Venture capital has an aura around it. It has helped create some of the largest business blockbusters on this planet. But as the Indian Republic turns 60, venture capital has not managed to even scratch the surface of the entrepreneurial spirit that is bubbling up from all corners of the country.
The Directory of the Indian Venture Capital Association lists 142 members, including advisors, PE firms and consultants. We can assume that about 200 VCs are operating in the country. Even this small number is further segmented into early-stage, mid-stage and late-stage investors amongst other things. And they are to meet the investment hunger of 200 million entrepreneurs (see blog entry at http://bit.ly/8Q5SFS)! Obviously, there is a huge gap in supply and demand.
How venture capital works today
The average venture fund—and a firm will have more than one fund over its life time—has a life of five to seven years and a bankroll of a few hundred million dollars, which get invested into anywhere between 15 to 50 companies. Most Indian venture teams are small operations with the staff on board being countable on the fingers on one hand. The line of entrepreneurs wanting a share of this fund is long and the courtship is long and protracted. Even after signing on the dotted line, the involvement of the venture team continues and is rigorous. The standard exit options that VCs seek, namely IPO or M&A, bring their own set of problems to the entrepreneurs’ table, with many not able to reach IPO size and a sell-off not being universally liked.
Within the entrepreneur community itself, there is considerable confusion about VC funds, including on basic questions, like whom to approach, how to approach, when to approach and how much to ask for.
On the other hand, venture funds complain about the huge number of proposals they get that are not related to their investment area, do not have basic requisites filled in and are not even properly drafted. And then there is the constant VC refrain that good investments are hard to find.
What all this ends up doing is to create a very small and exclusive club of venture fund investees in the country. How exclusive is this club? A quick estimate that I was able to make put the number of active VC investments (including PE) in India currently under 500!
Limitations with today’s model
The top reasons why the current VC model is unable to reach out to more entrepreneurs are size, scale and awareness. VCs, however early stage they may be, cannot make investments below a certain size. And they need the investee company to scale up significantly in a 3-5 year time frame so as to enable an IPO or a merger. What this means is that good ideas at the very early stages or which are not capable of scaling to IPO levels miss the funding bus.
Finally, even after all the hype and media coverage about everything VC, there is an acute lack of awareness of how VCs operate and what all they need to know before they make an investment. Often, entrepreneurs are confused even on the most obvious things, like which VCs are interested in their industry. From the entrepreneurs’ perspective, the secrecy that VCs maintain about almost everything acts as a major hindrance and the due diligence requirements for a VC investment are daunting, particularly for someone in the early stages of the entrepreneurship cycle.
The angel scene
The typical VC answer to entrepreneurs seeking very small (below the million dollar mark) funding is that they should approach an angel investor. The angel investment scene in India is even more unorganized than the VC industry and all the issues that entrepreneurs face in getting VC funding only get magnified in an angel investor environment.
Incubator seed fund
The department of science and technology of the government of India has a seed fund for entrepreneurs registered with the technology business incubators under NSTEDB. This fund has so far sanctioned just under Rs. 20 cr. to the incubators and out of this slightly less than half has been disbursed to 78 incubatee companies according to information available at the NSTEDB website.
The proposed model
It is in this context of the yawning gap between available venture financing slots and the need for a more scalable, cost-efficient mechanism that invests in entrepreneurship and innovation. While not placing as significant a premium on the investees’ ability to scale to IPO-able size that we are suggesting a new model of investment that alongside the current one can give a significant fillip to entrepreneurship and venture development in the country.
The idea is simple: A number of VCs (say 5) come together and create an angel fund by pooling a minor part of their resources. This angel fund could be run by a team drawn from the investee companies plus other dedicated general staff, with specialized resources available on a need basis. The fund will have the mandate to invest in a minimum number of companies every year. The investment will be a minority stake (say 20 percent), with the shares being sold back to the entrepreneurs or the next round of investors (usually Series A) at the end of the investment period. Investments would be in the 5 lakh to 50 lakh range and both investment and buyback will be based on valuation of the project. The valuation, particularly at the point of exit could be done against pre-agreed and transparent parameters by an independent agency, ensuring fairness to all investors as well as investees.
