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‘Its Good for the Sector’ – PE Players say of SEBI’s AIF Regulations

Team Entrepreneur — Wed, 04 Apr 2012 07:12:57 +0000

In its board meeting on Monday, the Securities and Exchange board of India approved the proposal to frame SEBI (Alternate Investment Funds) Regulations 2012 that will make the unregulated funds come under the perimeter of regulation by SEBI. Voices from the industry say that the provisions in the guidelines will help the industry grow and encourage competition.

Bharat Banka of Aditya Birla Private Equity said that “the guidelines seem well drafted though one has to wait for the fine print.” The guidelines will make the venture capital fund regulations of 1996 redundant and they will be repealed once the AIF regulations come into force. Industry representatives say that this will be good for the sector since the AIF regulations are more contemporary.

Some of the requirements mentioned in the guidelines are that AIFs shall not be permitted to invest more than 25% of the investible funds in one Investee Company and shall not invest in associate companies. AIFs shall also provide, on an annual basis, investors with financial information of portfolio companies and material risks. The alternative investment funds are also not to accept from an investor an investment of less than Rs. 1 crore, and it is required that the AIF shall have a minimum corpus of Rs. 20 crore. Another requirement is that a fund or any scheme of the fund shall not have more than 1000 investors.

The regulations categorize alternative investment funds in three categories. The Category I AIF will include those AIFs with positive spillover effects on the economy. This will include Venture Capital Funds, SME Funds, Social Venture Funds and Infrastructure Funds. These funds will be required to be close ended, not engage in leverage and follow investment restrictions as prescribed for each category. Depending upon the specific need Category I funds will be given concessions. The Category II AIF will include those funds for which no specific incentives or concessions are given by the government or any other Regulator. These funds will also not undertake leverage other than to meet day-to-day operational requirements as permitted in the regulations. This category will include Private Equity Funds, Debt Funds, Fund of Funds and other funds that don’t fall under category 1 or 3. This category will have no other investment restrictions. The third category Category III AIFs will include hedge funds that are considered to have negative impacts like increasing systemic risk, etc. The regulations will provide for these funds to be open-ended or close-ended, engage in leverage subject to some limits. Category III funds will be regulated through issuance of directions regarding areas such as operational standards, conduct of business rules, prudential requirements, and restrictions on redemption, conflict of interest as may be specified by the Board.

Under the new regulations, SEBI has made registration compulsory for all AIFs. The regulations are to bring the private equity industry in India under regulation by an independent regulator for the first time.

Another provision in the regulations includes that the manager or sponsor of a fund is to have a continuing interest in the AIF of not less than 2.5% of the initial corpus or Rs.5 crore whichever is lower. Industry representatives feel that this is likely to encourage domestic fund launches and increase competition.

SEBI will also take up with government to extend the tax pass through status to alternative investment funds and not just to venture capital funds that was discussed in the budget proposal in March.

It’s Not the Product but How You Position It That Will Make All the Difference

Team Entrepreneur — Fri, 24 Feb 2012 12:00:27 +0000

Being called a ‘master thief’ may not be a term you would like to associate yourself with, but Hamish Taylor associates with the term gladly. Known famously by that term, Taylor is popular for his use of ideas that have been successful in a certain industry to give desirable results in another industry.

In the run up to the Ernst &Young Entrepreneur of the year award, Taylor, an international expert on brand management and innovation undertook a workshop with some of the big names nominated for the awards.

Taylor asked the entrepreneurs to introspect that what is it as a business that one has understood about the customers that no one else has. The way to market your product he said is not by talking about the product but the utility of the product in the customer’s life. Having in-depth customer insights he says is essential for businesses to position their product effectively.

Deep Kalra, founder and CEO of Make My Trip (India) shared an experience in this regard. He shared that upon understanding the customers closely; they realized that one of the biggest reasons why many people take holidays is out of guilt for various personal reasons. Make My Trip then carved out an initiative targeting that aspect of the customer’s mindset to market their product. Kalra also said that those that are responsible for making the key decisions, the CEOs and management, cannot afford to be far removed from the customers. They have to know the customer’s mind closely.

