Venture Capital – Between Returns & Fund Sizes

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Interesting article by Jason Rowley on the lack of a correlation b/w venture capital fund sizes & fund returns.

Venture Capital Is Boring

Funny Side Up

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All those moments that left you speechless… (No, not like when you saw Claudia Lynx or  Mila Kunis on TV). More like the dumbfounded speechless. I was just thinking about it today, and thought I’d share some such situations that I have been lucky (and sometimes not so lucky) to be stuck in the middle of.

  • About two months back, I called my credit card company to tell them that I hadn’t received my estatement, and to ask them to mail it to me. The charming voice at the other end asked me some random questions just to make sure I was the actual holder of the card, and then proceeded to say that she’ll have the statement emailed to me. Then, as what I assume to be a part of the ‘procedure’, she thought of “confirming” my cell number, mail id, landline number, address (hey, don’t look at me, am still wondering about the logic behind it). Anyway, so when she read out my address, I realized that she’d got one alphabet wrong in the name, so I asked her to correct it. After that, again, as part of the procedure, she proceeded to fire a series of questions, about practically everything, just to (again) make sure I was me. The second last question, ‘what was the last amount billed to your card?’ Thankfully, since I had received a message when the transaction happened, I remembered and told her the amount. Last question, ‘where was that transaction made?’ How the hell would I remember, it was over 12 days ago. ‘No problem’, she said, cheerfully, ‘you can check on it, I’ll call you back tomorrow’. I completely forgot, so the next day, she called up as planned, but I didn’t have the info. ‘Not a problem’ she said again,  suggesting the same deal of me checking after I get back from work, and that she’d call the next day. Anyway, I checked that evening, but missed her call the next day. Next thing I know, I receive a letter from the credit card folks (the address on which, by the way, still happened to have the minor spelling mistake). The letter stated that “this is the last correspondence to your old address, and all further correspondence would be made to your new address.” Whoa. When did I change my address? And, if that wasn’t enough to leave anyone wondering, I received another similar letter the next day (with the spelling mistake rectified), informing me that my new address has been updated in their records and from then on, all correspondence would be to the new address.
  • Back in 2008, I got myself a Vodafone USB internet card after paying for a limited usage for the year (1GB free/ month). The little software which installs on your laptop, helps you connect/ disconnect, and also shows you the usage. So I’d keep the usage within limits, so as not to have to pay at crazy rates/MB beyond the free usage. And then, about 4 months down, I received a bill for Rs.200 for excess usage. As I saw the statement only on the due date, I thought I’d rather pay it and then look into the matter. So, I paid, but then didn’t bother check with Vodafone. Next month, I made sure I kept checking my usage. I’d used about 3/4th of my free limit for the next month, but I received a bill for Rs.1400. Ok, now things were getting serious. I went to Vodafone to find out about the screw-up. After the usual ‘Happy to help’ chat, they assured me it was probably a billing mistake, and that they happened sometimes. The deal was, that while my Vodafone software  was showing my usage at 3/4 of the limit, for some reason, the system at Vodafone was registering a usage about 40% or so more than the 1GB limit. Few days down, my connection was blocked. Next visit to Vodafone, the same exec apologized profusely and told me that he had forgotten to log the complaint, which is why it got blocked. I told him to take care of it, n went my way. Next month’s bill was over Rs.1500 (Rs.1400 + late charges, service tax, the works). What followed was 2.5 months of constant comms with Vodafone, at the store, on the helpline, and to with every email id I could find on their site. They kept insisting that they’ve checked and rechecked, and that I would have to pay up. At the end of that time, I had pretty much had it, and so I went and settled the bill, so as not to let them torment me anymore, even though they still hadn’t realized that there was something wrong with their systems. Next thing you know, I receive a letter from Vodafone’s legal guys threatening to go to court if I didn’t pay. The @#$#.! I called the lady at Vodafone whom I’d been in touch with regarding this matter. She was, I think, some mid-level manager. She told me that they’d received the payment, and that I could ignore the letter. Then I happened to just discuss the problem one last time with that lady, just to let her know the hell they’d all put me through for some mistake on the part of Vodafone. And when I, for the millionth time, told her about the Vodafone software that installs on the laptop, I said, ‘you know, the little window that shows the level of usage, and other info’. And guess what, that dame, Customer service something Manager, she tells me that she had never seen the actual software before. She’d never seen one of those things, and didn’t know what they did. So, I was arguing with about 12 different people at Vodafone for well over three months, had to shell out money for no reason at all, and all along, this lady, who was definitely at a fairly high up position, didn’t even know what she was arguing about or defending. No better way to kill customer care, eh? I guess all along, all they meant was ‘Happy to Help (ourselves to your money)’.
  • Several years back, my dad had applied for a car loan. So, as part of the process, the bank executive dropped by home one afternoon, to get some papers filled, and to collect the post-dated  cheques. While dad was signing the 59 odd cheques (5 year loan), the executive, with a concerned look, asks dad, ‘Sir, I hope you have the total amount (the loan amount) in this bank account?’ Dad, already a little irritated with all that signing, suddenly was at a loss for words. He tried his best not to show his disbelief at the question, which of course, didn’t work too well. He looked at the executive and said, ‘if I had that kind of money in the bank, do you think I’d be applying for a loan?’ It then struck the executive, who then tried his best to hide his embarrassment with ‘of course sir, well, I was just asking’.
  • As a kid, I used to frequent the Croissants‘ outlet near my granny’s place. While I had several favorites there, we sometimes used to take away a lot of the plain croissants, which, when heated and had with hot tea, taste amazing, especially in the mornings. So one evening, mom sent me to pick up about 15 plain croissants. I walked in, to find that I was the only customer in the huge place. Anyway, so I paid at the cash counter, and then walked up to the counter for plain croissants and gave the attendant the little order slip. He looks at it, and then asks me, “Will you be having them here?” I looked around, and then asked him, does it look like I’ll be eating 15 plain croissants here, alone?” Talk about being stuck with your foot in your mouth =O
  • My job in Venture Capital too, made sure I got a regular dose of such situations. Like a few times when I’d get calls or even random visits from aspiring entrepreneurs. They’d go, “I’m planning to venture out on my own. How can your Venture firm help me?”, they’d ask, with a straight, I-mean-business sort of face. That would get me all thrilled, every single time. I mean, it takes a lot of guts and conviction for anyone to start a business on their own, and I always admire that. So then I’d be all curious and ask them about what the venture is all about, how much money they’d need, and all that. Then comes the priceless answer, which normally sounds something like, “I have a few different types of businesses that I could possibly get into. Depending on which one, the venture funding I’d want would vary. However, I haven’t really worked out the exact funding that might be required. You see, I could either start with one of the businesses in one state, or cover like, half of India. So accordingly, the funding I’d need would vary. I wanted to know how your fund could help me out.” Huh.! I could’ve sworn the board outside my office didn’t read ‘Charity Venture’ or something to that effect. Then why.?

