Entrepreneurship and Venture Capital

I guess, if you have started giving gyaan about entrepreneurship, you can not escape talking about Venture Capital. So, how could I?

I have talked something about the absence of real angels in India sometime back. But let me take up the broader VC money and entrepreneurship issue this time. Let me warn upfront that this isn’t going to be a tip on how and when to approach VC. But it should tell you something about the perspective I have developed about VCs in a still just-started entrepreneurial journey. Whether you find it useful or not remains to be seen until (and if) you read through it 🙂

Many a times, even before thinking about an idea or a business, people think of the VC funding. Somehow, entrepreneurship and VC funding, as concepts, have become almost synonymous in certain circles. This is absurd and that is what I want to talk about first.

While people talk about how entrepreneurship has taken off in India after liberalization etc. the fact is that India has been a very entrepreneurial country since ever. License Raj may have restricted certain kinds of entrepreneurship because of which we could not create more TATAs and Birlas, but at smaller levels entrepreneurship always flourished. India has one of the largest number of retail outlets in the world and this number is not driven by government ration shops, but by all the entrepreneurs around you who ensure that you get things right in front on your house or even on your door-step. And apart from these visible entrepreneurs, there are bunch of people involved in the whole supply chain, who manage to make things reach your hands when needed despite all the infrastructural problems.

But yes – entrepreneurship has not been the glorified activity it is considered in the professionally educated circles today. In parts of the country if has been “in the blood” so to say (the Marwaris, Gujartis, Sindhis etc.) and at other places it has been the default choice when you can’t secure a job. The glorification of an entrepreneur as someone who has sacrificed present comforts for bigger vision is something new. It is good, it is encouraging, but it would be sad if in this new glorification, we forget the fact that entrepreneurship by itself is not something new, and the bells and whistles that come with this glorification are not essential to entrepreneurship. One of those bells and whistles in also Venture Capital.

No, I am not trying to belittle the importance of venture capital. The point I am trying to make is that venture capital is not an essential ingredient for entrepreneurship all the time. There are only certain kinds of businesses, in certain stages, where venture capital makes sense. Hence, you should not be thinking of how to get Venture Capital before thinking of the actual idea.

Now the most important thing a VC looks for when funding an idea is….?? Guess?? No, not whether the company would exist 100 years down the line 🙂 It is simpler than that. When can the VC exit and at what kind of returns?

VCs are using other people’s money (part of it may be their personal, but for most part they are answerable to their investors). The assumed reason behind why these people have invested money with the VCs is that these guys want better returns than what a bank deposit and even the normal share market can give to them. Hence, they bet on start-ups. They take ‘higher’ risk and want high, really high returns, when they exit.

Then they can’t wait indefinitely to exit. Most of the funds VCs have would have a definite life, say 8 years. So, when they invest they look at an exit by the time the life of the find is over. (So – yeah. If the expected time to exit is higher, you’d be better off being funded early in the life of the fund).

So, we know the criteria. They want to exit and exit with good returns. So, they need to believe that the business can give something like that to them.

Some of the things that can be concluded from here are:

• Most of the time they are not likely to invest if the business is sustainable, but can not grow at a rate that will give huge, huge returns. They won’t invest in a Kirana shop, although it would be perfectly good business for an individual.
• If you have a research output and a product plan that can give returns within the life time of the fund, you are fine. But you can’t possibly get VC funding to do research in the start-up and hope for something that gives good returns. Don’t propose pharma research lab to a VC.

But (and this is BIG one), that does not mean you shouldn’t be doing a business if it is not VCable. If a business is not VCable, it does not mean, its not viable. That is a different to keep in mind and it also helps if you can decide whether you want to build a VCable business or are you happy with a sustainable business. Once again, sustainable need not mean that you would be running a non-profit and would never make money. Depends on the business, but if you have a good one, it probably means that money will come from the success of the business and hard work that goes into ensuring that, rather than form the capital invested by the VC.

Before ending this post, let me throw some gyaan about exit options too. There can be three kinds of exit options for the VCs

• Acquisition of the start-up
• IPO of the company
• Purchase of VC’s shares by another institutional investor in the next round

The last of these is something almost everybody will feel skeptical about. If it is a VCable business as defined earlier, there shouldn’t be a reason to go for this route. Even if you are able to come up with a genuine reason, it is not likely to be taken kindly.

So, either given the market you should be able to prove as to why someone will acquire you? Or should be able to show that you can go for an IPO in these many years.

Some of the reasons others may acquire you are

• You will have a technology that would be tempting enough for a big player couple of years down the line.
• You will be able to create a large base of loyal users, which would be valuable for someone to acquire.

Probably the only thing that can justify your claim that you can go for an IPO would be that you can grow to a certain level of revenue and profits. I have heard numbers for what this level is, but I am not very confident about them. I guess it would depend on the a bunch of things, but for example can you have a revenue of Rs. 4 crore by the time you break-even in 1-2 years (for an early stage fund)?

Anyway – enough of gyaan. Don’t have time to re-read and proof-read it right now. Its 4.25 am, I am yet to sleep and there is a long day ahead. Will correct any incoherences later.