This understanding of a customer’s mind not only allows entrepreneurs to decide on what to include in their core proposition but also what to leave out of it. Shereen Bhan of CNBC-TV18 sighted the example of Indigo airlines in this regard. In a time when most companies in the sector are suffering losses, Indigo chooses to identify a service that is most important to their customers. The company identified that for those taking a flight to reach a destination, reaching on time is a key priority and made it a part of their core proposition, putting every other service at a lower priority and thereby flying customers at a lower cost.

Kalra said that since customer priorities and needs keep changing, entrepreneurs need to sit back and analyze whether the customer insights are still relevant over a period of time.

Taylor elucidated with an example from his experience at Eurostar, a railway service in Europe. He shared that the company was successful at making sales to those who were travelling for work to Paris but not to the leisure travelers. That was a market they were having a hard time to crack. The important question for the company, he says, was identifying the competition accurately and the customers mind. He says that the competition for the company wasn’t other railway services but all other leisure activities that the travelers could go to for the same amount of money. “We went from selling railway tickets to selling an experience” he shares. The whole marketing campaign was focused on telling people why they would want to go to Paris, and in the end mentioned that Eurostar would be the best way to get there.

Taylor also said that the commodity wasn’t as important as how it would be positioned. To elucidate Taylor asked every one in the audience to come up with suggestions to sell a bottle of water without changing the price of the bottle. All the bottles cost the same, but one must have some other reason for which the customer will buy a bottle of water from you rather than anyone else he said. He said that this is what entrepreneurs need to think about – what is it that customers will pay be willing to pay an extra amount for.

Time to Temper Ridiculous Internet Valuations

Team Entrepreneur — Fri, 17 Feb 2012 12:31:52 +0000

Investments in the internet space were made at “ridiculous” valuations and experts are hoping the trend will change in the coming year.

This was one of the key conclusions at the Venture Intelligence Apex Summit 2012 in Mumbai.

A panel, comprising Mahesh Murthy, managing partner at Seedfund, Sunil Goyal, CEO of YourNest Angel Fund, Alok Kejriwal, CEO and co-founder of Games2Win, Gaurav Shah, CEO and Group MD DeGroup and Sandeep Reddy from GrOffr discussed the challenges and operational issues facing the internet and mobile industry in India.

Murthy said that the ridiculous valuations were made with the hope that “a bigger fool” would buy it at a higher valuation, in most cases “the bigger fool was supposed to be Amazon, who came in and bought none of those companies,” he said.

The panel laid an emphasis on companies to build strong business models and have a business that differentiates itself and demands the customer’s attention. Murthy and Kejriwal both reiterated the point that companies that were based on the concept of offering prices lower than their competitors were just eating into their own resources as the battle could continue with no one in the businesses to benefit, the focus needs to be laid on building a strong business model and design. The idea, Murthy said, is to create such value in your product offering or the overall experience for the customer that they would be willing to pay more to buy a product from you. The focus of the companies on building a brand and to emphasize on design needs to increase.

Murthy also insisted companies aim towards breaking even sooner. Kejriwal however said that the companies should spend and focus on building up the business and that can take time.

In the applications space as well, the panel agreed that what really works well is a good app. Word of mouth and viral sharing can help any good app catch on. Spending on advertising, the panel agreed, is not a necessity in this space. Murthy, giving Amazon’s example, said that the company is making very sizeable sales in India, and then asked whether anyone had seen an Amazon advertisement around.

In terms of funds, the panel agreed that there isn’t too much angel funding and that there is space for many more seed stage and angel funds to come in. More investment should however be focused on research and development, that hasn’t been seen enough in our country yet, the panelists noted.

There should be more ways, however, for investors to make exits, the panel agreed. They should not be dependent on a company getting listed. A need for vulture funds was discussed by the panel for e-commerce companies that are unable to stay afloat. Kejriwal said that the talent from some of the ventures, however, needs to be nurtured.

With respect to the number of ecommerce firms present, Kejriwal quipped: “There should now be an ecommerce site to sell ecommerce sites!”

A Year of M&A; PE in Distress

shruti — Thu, 19 Jan 2012 07:06:50 +0000

While it is expected to be the year of mergers and acquisitions, private equity is in deep distress, said a panel at a Grant Thornton event to discuss a ‘New Economic Global Order and M&A and PE Strategies’.

