which will start seeing cash flow after 10 years. “This is the period when we need assistance. Tax sops are popular instruments, but they are not required for discovery research to flourish,” says Mr Deshpande.

For some years now, new-age entrepreneurs may have spoken as if starting up has to do only with internet, mobile technology and the typical online stuff. But, for economic growth to be wellrounded, a spurt in small business activity in the manufacturing sector is crucial. “The key issue here is that a large part of capital goods are coming from other countries. That means huge imports,” says Sarita Nagpal, deputy director general of the Confederation of Indian Industry (CII). The chamber has presented a voluminous, clause-by-clause memorandum of pre-budget recommendations to the finance minister, suggesting ways to ease customs duty and currency burden on the capital goods front. Also, “there is a significant need for a technology opportunity fund, which can play a role in developing the competency of these small units and which can finally augment capacity of the big players in the industry,” says Ms Nagpal.

Industry bodies have also been making the usual noise about extending tax holidays, providing interest rate subsidies and protecting exchange rates, but it is in the improvement of infrastructure and enabling conditions that an entrepreneur must base his or her strategy on. A new business is born to thrive in a competitive landscape, not a cocooned one.

That means, there will invariably be budget measures that a small business owner must accept and learn to adjust to. All is not lost for the export sector if the tax benefits are taken away, say industry veterans. In any case, plain services are increasingly becoming pointless and products are becoming cheaper by the day. And customers are demanding fresh value and innovation. This would call for entirely new products and services designed for the global market. For example, in the pharmaceutical sector, Deshpande’s Novalead is already showing that sound business models can be built around pure research. The company has shunned the undifferentiated generics business and has charted its own course in drug discovery. The same model could work in a variety of other industries.

The budget is at best a boost to business and at worst, just a bend in the corner to circumvent. As General Electric founder Jack Welch once said, “You’re either the best at what you do, or you don’t do it for very long.”

Article Resource:
Author: Ashish Kumar Mishra is the Chief Editor in the The Economic Times, Mumbai and the article appeared in one of their successful columns on Entrepreneurship/Start-ups called "Starship Enterprise".

Cautiously Venturing Funds.

Honourable examples apart, are venture capitalists in India generally risk-averse? Do they act more like private equity players?

WHEN Sujai Karampuri started soliciting venture capital investment for his fledgling business, Sloka Telecom, in 2005, he was 31 and the company was two years old. Both were too young to be funded, some VCs told him. Some others said the firm would fight a losing battle against giants such as Nortel and Alcatel. Still others were hesitant because the network infrastructure business that Sloka had chosen, was in a downtrend. The start-up approached about a dozen venture capital firms in India, but was declined each time.

Mr Karampuri’s experience is typical of hundreds of entrepreneurs in India, who find it nearly impossible to raise venture capital funding for their new businesses despite having a proper business plan and a good team. A growing tribe of business aspirants, as well as many venture capital managers themselves, say VCs adopt a very cautious approach in the country, which is just breaking into the business of start-ups. These investors, whose mandate must be to invest in new ventures and help businesses take shape, often act like private equity players and invest only in proven business models with assured cash flow. Is this a violation of the spirit of venture capitalism, just a passing phase in India’s entrepreneurship learnings, or is the quality of entrepreneurship and business model so low that VCs can’t help them even if they wanted to?

Spurned by VCs in the country, Mr Karampuri turned to those abroad. They either asked him to talk to their India offices, which brought Sloka back to square one, or told him to shift its base closer to where they were. With that option closed, Mr Karampuri weighed his next move. A typical start-up in his capital-intensive business needed $20 million. Trying to compete in an innovation-driven segment, Sloka needed $6 million for research and development alone. He figured that while entrepreneurs had to bet on the one thing they were pursuing, VCs had options from various suitors. He decided to end his search for VC investment and look out for angel investors. This time, he was successful. There has been no looking back since and Sloka’s business model was vindicated recently, when its technology was used to set up a WiMax network in the French town of Saint Medard en-Jalles.

Senior entrepreneurs and experienced fund managers in the venture capital industry say there is much justification in the criticism. Emerging markets such as ours will doubtless involve more risk, but the biggest rewards from the future are also here. Unless the VCs overcome conventional wisdom and become open to young age and radical ideas, they will miss out on the better opportunities.

But then, they also add that advanced nations, too, have gone through this phase when everyone was trying to figure out the concept of acceptable risk. Today, venture capital firms in the West take a lot more risk and have found out gems that would have been rejected in a cautious and ‘sensible’ approach. “As an entrepreneur who was once in the Valley, I can definitely say that VCs there have a larger risk appetite. This does not mean that VCs in India are not taking risks. Instead, they are taking as much risk as their mandate allows,” says Chandigarh-based entrepreneur Puneet Vatsayan, who co-founded an e-commerce platform company. “In a lot of ways, you can say that India is going through the excitement and learnings that the US went through in the 60s and late 70s,” he says.

Mr Vatsayan says it is only a matter of time before a virtuous cycle builds up in the country’s entrepreneurship scene. Mature and risk-aware entrepreneurs, backed by well thought-out business models, will be met by riskfriendly venture capital firms open to new ideas.

Venture capital industry has been substantially active for only a decade now. Already, there are success stories that inspire newcomers in both business-making and investing. Serial entrepreneur Rohit Agarwal, who founded techTribe, says businesses like Genpact, Naukri.com and JobsAhead are becoming large and will soon spawn new entrepreneurs from their stock of senior staff. “The seniorlevel and mid-level guys from these companies will be out to be entrepreneurs tomorrow. They will getting easier funding as they have been part of growing a company. In the Valley, most people raising funding are doing it for the second or third time around,” he says.