Lemme know bout your ‘at a loss for words’ moments…

Way to go, Alok.!

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Interestingly, a few years ago, I came across this interview with Alok Mittal on the internet. Alok is the Managing Director at Canaan Partners, one of the leading VCs in the technology and healthcare businesses, the world over. And in that interview, Alok was talking about their investment in techTribe a few years earlier. techTribe, by the way, happens to have a job referral service offering, similar to the incentive based job referral business model of the company I wrote about earlier. And Alok had publicly agreed that the incentive driving referrals was not going as expected, and they have been planning to sell the company as the business model didn’t seem to work. I did feel a sense of pride and satisfaction that my gut feel and reasoning was in a way being backed by someone, who is to me, something of an authority in the field.

But then, something hit me hard. In a world where everything that everyone spoke about publicly was, like the Americans popularized, “good”; here someone as knowledgeable, intelligent, and capable as Alok Mittal himself; was so humble, so grounded, and so true to his work, that he could openly talk about his mistakes. Literally in Rudyard Kipling’s words, he could ‘meet Triumph and Disaster, and treat those two imposters just the same‘.

Hats off to your humility and honesty towards your work, Alok.!

Herd Capital

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Everyone’s aware of the herd mentality. Be it iPods, bigger and bigger cars, or even a Twitter account (which doesn’t really make sense if you’re not actually gonna use it). Hell, even I got a Twitter account that I don’t use.

And many a times, it takes a while before a smart management guru finds the method behind some of the madness.

I’ve come across a few similar instances of herd mentality in the Venture Capital industry too in the past few years.

Before I mention them, I’d just like to state here, that the views below are only mine, and I don’t, in any way mean to undermine or insult the knowledge and strategies of my fellow members of the VC community. I’m merely expressing my concern about something I’ve observed.

Herd Mentality. Hmm.

One example that comes to mind, the textile/ garment manufacturing and associated retail industry back from 2006 through most of 2008. Companies saw several Million $ of investment, and were doubling and tripling their manufacturing capacities – spinning, weaving, dyeing, printing, stitching; you name it… not to mention the number of retail outlets, adding customers (read big brands in apparel) with demands going into astronomical numbers of pieces of clothing.

And obviously all of this took the valuations of these companies pretty high. Just to give some perspective to the quantum of investing, this sector saw around 3% of the total $5.6 billion of VC investment in just the first six months of 2007. That’s roughly a whopping Rs.750 crore.!!

And then, with the collapse of the US economy, textile exporters suddenly lost one of their prime markets, and quite instinctively, came back home and focused their energies and capacities on the domestic market, which itself was beyond saturated with all the domestic expansions that were funded.

That led to more n’ more discount malls springing up, running on wafer thin margins.

Then, there was the mad rush after clean n’ green businesses. Of course, there’s nothing bad about investing in technology that’ll help conserve the limited resources of the globe, but from a VC’s point of view, it’s about making money too, right. Now, the focus on making those multiple ‘x’ returns should be one of the fine filters through which great companies and amazing business models must emerge.

