• Opportunities

Venture capitalists are typically very selective in deciding which companies to invest in. As a rule of thumb, a fund may invest in one in every four hundred opportunities presented to it. But VCs offer numerous plus points to a company—and not all are in cash. The sheer experience of having been in similar situations that your company might be in allows VCs to offer solutions when you can’t think of any.

“We seldom get operationally involved with any of the companies we have invested in. But we do get involved in the second level [of operations] by bringing our network to the table; this includes recruiting the right people for the company,” says Alok Mittal, partner at Canaan Partners, an early-stage venture capital firm.

Echoing similar sentiments, Walden Venture Capital’s Managing Director of Indian operations, Rajesh Subramaniam, feels VCs could play a bigger role than that of just a fund. “A VC’s profile differs from that of a hedge fund, as
a VC has experience in helping build companies through the inevitable ups and downs. That gives a VC the ability to impart its expertise in individual segments in addition to funding a startup,” says Subramaniam.

Mohanjit Jolly, Executive Director of Draper Fisher Jurvetson, describes VC money as the most “expensive money” an entrepreneur can get, but it is most often worth every penny. “The knowledge gained from a VC is very valuable, as it can offer the best practices at a strategic and tactical level,” he says.

Moreover, as a VC tends to invest in industries that it knows well, it can provide stellar networking opportunities in these industries. It can serve as a great resource in areas like business development, channel development, structuring and in forging strategic partnerships. Mittal elaborates, “In addition to our business developmental contacts, we can also bring in customer introductions in specific industries.”

Corporate governance is another important issue for which a VC can be of great help. New companies, in particular, require the right mix of people on its board to keep checks on the business’ operations, administration and balance sheet. A VC can prove to be invaluable in discovering talent that is best suited for the company.

Bharthi Jacob, Managing Director of Seedfund, says VCs are also target customers—and, more importantly, ones that can provide inputs while you are still building your prototype. This is always great for fine-tuning your product/service before it hits the market. In the process, a VC can help boost the level of confidence in a startup by providing practical feedback rooted in ground realities.

According to Subramaniam, two major advantages that a VC could bring to your company are access to professional money and a whole new set of minds to refer to.  The success stories of private funds making Indian multinational firms are many. Money manager Arisaig Partners, which buys chunks of small companies in Asia’s emerging markets, hit a jackpot in early 1993: it invested in a small company called Infosys Technologies Ltd. Arisaig’s current picks include Educomp Solutions Ltd. and Britannia.

This phenomenon can often be traced back to effective VC support. Most of these investors interact heavily with management teams. In 1991, New York-based growth investor Warburg Pincus LLC invested in a little known company at that time, Bharti Airtel Ltd. According to Warburg, the firm is essentially “an experienced partner to management teams that are seeking to build durable companies with sustainable value.”

Backing the right deals, Walden invested around Rs. 25-35 crore in MindTree over a period of eight years, starting in 1999-2000. Draper Fisher set its sights on companies like Reva, mChek and Cleartrip.com among others, while Seedfund invested around Rs. 2.5 crore in redBus.

Abhijit Bose, Vice President of ngpay—a company funded by Helion Ventures—emphasizes that his VC provided ngpay with a lot of value over and above the cash it brought in. “Early-stage startups gain credibility and market visibility based on the firms that back them. Being funded by a well-respected VC makes it easier to gain access to and sell to customers,” Bose says.

Yos Technologies President Vijaya Verma feels a VC should open doors for a startup that it wouldn’t otherwise be able to open on its own. “This would include areas such as insurance, networking, business partnerships, etc.,” she says.

VCs can prove to be a growth accelerator with their networking and operating experience. In addition, they have had the luxury of looking at others’ mistakes and so know what not to do.

Challu adds that being backed by a VC makes it easier to get additional financial help when a fresh round of funding is required, as these funds are connected in the financial market.

Today, a VC’s role has evolved to meet the demands. No longer do they deal with the companies they invest in at arms length. There are times when they shoulder the duty of mentoring, too.

THERE’S MORE TO EXTRACT FROM A VC
• A superb network, invaluable to startups
• Customer introductions in specific industries
• Help in recruiting seasoned professionals
• Feedback on your prototype as you are building it
• High-impact recommendations to obtain finances for scaling up

THE VC VANTAGE
Money: They will offer you the most important element to start your business, but will take their pound of flesh as well.

Networking: Their network is amazing, extending from leaders of nations to ground level markets. You can get deals, people and references easily.

They have done it before: Most VCs have been entrepreneurs themselves. They have seen the boom and the bust. Learn how to manage both from them.

Global view: As most VCs have experience in international markets, they can offer you a global view. It is even worth visiting your overseas mentors once in a while for new contacts and a view from the west.

Feedback: VCs wont hold back their feedback or criticism, as you are playing with their money. They want you to succeed just as much as you do.

©Entrepreneur September 2009

Tags:
Abhijit Bose, Alok Mittal, Arisaig Partners, Bharthi Jacob, Bharti Airtel, Canaan Partners, Corporate governance, Draper Fisher Jurvetson, early-stage, hedge fund, Helion Ventures, Infosys, MindTree, Mohanjit Jolly, ngpay, Rajesh Subramaniam, Seedfund, smetv, VCs, venture capital, Venture capitalists, Vijaya Verma, Walden Venture Capital, Warburg, Warburg Pincus LLC