Sasken Communication Technologies CEO Rajiv Mody cites the example of Intel’s early journey through the 1960s. People didn’t understand semiconductors back then, but once they saw a success story there, there was soon a flurry of investment in that space. “The VCs in the West have a culture of innovation. As we see high risks yield high returns, we will see more people taking these risks.”

India also lacks institutional structures that can ease the way for venture capital flow. While business risks may be the same here and in the US, systems suffer inefficiencies in India, says Reliance Technology Ventures CEO Harshal Shah. For instance, the legal process for the formation or liquidation of a company is still long-winding and tortuous. “In the US, there is an institutional-like structure that has been built around venture capitalism. There is the concept of limited liability partnership, which hasn’t caught on in India. Then, there is also an accreditation system in place for VCs (there),” he says.

But at the core of many failed VC pitches is the entrepreneur’s inability to convince potential investors of his or her risk-taking ability. Raising capital is not a way to palm off the risk as some entrepreneurs might tend to believe. “Many ideas are just ideas, where the ideator himself is not willing to take a risk,” says Mr Agarwal, who is now working on his fourth venture. “Instead he wants the VC to take the risk. VCs want to see that you are willing to bet your career on your idea.”

There is also the problem of scale. Some businesses just can’t grow beyond a certain point. Rahul Khanna of Clearstone Ventures points this out with an example, “A hairstyling salon for children will not be a Rs 100-crore company in five years. It just cannot happen.” In a company without potential for scaling up, few VCs will show interest. So, the problem may be more basic in a business pitch than can be solved by repeated pleadings with more VCs for money.

“There are businesses that do not match our investment return threshold. This may not be the entrepreneur’s fault. It could be because the market isn’t ready for the idea. There is a much greater risk in a smaller company,” Mr Khanna says. “Entrepreneurs have a tendency to talk about a large opportunity, they don’t talk about how they are going to win.”

Venture capital firms are inundated with hundreds of pitches from professionals, genuine entrepreneurs, wannabes and hustlers. Occasionally, they put money where they shouldn’t and fail to invest where they should. And VCs, who had made either mistake, often laugh at themselves. Bessemer Venture Partners maintains an antiportfolio of what it calls “an unparalleled number of opportunities to completely screw up.”

The venture capital firm, which once invested in a wig company and French fry maker, missed out on several more lucrative opportunities, spurning repeated approaches. As per Bessemer’s own account, its managing partner David Cowan, listed as one of the world’s top 10 venture investors, was visiting a college friend when she tried to introduce Cowan to “these two really smart Stanford students writing a search engine.” Students? A new search engine? In the most important moment ever for Bessemer’s anti-portfolio, Cowan asked her, “How can I get out of this house without going anywhere near your garage?” The company was Google.

Article Resource:
Author: Jacob Cherian is the Chief Editor in the The Economic Times, Mumbai and the article appeared in one of their successful columns on Entrepreneurship/Start-ups called "Starship Enterprise".

VC investments jump five-fold to $777 m

IT Attracts Highest Inflows

VENTURE capital investment in India is growing at a furious pace. The Quarterly India Venture Capital Report published by Dow Jones VentureOne and Ernst & Young reveals that venture capitalists invested more than $777 million in 57 deals in the first nine months of 2007. This represents a nearly five-fold jump over the comparable period last year.

The study also shows that early stage investment accounted for 63% of the deals in the first three quarters of the current year. The information technology sector attracted $327 million in 31 deals, while the business/consumer/retail sector attracted $376 million.

Dilip Dusija, associate director for private equity group at Ernst & Young, gives a perspective on the venture capital scene in the country:

The largest number of deals has been with IT-oriented companies and the largest chunk of funds has been put into the retail sector in 2007. Are we likely to see a shift of focus this year?

VCs have always been traditionally associated with IT-oriented companies. This year, we saw more focus on retail and consumer services. This is what we have tried to highlight in our report. In the near future, we don‘t see much change in focus from these areas. However, we do expect activity in the alternative energy space. This is happening the world over and (we) expect a similar case in India. Manufacturers of solar cells, solar panels and other alternate energy equipment can expect some attention.

What are the factors that are leading to a rapid growth in venture capital investment in India?

There are three or four factors that have led to this growth. The first is the India growth story. India is expanding at a good rate and the world has its eyes on it. There are also plenty of untapped areas. This ranges from internet advertising to clean technologies. India’s consumer growth story is also creating a huge demand.

A lot of money has come in the recent past. Is there space for more or is the VC space overheated?

This phenomenon of VC funding has just begun and there is scope for more. In India, we haven’t seen too many investments in the early stages. Private equity activity started only two years ago. VC follows private equity. It could be behind PE as India is a growth market. PE funds’ investments in India was $2 billion in 2005, $7.billion in 2006 and it should be anywhere between $12-13 billion in 2007. VCs tend to follow the PE.

Are venture capital funds behaving, sometimes, like PE investors, investing only in successful enterprises? What proportion of VC funding is made early enough to help businesses grow?

Yes this is definitely true. Especially in India, the line between VCs and PE investors is very thin. This is because the VC culture and opportunities have just begun in India.


Article Resource:
Author: Jacob Cherian is the Chief Editor in the The Economic Times, Mumbai and the article appeared in one of their successful columns on Entrepreneurship/Start-ups called "Starship Enterprise".