This saturday i attended a event organized by Tie-BoA . Agenda of this event was to announce a collaboration /Alliance bitween Tie and Band Of Angeles as an initiatvie to nurture a Silicon Valley like Eco System in india.
I am writng this post to highlight one aspect of this eco system which i have seen in all such events . sometime under the surface sometime discussed openly .
Its the Silo or Communication gap bitween Investor and Enterprenuer .
Be it VC or Angel , Institutional or Individual there is always a conflict of interest bitween both of the parties . As a matter of fact this phenomena is not confined to this country . Even in developed economies tales of VC-enterprenuer conflict is commonplace.
This used to baffel me when i started attending such gathering around a year back . by every logic i can think of , VC and Enteprenuer should work togther and it should be a win-win deal . but after one year and 10-12 such gathering i can safely say that this is hardly the case .
what is suppose to be a “Meeting Of Minds ” often Turns into a “Clash of Heads” . why ?
As an aspiring enterprenuer i have a significant interest in exploring answer to this Question.So that when i approach potential investor in my venture i can avoid all that . so here is my analysis of this phenomena . I wanted to post the complete text here but the post was a bit too long so i published it on my blog .
You can read the complete text here .
Your Comments /Advice is awaited and greatly appreciated .
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Krish,
Just a correction in your example. It’s Warburg Pincus that made 6 times from their Bharti investment. It’s not Chryscap. The latter invested in Suzlon, Spectramind, IVRCL etc.
But I think in the context of 10X, we need to be sure about how much innovation is coming out of India to make that kind of returns from VC investments. In the Indian context, anywhere between 4X and 6X should be considered a good VC return. Unless somebody comes with a drastically disruptive business model. If VCs are eternally searching for a 10X return, then it’s hard to come by.
My suggestion: Start investing even if the returns could be in the range of 5X. At least the same entrepreneur – after a good exit – could go and start another venture which could fetch may be 10X return.
Hey Krish,
Thanks a lot for the examples.
Alok has created a new post. Would love to carry forward the discussion there ..
Anon – Normally 10x is built in the term sheet for very early stage investments which are high risk, hence high reward expectations. These clauses are in the term sheets signed by the entrepreneurs and are not public documents. Hence one doesn’t get to know which company has a 10x unless he’s an insider. For later stage investments by way of expansion capital, PE firms settle for much less because the absolute value is significantly highter. Besides the Mphasis example what Alok had mentioned, the most recent lucrative exits which comes to my mind is Chrys Capital investment in Bharti Televentures where $ 300 m investment fetched $ 1.3 billion under 6 years. The largest private equity-backed IPO during 2005 was that of wind energy turbine maker Suzlon Energy, which raised $342m. Suzlon, within an year of its listing, quoted 2x its issue price and is notching up a revenue close to $ 1 billion – and the company is just 4 quarters down since it’s gone public…!! The Non Conventional Clean energy space in which it operates is cynosure of all global PE / VC eyes and early investors are in no mood to exit…! Khosla Ventures have in fact earmarked its funds for this sector. Other top private equity-backed IPOs during last year included that of Punj Lloyd, HT Media, YES Bank, Shopper’s Stop and PVR Cinemas.
Another potential multibagger that comes to my mind is Persistent systems, which could generously reward their early investors shortly. Watch for its valuations when it hits the capital market turf.
Rad – VCs owe their greed to lots of `misses’ and fewer `hits’ that they have to put up with in their lifecycle. It’s similar to what explains the high rates of interest charged by Credit Card issuers. Losses from large no. of defaults / high costs of follow up litigation expenses will have to be offset by those who opt to revolve their credit the pay up. Tell me who else will be ready to fund a startup with just a few computers and a garage for assets…? It’s the most sophisticated investors who form the band of investors in Private Equity ( as a separate Asset Class ) and they are very highly demanding. VCs have no option but to deliver.
For that matter, are entrepreneurs charitable…? You are right when you say it’s the entrepreneur’s responsibility to cover his base while he seeks VCor for that matter any external investor participation.
You dance best with VCs only when you are up and running, have a good order book and ready to scale up. It’s momentum money you should be after and VC understands this best. When he finds that the Venture is relatively de-risked and can have a liquidity event in the near future , VC loves it. Now you can play hardball and wring out the best valuation waving multiple term sheets. This will also assure you of a benchmark price in the Red herring prospectus when you choose to hit the IPO turf even as you cede less and less of your ownership stake to the VC.