You have hand held several first generation entrepreneurs into fund raising. Can you tell us
What are the key parameters which an investor looks for before he invests money in a start-up?
AT an early stage, it is always the promoter or the promoter team that holds the key. His credentials and track record, focus and passion and perceived ability to scale and execute the plan are critical. Equally important is the segment in which the business operates. The opportunities and challenges posed by market and competition and the potential to scale. Very often, despite the above factors being positive, entrepreneurs struggle because their business plan is faulty. So a business plan that is financially attractive and also paints in fine strokes the execution strategy and roll out plan is equally important. Finally, its also being at the right time at the right place and making the right noise! So timing, selection of investors and pricing also hold the key.
What are the sacrifices that one has to undergo before taking an external investor?
Firstly, an entrepreneur must have the intent and desire to provide an eventual exit to an external investor. Most external investors have a limited investment horizon and hence need an exit sometime. An entrepreneur needs to understand this obligation and work towards it. Also discipline and accountability plays a major role. Once an external investor comes in, an entrepreneur must understand and get comfortable with the fact that he will be posed questions and at times challenged and this is a part and parcel of opening up ownership. Money comes with accountability and often such a process is also beneficial to the company since it brings in higher professionalism at the board level and percolates below as well. Ensuring a high level of corporate governance and compliance is a must since most institutional investors will not compromise on this. An entrepreneur must also understand that equity is always costlier than debt in the long run and venture capital investors have high expectations on returns and hence work consciously towards delivering such returns.
Besides, money, what kind of support an entrepreneur can expect from a venture investor?
Venture Capital investment and strategic investments are in a way like apples and oranges. Venture Capital investors are mostly financial investors seeking financial returns and retaining rights as may be required to preserve their positions. However, strategic investors have aspirations beyond just financial returns. They would normally, either upfront or over a period of time, seek to attain operating control over their investee companies. So in a way, entrepreneurial freedom gets progressively diluted in a strategic investment whereas it gets progressively mature in a venture capital investment. So the choice of whether to go for venture capital or strategic depends on the entrepreneurs state of mind and confidence levels, the nature and dynamics of the industry in which the business operates, the risks and opportunities and the choices available. Needless to add that if the entrepreneur feels confident enough to run the race himself, is in a position to raise capital from financial investors, sees more opportunities than risks and is patient to wait for his returns. Or else, strategic investor could be a better option.
Is there appetite for investment from venture capitalists for small start-ups?
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There is. And we have seen a second wave of internet and ecommerce investments over the last 18 months or so and some like flip kart have gone on to become blockbusters in a way. One interesting aspect is that this time round, we are seeing interest from venture capital investors across a wide spectrum of industries and not just IT. Health care and medical technology, renewable and green energy, financial services and a host of other sectors are attracting venture capital investment, which is good for the entrepreneurial community as a whole.
At what stage should an entrepreneur look for external funding?
When he thinks the business needs more money than what he can individually support either through equity or debt and at least 6 months before he needs the money! And when he is confident that he can utilise the money to grow at a faster pace than what he would have otherwise. And when he is also confident that is willing to be accountable and disciplined in his approach to external investors.
About the Author
Venkat is a co-founder of Veda and has more than 16 years of hands-on experience in the investment banking business. Venkat has been a pioneer in the investment banking space in India and has been closely associated with the growth of the Indian VC/PE industry since the mid nineties. He has an enviable track record of transaction closures in private equity as well as M&A, having crafted several defining transaction across domains such as services, infrastructure and ITeS, amongst others.