Calling 2012 the year of M&A, Professor Jagdish Sheth, Charles H. Kellstadt Chair of Marketing in the Goizueta Business School at Emory University said that the companies that have large amounts of cash on their balance sheet are going to have an advantage when it comes to mergers and acquisitions. The importance of consulting lawyers and accountants, over bankers, will rise, considering the legal situations companies can be faced with due to laws enacted by governments in emerging economies.

Private equity investments made in 2007-08 are coming to the close of their cycles. This will result in increased M&A activity as well. There will also be buyouts and companies going through bad phases fuelled by the economic conditions which will also lead to heightened activity on the M&A front.

Private equity players are finding it tough to find good investment opportunities. Also with the market not showing signs of recovering from the IPO lull for another six months, an exit route for private equity players seems to be running dry.

Entrepreneurs in India, particularly owners of family run businesses have also increasingly opened up to the idea of selling their businesses, fuelling a rise of M&A activity. Prof. Sheth discussed a problem with family run businesses saying that most family run businesses tend to diversify into too many sectors, and are competing with a different set of competitors in each. The businesses need to reduce this diversification and sell off businesses that are not core to the company.

Private equity can make money by restructuring and breaking down a business brutally. There are more and more hostile takeovers expected towards approaching this end. PE players have gained an increasingly negative image because of this change in attitude. PE players need to consider how a business they are investing in can be nurtured and not only look to restructure and make a quick profit, Prof. Sheth said.

A trend in M&A expected, according to Prof. Sheth is that “companies in emerging markets will look to acquire in other emerging markets.” The sectors in terms of M&A which are expected to see hectic activity are pharma, IT, real estate and infrastructure. He added that “India will become a second sourcing destination for manufacturing.”

According to Grant Thornton’s Deal Tracker, a record of all the major deals in 2011, M&As and PE deals put together, 2011 saw a total of 1,026 deals in India, totaling $54 billion, down, however, from 2010’s figure of $62 billion, which was clocked through fewer deals at 971. Another reversal of trend was the fact that in 2011 inbound deals were more than outbound.

Message for Entrepreneurs: Resist VC Money, Innovate in Business Model

Team Entrepreneur — Tue, 17 Jan 2012 11:34:16 +0000

It’s 2012, and a challenging year ahead for entrepreneurs. But the general view among experts seems to be that money is there to back ventures if the business model is innovative. Too many me-too ventures are cluttering the market, with a focus on e-commerce, but the future will have to see start-ups innovating on both the business model and execution.

The general consensus at a discussion at the recently concluded Wharton India Economic Forum panel discussion on “Entrepreneurship in India” was that the next ten to twenty years will be very different for entrepreneurs in India than what was seen in the past, where ‘irrational exuberance’ ruled and consequently many ventures could not sustain themselves. But despite the current challenges, this is a great time for entrepreneurship in India.

The panel – comprising Manish Sabharwal, co-founder and CEO of Teamlease, Kunal Bahl, co-founder and CEO of Snapdeal.com, Sandeep Murthy, former CEO of Cleartrip.com and India Head of Kleiner Perkins, Gautam Gandhi, head of new business development, Google India and Sandeep Singhal, managing director, Nexus Venture Partners – discussed a wide range of issues from venture funding to social entrepreneurship to bootstrapping. Here are some of the thoughts they shared:

A lack of respect: Unlike the US, the Indian entrepreneurial journey does not command great respect. There are pressures from the family, it’s hard to get capital, there is a lack of protection and it’s a big black spot on the resume if a start-up fails. Indians are excessively focused on the end-result, not the journey.

Preparedness is critical: Entrepreneurs don’t enter the fray well prepared, and there’s little innovation taking place in the entrepreneurship space in India. Consequently, the e-commerce space is flooded by me-too products and services. But there are cases where such ventures have also succeeded, in spaces like job listings, travel sites etc. Utility-focused models are working these days.

Choose funding carefully: Raising money is a ‘humiliating’ process. And the colour of money is more important than the quantum of funds. Resist venture capital funding as much as possible, because VC funding ‘changes everything’.

Bootstrapping vs external funding: Bootstrapping a business is generally a better option than seeking funding from external investors to begin with. Angel investors are also coming in large numbers. “If you have an idea, there is money to back it. And money can come in from anywhere.”

