"How can entrepreneurs take advantage of the changing Venture Capital environment?" The mature VC/PE market in the US is changing and the Indian VC/PE market is slowly evolving. This is a challenge and an opportunity for entrepreneurs trying to build their companies in a dynamic environment. Raising money from VCs has always been hard, and in India's evolving environ-ment, is even harder. Entrepreneurs can benefit with hand-holding and mentoring that can help ease this process.

Prof. K. Kumar and David J. Brophy elaborate on how several institutions have taken the initiative to help make companies "Venture Ready".

Prof. K. Kumar, currently a Professor of Entrepreneurship in the N.S. Raghavan Center for Entrepreneurial Learning at IIMB. 

Prof Kumar spoke about "Getting India's New Businesses Venture Ready" Excerpts:

The current status of entrepreneurship in India can be reflected on by observing a study by GEM. The highest rate of total entrepreneurial activity in the world is in India but the problem is that there is a high incidence of ‘necessity based entrepreneurship'. The difficulty with this kind of entrepreneurship is that the DNA of these businesses has limited scope and opportunities. Hence, one major crisis in India is that opportunity based entrepreneurship is very low and ‘necessity based entrepreneurship' is high. This means that high growth ventures are very low in India.

The venture capital scene in India can be divided into various phases. 1980s to 90s was phase 1 where government owned capital came into play, for instance TDICI or APIDC. From ‘95 to '99, we had phase 2 where foreign venture capital funds like Draper and CDC became the early funds in the market. In the year 2000, we had phase 3 where the funds came from India centric venture capital firms. Presently, the current phase has global venture capital and private equity firms from other countries as well as India.

The growth of the IT industry & BPO boom has given VC a lot of impetus. As per an IVCA report, there were about 1000 funds in the last 3 to 4 years. Incidentally, the number of deals has not gone up. For instance in 2000 we had 280 deals in India, whereas in 2007 we had 387. But what has changed is the amount of money involved, which has grown more than 10 fold. So we can safely conclude that we are having fewer deals, but they are much larger in size.

In terms of understanding VC, we should realize that VC is a private equity, but all private equity is not VC. Private equity usually comes in the later stages, with larger investment. Private equity in most cases goes after well defined business models and not after business in infancy stages. VC usually comes in during the early stages and are smaller investments in an evolving business model

The factors in VC are as follows.

* Capital Providers - They look at returns well above those earned from public capital markets.

* VC Investors - They look at portfolio returns and harvest actions within a finite time period.

* Entrepreneurs - They need capital to convert an idea into a profitable business

* Society - Needs creation of high growth businesses and replenishment of risk capital

Types Of Ventures In India

* Revolutionary Ventures - Which are really high on innovation and create new markets

* Propagatory Ventures - These don't use novel ideas as they typically follow a wave. They don't have the 1st mover advantage, but they rise to the occasion in the market. Example: Compaq, which was not the first in computers, but quickly gathered momentum.

* Niche Ventures - Highly specialized ventures but with a small and limited market.

*  Hustle Ventures - Necessity based entrepreneurs. Nobody notices these ventures when they get in or get out of the market.

* Speculative Ventures - "Buy Low, Sell High" kind of ventures.

Most VCs like to invest in ideas that are really innovative. "We invest in businesses that change the world" said one of the famous VC, Arthur Rock.

What Is A VC Ready Venture In India ?

* It has to have a revolutionary idea.

* It needs to have a high risk- high return profile.

* It needs to have sufficient scope for value addition from VCs who can provide specialized knowledge, access to networks and ‘follow on' funding for later stages.

* Harvest options should be available.

Challenges To High Growth Enterprises In India

* Government policies are not business friendly

* The R&D infrastructure is not up to the mark.

* Education and training for entrepreneurs is not efficient or effective. Infact the Indian education system kills new ideas and discourages entrepreneurship.

* Physical infrastructure is a huge problem.

* Property rights and enforcement including IP is another dilemma.

* Social and cultural support is a predicament as many people think entrepreneurship is bad and there is a stigma attached to it.

* Lack of legal system

To conclude, the drivers of opportunities for entrepreneurs in India are deregulation and liberalization, advances in technology and access to global markets. A few tips for entrepreneurs seeking VC, are to build on innovation, focus on removal of barriers to entrepreneurship, seek opportunities that address local problems and harness human capital where it is available. An entrepreneur also has to ensure his business idea has a fit in the market, commit to building a high growth business, leverage the VC's expertise to the benefit of the business, understand and subscribe to the VC's expectations and moderate his own expectations

David J. Brophy, member of the Finance Faculty at the Ross School of Business at the University of Michigan where he teaches courses in venture capital and private equity finance.

Dr Brophy spoke on the "Changing face of US private equity and its implication for Indian entrepreneurs."

Excerpts:

There is 3 main players in this business of private equity.

* Investment Group, or the institutional investors, who drive the game and control this industry.

* Small Companies, who need funding and are looking at investment groups for capital support.

* The Middle Agent, whose job is to provide services for the investor by identifying and screening opportunities and helping the investor to invest in the right places with maximum returns.

What's the ideal deal or "Super Deal", which will make all the above 3 players happy?

* The goal has to be to build a highly profitable company which will have high value in about 5 to 8 years.

* The management of the company needs to have proven experience.

* The product has to have sustainable competitive advantage over others in the market.

* The market has to be clearly identified, with minimal current and long term competition.

When you look at the geographic distribution in the USA of VC investment, you will observe that the Silicon Valley has the lion's share. We need to ensure that this distribution is fairly evened out throughout the US. As of now, VC is a local business and pretty much concentrated around California. In contrast, when you consider the geographic distribution of buyout investments, most of the money comes from New York, California or Texas. This means that the buyout business is driven by financial centers and hence its not a local business.

Institutional investors typically hope to get a "super deal" out of every 10 deals. But the statistics and studies reveal that you will make money on ONLY 2 deals. 3 of the deals get written off early and the remaining 4 are in the somewhere in the middle. Thy are known as the "living dead" deals, since you have to tolerate them for some time before they die out in due course of time.

Some government intervention acts delivered impetus to entrepreneurs such as Bayh Dole Act, ERISA enactment and the Telecom Act of 1996. It would be excellent, if the US government continues its support to the private equity industry.

The good news is that there is a new cadre of VC firms growing in the market. For them, all investments are exit driven which means that they look at the current market and make decisions based on market conditions. Another interesting fact is that, post the year 2000 the number of IPOs are lesser since companies are older and larger. Due the huge problem of credit crunch, big funds can't raise money for mega deals. The trend right now is that forming a new fund is hard since new funds are formed by people who drop out of big funds. Hence finding new clusters of entrepreneurial activity is vital for any private equity firm. India seems to be the perfect destination of the private equity firms from the USA and in the coming decade one can expect more firms investing in Indian companies.

These were excerpts from an event organized by TiE.- Bangalore Chapter  

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