However, what happens with the herd mentality is, that companies with limited knowledge or capability, get invested into, just cause some VC was probably not approached by the best companies in the sector, and who did not want to miss out on the ‘gold rush’, and so ends up investing in the 20th company in the sunrise sector at a ridiculous valuation. The VC seeks the safety of the herd. Everyone’s doing it, so maybe I should too. This not only makes the top team at the company over-confident of their supposed capabilities, but also makes it tougher for the company to raise its next round of investment (due to the already sky-high valuation it got its first round investment at).

So, we end up with:

  • Just a handful of the numerous funded companies actually adding reasonable value, globally
  • Several overconfident funded companies that just trudge along, finding it difficult to raise additional money
  • The sector very quickly becoming over-invested and going out of flavor with the VCs due to high valuation expectations by other companies, thus resulting in less investment happening in creating more effective and widespread clean and green technologies and applications; something that was needed by the world on an urgent basis, to begin with.

It would help if VCs invested after a well thought-out strategy rather than almost on impulse, irrespective of whether it means missing the bus on a fad investment sector. This would result in the VC not making losses on a bad investment. At the same time, she or he could focus on understanding the sector quickly and perhaps support young companies with innovative products or solutions that they feel might significantly help preserve the planet, rather than just dump money into just another solar-cell manufacturing company, or another wind turbine manufacturer, or something like that.

In the end, all this could be herd mentality, or perhaps even the wisdom of the crowds.

Only time and lots of investing will tell.

[Again, these are just my views on it, being strongly based on my belief that known and stable businesses or mass producing of products should be funded more by debt; and the risk investing in paradigm-shifting technologies and solutions should be left to VCs. I would like to get the views of promoters and fellow VCs on this. In the end, it’s all a part of our learning process.]

Dare to Venture?

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“The best things in life are free,

But you can keep ’em for the birds and bees;

Now give me money, (that’s what I want) that’s what I want.”

– Barrett Strong

Lets see. First time entrepreneur… or you’ve already taken the brave leap, but suddenly hit a roadblock for lack of additional funds to scale up to even qualify for an order… or banks wont help because your services or IT firm doesn’t fit into their way of doing things … or even better, you have a crazy idea that could as well be the next big thing, only if someone would see the potential growth and the guts…

If you sniggered after reading any of the above, you’ve probably already had your share of knocking on doors in a bid to expand your business, or even just set sail…

I’ll give you a lil overview on venture capital, hopefully answering some of those questions you had about it…

  • VCs invest in ideas, businesses with a high amount of perceivable risk but also a potential upside
  • VCs invest towards buying a stake in your company (they buy shares of your company, without any collateral or pledge. That however, doesn’t mean that you don’t take their money or them seriously coz it appears to be tension-free capital unlike a bank loan.
  • Not wanting to alarm you, but generally the legal agreements with a VC are made in such a way that the VC has a significant powers where the company is concerned.
  • The powers and rights should be seen as a trade off for the risk the VC takes, and the collateral-free funds they bring into the company, and their time and effort.
  • And while certain clauses in these legal agreements might give some of you sleepless nights, many extreme measures are almost never exercised by the VC. They’re sometimes just there so that promoters don’t think of playing any tricks on the VC or the company.

Yeah I know this is a very basic and simple way of putting it. There is much more to it, but if I were to put it all here, you’d be fast asleep before I’d expect you to scroll down…

Anyway, I’d just like to elaborate a bit on the last point in the image above, that I think is crucial for you entrepreneurs to know for when you plan to raise some money from professional investors:

(ok, now I usually get extreme reactions to my comparisons/ examples, so even if you find the comparison absolutely insane, don’t miss the underlying message)

The relationship between a VC and the promoter/ management team…it should be looked at like a serious relationship, a marriage of sorts or even as though you were looking for your next best friend if you’d like. And as we all know, everything long term cant be based on something trivial, like ‘I love the way she looks n dresses’, or, ‘I think she’s my soul mate coz we look great together’, or ‘she just has the most amazing expression when she’s trying to work the microwave while reading thru the manual’ or some similar balderdash.

The long haul asks for bigger and more important factors to be considered.

Venture funding, in any form, is not so much about the money as it is about the connect the promoter, the top team and the VC share. You could probably raise capital from four different sources, but it isn’t going to be so much about the money as it is about the magic the team of promoter and VC can create.

And unlike relatives whom we don’t get to choose, promoters can and must take time to see if her or his visions, objectives and spirit matches are clearly understood and appreciated by the VC they’re in talks with. Coz otherwise, like good ol’ Axl Rose says, ‘nothing lasts forever…’ Things sure can get nasty between promoter and VC if they don’t understand and share a similar vision of the company, and they are bound to lock horns; in which case, they both suffer, along with the business and all the employees, customers, …

You wouldn’t really want a tug-of-war with the promoter trying to go global next year, and the VC ranting for a quicker exit.

So while you may be strapped for cash, still choose your VC very carefully. And raise only the money you need. Gone are the days when VCs funded the Lamborghini’s of dotcom promoters.

I’m still just four years n learning in this industry, but if you do have any queries about venture capital, fire away. I’d be more than happy to try and help you out with it.

Happy fund-raising.!

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