Social enterprise: There are several ways of creating companies that do social good. India is at a juncture where firms can find themselves at the unique confluence of doing well and doing good. But it is important not to nuance the term social entrepreneurship too much. Firms are, in some way, social enterprises because they provide employment. There are ventures which can be fun, profitable, and yet good for India.

Be ready for the harsh realities: Don’t ignore the smaller aspects. After getting funding, the biggest challenges are office space and infrastructure. Start-ups must focus on these relatively smaller aspects to get cracking.

Product, brand, people: It is critical to get the product right, invest in the brand and in people. It is critical to keep investing in people and scale up the venture. There are also some sectors where entrepreneurship opportunities are likely to be higher. The food and beverages industry is one of them.

Shakeout imminent in PE space

Team Entrepreneur — Tue, 10 Jan 2012 06:32:32 +0000

With over 500 registered private equity funds registered, and challenges looming large in the economy, a shakeout in the PE space is imminent, as players warn of ‘crash and burn’ for some. However, it’s not an entirely doomsday scenario, since some of the largest PE players still say that they are cautiously optimistic about the Indian market and say differentiated offerings will work and get rewarded in the future.
As the Indian PE space gets ready for some serious introspection, some of the top private equity players exchanged notes on the scenario and what would be the best recipe for the road ahead at the Wharton India Economic Forum on Monday in Mumbai.
The line-up was impressive: Manish Kejriwal, former Temasek India boss and now managing partner, Kedaara Capital, Naveen Wadhera, India Country Head, TA Associates, Sandeep Naik, India Co-head, Apax Partners and Nainesh Jaisingh, managing director, Standard Chartered Private Equity. The verdict: the time has come for a change in mindset on both sides. While PE players must realise that momentum-based investing will now be replaced by fundamentals-based investing, companies will increasingly have to understand that the capital market, despite the odds, will reward companies which keep a tight watch on costs and efficiency of operations in these times.
Limited Partners (LPs) are currently changing their view on Indian companies significantly – over the past few months – as Indonesia, Vietnam, Thailand and, of course, China offer alternatives and India’s policymakers grapple with challenges creating a policy paralysis. “Trying to tackle supply side inflation by jamming demand is not going to work,” the PE majors point out.
Those like Manish Kejriwal, who, in his Temasek avatar has funded several major Indian companies, among them ICICI Bank, are still bullish in general about the Indian scenario. “There are solid companies, promoters are shaky but want stability. So it’s a great time for private equity. I feel the 2012 vintage of funding will be much more rewarding than the 2008 vintage,” explains Kejriwal. But the general consensus is that the current slowdown will differentiate the men from the boys, both for companies and for PEs.
Fund-raising will be tough, but funds once raised will fetch attractive returns in this market, says Kejriwal. Wadhera says earlier, the role of PE funds was not entirely understood by Indian companies, but that has significantly changed now. “It used to take ages to convince entrepreneurs once the term sheet was out,” he explains, “but that has now changed.” PE funding has helped create the Business Process Outsourcing (BPO) success story in India and companies like Suzlon and others, the PE majors point out. The mid-sized entrepreneurs had an alternate source of funding during the boom of 2006-07, though the euphoria of those days is well and truly over.
What does the future hold?
The next two years, some of these large PE players feel, could well be the golden years of PE despite the shakeout and the challenges as a focus on correct valuations, governance and people get priority and lessons are learnt from the bubbles of the past. There are several high growth companies outside Mumbai and Delhi where the spirit of entrepreneurship is alive and well and these companies will be the stories to watch for PE funds. “There are stories in cities like Nagpur, Jalgaon, Ahmedabad…”, point out the top PE players. The current period will, therefore, be “the busiest, the craziest, but fun.”
Will PEs also look at distress sales as the economy gets challenging for corporate India?
That, most PE players believe, is unlikely. The public sector banks work like safety nets for entrepreneurs who therefore have little fear of failure. “If there is trouble in the business and a fear of problems, it’s time for a cup of tea with the general manager of your public sector bank and all will be well. Corporate debt restructuring will solve the problem,” they point out. Distress investing won’t work in India until there are clear foreclosure laws, greater governance and accountability. PE majors recall that even in 2008, when PE funds expected corporates to fail and hence were “literally running around, chequebooks in hand”, this cosy relationship between state-owned banks and entrepreneurs ensured there were hardly any deals done even when valuations were plummeting.
India, therefore, is an unique market. And the faster the PE investors realise it, the more profitable their engagement with the Indian market will be in the coming days. Going by the views of some of these top players, many of them are quick learners.