Exit would be at the end of three years, with one extension of two years in deserving cases, where the project has a longer gestation period or in case entrepreneurs are not able to buy back stake at valuation price or are unable to organize the next round of funding. In the case of extension, buyback could be at the valuation at the end of the third year or at the end of the fifth year, whichever is higher. Or it could be at the valuation at the end of third year plus market interest rate for three years if the entrepreneurs are unable to buy back the stake at the end of the third year.
There would be a transparent and simple process for the evaluation of investment proposals, with clear milestones, like give a definitive yes or no within three months of getting a proposal. The early stages of this evaluation could be Web-based and even automated, so that the entrepreneur gets instant feedback.
There could even be an empanelled list of agencies and experts who could be approached by the entrepreneurs who get investments for issues like accounting, packaging design, advertisement and marketing collateral design, legal paperwork and so on.
Why am I suggesting that a group of VCs pool together? Many reasons. That way the risk for each would be minimized further. Also sectoral limitations for the proposed angel fund could be done away with if VCs with multiple sectoral interests come together. Further, the graduates of this angel program, the companies that achieve their targets, could be easily considered for Series A investments by the sponsoring VCs themselves. In effect this angel program could end up creating a stream of good investment opportunities for the VCs!
The numbers
To talk to a VC you need numbers; so here goes.
I have worked out a year’s investments’ return profile. The assumption is that 10 VCs join together and put in Rs 1 crore every year into the investment pool. Expenses are separate. I have also assumed that this fund is invested across 100 companies at an average of Rs 10 lakhs per investment. That is, there is a mandate to invest in 100 entrepreneurs/companies every year.
A typical returns profile could be something like this:
| No. of investments | Total investments | x returns per year | Returns /investee /year | Total returns | Repayment of capital |
| 60 | 60,000,000 | negative | |||
| 15 | 15,000,000 | 15,000,000 | |||
| 10 | 10,000,000 | .25 | 250,000 | 7,500,000 | 10,000,000 |
| 5 | 5,000,000 | 1 | 1,000,000 | 15,000,000 | 5,000,000 |
| 5 | 5,000,000 | 2 | 2,000,000 | 30,000,000 | 5,000,000 |
| 5 | 5,000,000 | 4 | 4,000,000 | 60,000,000 | 5,000,000 |
| 100 | 100,000,000 | 112,500,000 | 40,000,000 | ||
| Total recovery | 152,500,000 |
Now, if there are five funds like this, that would mean investments in at least 500 ideas every year, a far cry from the paltry numbers we have going now. In ten years, you could virtually rewrite the future of entrepreneurship and business in India, not just at the entry and small scale level, but also at the early and middle venture investment levels. Any takers?
Subscribe to this comment's feed
written by Rajesh, February 02, 2011
written by Rajesh, February 02, 2011
written by rubik's cube, June 18, 2010
want something special, come here
led flashing bracelets, cheap bakugan toys
finger skate, power balance
ddung, barbie girls
led flashing bracelets
organ donor dolls
at http://www.toptoys2trade.com
written by Angel Habitat, March 22, 2010
AngelHabitat is an organization dedicated to encouraging and promoting the spirit of entrepreneurship and innovation and providing opportunities to entrepreneurs to transform their ideas into viable ventures. We are a network of investors and entrepreneurs committed to creating value and assisting entrepreneurs through the entire life cycle of their ventures. AngelHabitat helps young companies to raise money from investors for kick-starting and growing their businesses.
For more details, log onto www.angelhabitat.com
written by Maj Gen PP DAS, March 16, 2010
If INDIANS can be STARS in MNC ,why not in their own ventures in india ?basically mistrust -which should be done away with. VCS SHOULD LOOK FROM THAT ANGLE ALSO.
Dont go to GoI Org for funding as you will be in circles wasting time , as officials take pride in not sanctioning funds due to norms, my 38 yrs experience in GoI tells that.
Vcs must support .
written by bikash sahoo, March 16, 2010
Pool a set of VCs and invest in a large list. Ensure that money is spent for generating revenue and not creating assets. Help ideas make business, they themselves will learn to make companies.
written by suresh.B, March 10, 2010
written by neerajjain12345, March 05, 2010
| < Prev | Next > |
|---|
