Entrepreneurs & VCs: Evolving a partnership
Date: Tuesday , February 01, 2005
Having experienced the VC game during testing times, I constantly wondered the criterion that encompasses becoming a VC or an entrepreneur. Regressing, VCs in India have no lengthy history. It effectively began during 2002’s technology period, and since then every day is new for the VCs. Earlier Indian VC communities had limited themselves to defensive investments. Breaking categories, early VCs primarily invested similar to conventional financial institutions. They effectively structured the product equity to have several characteristics of debt instruments. Also, their portfolio size previously ranged from 80-150 companies. Unsurprisingly, they couldn’t add much value to such a diverse portfolio. In their defense, the capital markets were nowhere as dynamic current ones, nor was the entrepreneurial climate very conducive.
A common refrain follows- do VCs really add value to the enterprise? Many VCs obviously claim they add enormous value, and entrepreneurs mock them. Many entrepreneurs have dealt with VCs and have had bad experiences are. But that is where the important factor of mutual understanding comes to play. For this, each Indian VC and entrepreneur should evaluate and learn from their mistakes.
The atmosphere was also vitiated by external forces like the tech meltdown, under-developed technology understanding of VC community and an immature entrepreneurial attitude. Nevertheless, there are a few bilateral understanding and attitude shifts that both the communities should partake, as I will elaborate.
Entrepreneurs: Not owners but managers
The recent developments in the Indian VC industry have helped the ambiguity. Although instances of entrepreneurs’ misconducts abound, I confess that often times it’s the conduct of the entrepreneur and VC and lack of mutual understanding of each other’s business that hinders venture growth. It is essential for entrepreneurs to also think as managers and not just owners.
First, Indian entrepreneurs are often not receptive to advice. When VCs advise them about certain issues, entrepreneurs dismiss them without considering the advisor is a man who has invested in the company. One good example is the numerous underdeveloped product companies in India. Despite a VCs’ advice on how a product company should be built entrepreneurs disdainfully designed their own products with a blind hope of the markets accepting and adjusting to these products. Entrepreneurs thought that market would adapt to their products, which never happened.
Individually, each entrepreneur is often a powerhouse of talent with an amazing sense of knowledge, and experience with high-level positions in MNCs but in a group most of them falter. They often fail to play the role that is assigned to them and their typical India mindset causes each of them behave like the owners of the company. Vainly, their private advisors disillusion them with poor suggestions, like aiming for higher percentage of control. VCs demand MIS and the entrepreneurs have nothing to report because there are hardly any customers or pipelines. More importantly, when things are difficult, VCs surely ask for reducing the burn and taking a salary cut, something entrepreneurs are averse to. As a result, they blame those far from their affections: VCs!
Typically, tech entrepreneurs are domain experts in a particular niche space but are not flexible enough to adapt and learn other aspects of the same business. Entrepreneurs hardly monitor cash position, because VCs do that for them and obviously force them to act accordingly. The most important part of business is converting pipelines into a customer base so when entrepreneurs cannot close neighborly transaction due to the lack of business accruement it’s intolerable for VCs. It is not that these entrepreneurs have not made attempts at customer traction to develop the pipeline, but the closing of the deal is different where entrepreneurs stumble.
Something else the entrepreneur needs to appreciate is that his VC backed venture needs to continuously scale up within a given time frame. After all, VCs are financial investors who need to realize returns in a particular time period because they are measured in IRR terms by their investors.
Also, it is very important for the entrepreneur to be transparent about important issues like the financial health, pipeline, and relationships with key personnel since the VC will become aware by virtue of being involved in the market. The danger is that such lack of transparency will create doubts in the minds of VCs about other issues as well.
One thing that concerns me the most as a VC is: the spirit of entrepreneurs. If an entrepreneur approaches a challenge head on, he is a true treasure for VCs. However, most of starting entrepreneurs in India are ex-employees of big MNCs and their risk taking ability is sometimes juxtaposed with the experience of comforts of MNCs. Meaning entrepreneurs from such a background are conditioned with overlooking small jobs like business charter preparation, and maintenance of company records because such things automatically fall into place in an MNC with minimal contribution from them. But when starting your own company all such issues arise and smaller issues become large concerns. Finding such pressures abandoned, the honeymoon of VCs and entrepreneurs ends abruptly.
Do VCs really contribute?
All VCs are not mere braggarts, although some exaggerate claims while chasing hot deals and end up with no contribution and as a whole they do value add for any company seeking brighter prospects. It’s universally accepted that VCs have bandwidth and domain strengths because they do help in taking the end company to the market successfully. In that way, few VCs live up to their predecessor’s stature. VCs also aid companies in restructuring, providing debt and HR support, as well as taking a company public. Also, some of value addition from VCs cannot be denied however poor the VC may be. First, venture backed companies receive instant recognition and also gain immediate credibility in the marketplace. Your banker and customers will regard you with more comfort.. Similarly, your ability to attract, hire and recruit talent will become superior because the VC happens to be your business partner.
VCs are the brand ambassadors to the world. Inside the company they may not be satisfied with the company traction but outside they have no choice but to speak well of the company. They praise their portfolio company, and offer networks as well.
One thing that any entrepreneur ought to remember is the fact that VCs could be more experienced than they are themselves in their business. The statement ‘VCs have failed more times than entrepreneurs”’ is not exaggerated but an account of industry experience. The aggressive VCs in the year 2000-01 failed in every venture they invested, so they wisely commenced another fund. This gives VCs shrewd knowledge in pinpointing weaknesses in a company. They always observe cash position and suggest measures for checking the burn because once the cash position falters, the professionals will rightfully abandon. VCs;’ advice is worth considering for one reason: - a VC firm is typically manned by experienced and skilled people with diverse backgrounds.
My advice to entrepreneurs is to never take the venture capital if you cannot foresee VCs as true business partners and never acquire new venture capital if you are not receptive and accommodating to new ideas. An ideal entrepreneur has a goal and urges to succeed while being determined to create personal wealth. He dreams large and uses venture capital as just a means to achieve his goal. In that process, VCs are incidental beneficiaries, never the primary and sole beneficiaries!
In summary, perfect understanding and appreciation of each other’s roles is essential for a successful relationship to develop between an entrepreneur and a VC. This has assumed greater importance as venture capital and private equity is poised to launch in India.
Raja Kumar, C E O & MD, UTI Venture Funds