“Skill the workforce”

Team Entrepreneur — Mon, 09 Jan 2012 09:56:55 +0000

Is the Indian growth story a reality or a concoction of various reports compiled together to reach a figure which is ambiguous? Is the India Shining picture a true one or a creation of people with vested interests? These are some of the issues which were addressed during an interesting first session by K.V. Kamath, Chairman, Infosys and non-Executive Chairman of ICICI Bank. Speaking at the 16th Wharton India Economic Forum today, Kamath said that the true picture of India’s growth will only emerge if we get a clear report on all the sectors of the economy. The unaccounted-for money also needs to be accounted for, he added. Delving into the past for a bit, Kamath said that the future lies in building a successful social and physical infrastructure in India, thus ensuring healthcare and education needs of all Indians. “Vocational training and skilled labor are the need of the hour and one cannot exist without the other. Skills need to be taught from an early age-say, high school. The workforce has to be skilled in order to ensure better productivity. When we meet the aspirations of a large number of Indians, across states and regions, then we can ensure proper growth will take place in the economy,” said Kamath. “As India Inc. scales up, there will be an increasing need for people with the right skills. That is an area of concern that needs to be addressed urgently,” he added. He gave the example of the IT sector, where such an exercise has already begun.

Utility Vehicles Steal the Show

Team Entrepreneur — Fri, 06 Jan 2012 06:18:39 +0000

Things are certainly happening differently this year. While small and compact cars were the preferred option last time round, this year’s Delhi Auto Expo is clearly veering towards launching more and more Multi Utility Vehicles (MUV) and Sports Utility Vehicles (SUV).

Yesterday morning Maruti Suzuki unveiled its compact SUV XA Alpha. The company plans to bring in a production level car in the next two years. Today Suzuki will unveil the Ertiga, a multi-purpose vehicle while French carmaker Renault will introduce its Duster SUV. Hyundai India showcased its new Sonata sedan, while its MUV Hexa Space also made its debut.

“SUVs and MPVs are lifestyle products which India is today ready to accept,” said Arvind Saxena, Director of Sales and Marketing, Hyundai India.

Across the hall, Nissan Motor Co. introduced its MUV Evalia, while American GM displayed new versions of its Chevrolet Captiva and Tavera that will be sold later this year. Not to be left behind, Toyota introduced new versions of its Fortuner SUV as well as the Innova MUV.

Hyundai Sonata

Mahindra & Mahindra Ltd., which has acquired South Korean Sangyong Motor Co., is participating in an auto show for the first time. The company now plans to start selling the SUV Rexton by the middle of this year while another SUV, Korando C, is expected to follow in 2013.

German auto major Mercedes introduced the new M-Class SUV while Audi AG introduced the Q3 SUV, following the success of models like the Q5 and the Q7 in India. Another German company, BMW AG, stayed away from the bigger utility vehicles and instead chose to introduce the high-performance M5 sedan at Rs.95.9 lakh (ex-showroom) and the iconic hatchback, convertible and Countryman models from its Mini brand.

While Ford had already unveiled its EcoSport SUV on Wednesday, it decided to do it once again in front of a larger crowd. Powered by a 1.0-liter gasoline engine, this vehicle will be produced in the country from the latter part of this year. The new entrant on the block, French carmaker PSA Peugeot Citroen, explained that while its Sanand plant starts production only in 2014, it may start selling its cars in India ahead of its original target by importing 508 sedan and the RCZ sports car.

Bailing out the king?

