Why VCs need to make money, and how

Just saw a couple of side discussions on some comments posted elsewhere on VW. Am bringing this up as a main post as it might be of interest to others as well.

Rad said

What applies to the rest of world, doesnt apply to India. Everybody – Indian Entrepeneurs, Indian VCs, Indian Angels need to think and act differently. If you guys think about your country and strive for a pride that comes from having a Sony or a Google, you would find yourself spending more time with young guys nurturing and mentoring them, rather than than just chasing fund targets.

Whats missing in India is Idealism, Romance and long term vision.

Rad, I understand what you are saying. What we also need to understand is that in the investment business, there is no “long term” unless the fund targets are met. As important the long term vision is, it is equally important one understands how to get there. Sony and Google are prides of their countries because they are business successes, not because they are romantic.

Anon said

… please tell us what are the things a VC is looking at when he invests in a startup ?

Anon, I think at 30,000 feet, we look for the ability for ourselves to make good returns on investments. That typically requires large markets, great teams and sustainable differentiators in the business. At a high level, it is really that simple. As you dig in, some factors become more important than others. In Internet, a great team might mean passion and understanding of the medium; in enterprise sales, it also includes past experience in selling to enterprises. Sustainable differentiators might exist on day one due to technology, or you might be able to build them over time (as in case of consumer internet companies, where brand and first mover advantage can be significant).

And then, our own understanding of the space and our ability to address risks in that specific business become important. Most successful early stage investors are conscious of the fact that all good investments are not necessarily good investments for them.

Would love to continue the discussion,

and yes, we are adults — we can use our names here :)

20 Responses to “Why VCs need to make money, and how”

  1. Anon says:

    Alok,

    Veto for some decisions, specially the financial ones, totally makes sense.
    I want to know would VC want to have a deciding say (veto or anything of the kind) in what goes in to the service or product ?

    Second question I have is how much would the pre-money financial structure influence the terms in the term sheet ? Now, I am talking about an internet based service + no debt + seeking external finance for the first time + mostly at the going to the market stage. What i specifically want to know is if 1 person is holding all the equity (pre-money), and he has a team which is fine with it (because they still haven’t shared the risks), what are issues VC might have ? how would this influence the deal (if at all) ?

  2. C Ramesh says:

    Bravo, SS. Spoken like a real entrepreneur. It is the same spirit that has kept me and my team going for 18 months now, in the face of daunting odds (only my Maker and me know what I’m going through to keep the ship sailing).

    As you said, come what may, go ahead and DO IT! As Gandhiji said, find purpose, the means will follow (Gandhigiri seems to be the flavour of the month). As I read more and more blogs relating to VCs and VC-seekers, I increasingly find my experience mirroring that of others who have gone before me. And it only stokes the fire in my belly. To keep DOING IT! One step at a time.

    All the best.

  3. Rajiv says:

    I guess i am late into the discussion, but here are my two cents.

    1) As an entrepreneur you have to be practical. At a given point of time there are 100′s of startups competing for the same VC money and each one of them believe that they deserve the money.

    2) But given the vc scene in India, only those companies which have a proven business model get VC money. Risk capital is lacking in India.

    Co-relating the above two, the only way for a startup in India to get funded is go to revenues as soon as they are out of early stage! Show some revenues coming in and then you can have a shot at Series A.

    A simple and straightforward plan :) .

  4. SS says:

    I think VC money is just one piece to the big problem of making a business success in India. For first generation entrepreneurs money is a big issue. But at the same time the passion and fire to do it is so much that all other things, including the need for money, become secondary.

    Let’s face it, we have lot of issues here that we can’t solve (as startups)-
    1. We don’t have enough precedents of great success stories.
    2. VC firms in India dealing with startups are very few and most of them are not homegrown- I mean they themselves did not get started here. Most of them have come from abroad.
    3. There is no ecosystem here in India that would increase the probability of a startup’s success. We keep hoping that some success stories will actually create such ecosystems. We are a long way from making a Silicon-Valley-like stories probable here. It will come about only through some disruptive examples. And we all hope we are one of them. (That’s the hope which drives us!)

    Instead of solving those bigger problems- hoping that VCs understand us, hoping that there is an ecosystem, I think we should concentrate on JUST DOING IT.

    JUST DO IT! is our mantra.
    (from Nike Ad) [We all have T-shirts that say "We are doing it!"]

    It takes lot of hard work to raise money, but it can be done. There are not many angel investors, granted, but it still can be done. Its tough to get a team in place without money, granted, but it still can be done. It may be tough to sell your product/idea to your customer, but it still can be done. Through dogged perseverance! And I think that’s the only way to go about it- in the present scheme of things in India. Some of us will fail, some of us will succeed. Hopefully, the next-generation entrepreneurs will have it better because of the the successful examples we set.

    I think there will be lot of time for us entrepreneurs to sit back and analyze – to know what-we-did-right and what-we-did-wrong. But for now, I think the only mantra that works is JUST DO IT! Thinking too much about the right way to do it may not help. What is the right way to get financing? Bootstrap? Sell your Apartment to self fund? Borrow Money? Angel Money? VC Money? Who knows! Frankly I don’t have a clue what is the right method. We thought we knew the right method- because many ‘experts’ told us what it was. But it didn’t take off.
    Come to think of it, there are examples galore to justify all the methods.

    We believe this- Take each small step at a time, prove it, convince someone around you to pump more money and then go the next step. I have been told by some VCs that it is NOT the right way to do it. Then I asked him if he was ready to fund us so that we can do it the RIGHT WAY. Of course, you can guess what the answer was!

    We are a two year old company with 15 people working full time and we are self-funded and angel-funded- and we are about to launch our product. We have a long road ahead but we believe we will scale it (with or without VC money/advice). One step at a time!

  5. AshishT says:

    Alok:
    Appreciate your effort to educate entrepreneurs, on what VC’s really want?

    Entrepreneurs – I feel, a lot of us think, that angels/VC are the only way to start your high-tech business.

    May I suggest we step back and re-analyze – What do WE want?

    When starting a new business we can choose between:

    A – Founder centric business model: A business to serve us by providing “long-term” abundant livelihood and lifestyle.

    B – Investor centric business model: A business to serve its investors by driving its share value higher and delivering liquidity event (5-8 years).

    How do you choose the right fit?

    Answer these questions –

    1 – How big is your ego?
    Big fish in a small pond
    Small fish in a big pond

    2 – For whom does your business primarily exist?
    Example – Your goal is to leave your daily job and be independent – one option: Put your grand idea on hold, start something small with your own savings, become cash-flow positive ASAP.

    3 – Your business’s financial roadmap:

    3A – Capital required: huge or modest

    3B – Access to capital Sources:

    Debt/Grants:
    Government programs/Grants
    Quasi-governmental organizations
    Banks

    Equity:
    Seed – Founders savings and Friends and Family of founders
    Pre-public – Angels, Venture Capitalists

    I hope this will help you in re-analyzing your current assumptions.

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