Team Entrepreneur — Fri, 23 Dec 2011 12:22:48 +0000

By now, you must have all heard and read about the fiasco with a big Indian airline owned by one of the most ‘enigmatic’ businessmen in the country. Chances are that by the time you read this, the whole thing would be dead and buried. And its planes would be flying again with those lovely airhostesses, which he does not fail to tell you a few times, that he has ‘personally’ selected.
To be clear, I neither have the domain expertise nor the consolidated view of the sectors that policymakers enjoy. Hence, any solution I serve up to this mess would hold little significance in boardroom discussions, which I am sure of. Even so, I do have my own little opinion about the airline boss expecting a government bailout and asking banks to take a haircut, at a time when most of them are under intense pressure with broader economic factors.
First up, why would man so much in distress still be up to all the usual when all is not usual with his business? Let’s step back and take a look – our man has a F1 team, an IPL team, a yacht or two, a sprawling holiday estate in Goa (there maybe others, we know), a bevy of beauties and photographers flying off for a calendar, a TV channel or at least branding on one, and tons of real estate everywhere.
Take your own haircut first, sir. Sell some of those cars and some of that real estate if you are really awake to the impact of your airline failing. Cut down all that vanity spend and pay your dues. But first, pay your employees. I am sure an open letter or two are on their way if you’re still studding your way through this.
I also have an issue with the whole thought process about a bailout, and why not giving one will put Indian aviation in a mess. It won’t. If the airline fails, then so be it. The government has no business interfering in a free market, where you place your bets, work hard, hope for a little luck, but if you don’t make it, you cut your losses and run or are usurped by the better competition. Eight airlines in India have packed up since the 90s. Some like Paramount Airways were wound up not more than a couple of years ago. Aviation survived all through. Those planes will fly again under a different banner. We will still fly. The Indian economic engine that is spurring airline travel is just too strong.
Lastly, I just don’t know why a thought for a taxpayer’s bailout exists for a fat, unprofitable, over expanded airline for whom conditions were made ideal by a certain civil aviation minister, but not for the state-owned airline that was profitable until it was messed about by him to make conditions ideal for others.

AUGUST SHARK is a once-failed, second-time successful bootstrapper who resides in Mumbai. He can be contacted at august@stumpspeak.com.

Land Ahoy!

Team Entrepreneur — Sun, 01 May 2011 04:30:08 +0000

Hello, dear Indian entrepreneurs. How is it hanging today? Any orders come through? Any got cancelled? Is that licensing still six bribes away? Is that vendor sticking to his deadlines? Has the bank again rejected your application for a loan? Civic authority creating problems again?

You could go on and on about the troubles Indian entrepreneurs face in this country on a daily basis. There are romantics who call this part and parcel of doing dhanda in India, and what makes Indian entrepreneurs a cut above others. But that is all rubbish.

To those who yearn for better infrastructure, better regulations, better funding rules, and better support systems, I present the entrepreneur’s version of the IT worker’s Great American Dream: the Startup Visa. Yes, a visa for entrepreneurs. Still awaiting to be passed in to a law, the Startup Visa legislation is being spearheaded in the U.S. by a couple of Senators who know that the way out for the U.S. economy is to get more companies on the floor. And immigrants must be armed with an opportunity to do so.

The legislation says (credit to the TechCrunch piece by Vivek Wadhwa of Berkley, Harvard, Emory and Duke here) that entrepreneurs living outside the U.S. will be granted a visa to set up companies there if a U.S. investor agrees to sponsor them with a minimum investment of Rs.45 lakh. It further says that workers on an H1B visa, or graduates from U.S. universities in science, technology, engineering, mathematics or computer science will also be eligible for the Startup Visa, provided they manage an annual income of at least Rs.13.5 lakh or assets of at least Rs.27 lakh and have had a U.S. investor commitment of at least Rs.9 lakh in their venture. The Startup Visa will also be available to foreign entrepreneurs whose business has generated at least Rs.45 lakh in sales from the U.S.

What’s the catch? For all three, the startup must have created a specific number of new American jobs, and either have raised over a certain amount in financing or be generating more than a minimum amount in yearly revenue. I like the sound of this. Sure, there is the great India story to stop you from heading to the U.S., but there are many pros to this act. For one, it’s a boon for Indian students going to the U.S. and wondering if they will get hired there or will have to return to India to pay off heavy education loans on a much lesser salary. Similarly, it will help those zombie-like H1B workers dive into the startup sea. And thirdly, the job scenario in the U.S. might be down, but it’s still a market with enormous purchasing power and consumers who are ready to try new products/services—especially all things tech.

And heck, the ecosystem for startups is much more mature in the U.S. Things will get really interesting if this legislation goes through.

AUGUST SHARK is a once-failed, second-time successful bootstrapper who resides in Mumbai. He can be contacted at august@stumpspeak.com.