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VCs look for clear exit routes

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Venture capitalists are experts who have the ability to take calculated risks to make innovative ideas a reality through encouraging new enterprise. MR VISHNU VARSHNEY, CEO AND MD OF GVFL

MR VISHNU VARSHNEY, CEO AND MD OF GVFL
MR VISHNU VARSHNEY, CEO AND MD OF GVFL

D. Murali

When young and studying, VCs meant vice-chancellors. As investors, however, the VCs you hear about are the venture capitalists.

To know about VCs,

Business Line

contacted "the oldest venture capitalist of India," Mr Vishnu Varshney, Chief Executive Officer and Managing Director of GVFL, who is an IIT-ian, with an MS and MBA from Louisiana State University. He has financed nearly 60 early-stage start-ups, over about 16 years.

GVFL Ltd (formerly Gujarat Venture Finance Limited) is an independent board-managed, autonomous venture finance company based at Ahmedabad. It was started by Gujarat Industrial and Investment Corporation (GIIC) at the initiative of the World Bank in July 1990. Thus far, GVFL has raised five venture capital funds with a combined capital of nearly Rs 150 crore for investment in startups.

"We have some exciting companies in our portfolio such as eInfochips, Icenet and Anupam globalsoft from which, we would look at divesting in 2007 as these companies have matured and would give us optimum returns," said Mr Varshney, earlier this month when announcing investment plans for the year, with a focus on IT (information technology) and biotechnology. "We are currently evaluating several interesting proposals including some from IIM-A incubator and NirmaLabs, which we would soon be finalising for investment. In 2006 our thrust was on divestment and consolidation of good investee companies and we had taken up opportunities wherever we could see an opportunity of making good returns," he elaborated then.

The eight big sectors for 2007, according to Mr Varshney, are clean energy, healthcare, mobile, hospitality, IT, Internet, ITeS (IT-enabled services), education, financial services and entertainment.

Excerpts from the interview:

Who are venture capitalists and what do they do?

Venture capitalists are experts who have the ability to take calculated risks to make innovative ideas a reality through encouraging new enterprise. They are meant to provide finance at seed and early stage to budding entrepreneurs who have ideas but lack the financial means to put them into practice. The role of venture capital and private equity differs slightly where VCs are into nurturing and building enterprise at start up stages of a company whereas PEs fund companies at growth and expansion stages.

Describe the lifecycle of a venture.

A venture capital lifecycle consists of four phases fund raising, investing, divesting and distribution. VCs set up funds specialising in different sectors such as IT, biotech, SMEs (small and medium enterprises) etc. post-registration with SEBI (Securities and Exchange Board of India). Post-fund-raising, the investment process, from reviewing the business plan to actually investing in a proposition, can take a venture capitalist anything from one month to one year but typically it takes between three andsix months. The venture capitalist while making investment decisions would evaluate factors such as entrepreneur's background, viability of the service, potential, risk proposition and financial return on investment. Today, divestment viability has also become a key factor in investment decisions. VCs exit firms through IPO, strategic buyout, management buyback, etc.

How big is the Indian VC industry?

In calendar 2006, the total investment by domestic and foreign VCFs (venture capital funds) registered with SEBI was pegged at nearly Rs 12,000 crore. In 2006, the biggest gainer was the real-estate sector, which saw investment of over Rs 4,000 crore by VCFs and foreign venture capital investors. The IT sector (last year's winner) attracted just about half of this, or Rs 2,000 crore. Similarly, venture capital investment in the services sector and industrial products stood at Rs 1,000 crore and the pharma sector got nearly Rs 800 crore in 2006.

Where do we stand in comparison to other countries?

In spite of the big moolahs, the actual scenario for early stage companies looking for start-up capital is not so rosy. In 2006, out of the total private equity funding in India only a dismal 20 per cent was invested in the early stage innovative start up firms as compared to 29 per cent in the European Union, 41 per cent in China and 50 per cent in Israel. The shortage of capital for the early stage ideas is leading to a dearth in early stage investments in India. This could have a negative ripple effect on the quality of late stage opportunities in later years.

On how the VC industry has been evolving in recent times.

In 2000, the Indian VC market was at its peak with investments made up to $1160 million. But then came the dotcom bust, which led to a steep decline in investments. In the past two years, the private equity and venture capital have started picking up. In 2006, VC investments in start-ups accounted for 20 per cent of the overall PE investments in the country, which stood at $7.46 billion and over 299 deals. The percentage is expected to improve since PE investments are estimated to touch $10 billion in 2007.

Are VCs governed by any specific laws or regulations?

In November 1988, the Government of India decided to institutionalise venture capital industry. It announced guidelines in Parliament. The guidelines were restrictive; definition of VC was very narrow. They required venture capital to be invested in companies based on innovative technologies started by first-generation entrepreneur. This made VC investment highly risky and unattractive. In 1991, reforms were commenced where guidelines were abolished and VC industry became unregulated.

What skills are required in VC firms, and what courses can prepare the aspirants?

Exceptional communication, perseverance and analytical skills are a must among employees in venture capital firms. Preferred academic qualifications are MBA (Finance), BE/B. Tech., and CA, etc., for the projects department.

Can VCs go wrong? How?

Any start-up project where a VC invests is a high-risk proposition as the project is at a beginning stage and there is no past history to determine trends. Projects are known to fail despite of good prospects and sincere efforts.

A VCs role is not restricted just to funding but they also make value-additions to the investee companies by providing managerial support, helping in sourcing additional funding and strategic tie-ups, strengthening internal systems and corporate governance, increasing visibility through various events and networking with industry experts.

These efforts are an attempt to help their investee companies in succeeding by the VCs so they don't go wrong.

As an experienced player in the industry, how do you zero in on the right venture?

Venture capitalists are higher risk investors and, in accepting these higher risks, they desire a higher return on their investment. The venture capitalist manages the risk/reward ratio by only investing in businesses that fit their investment criteria and after having completed extensive due diligence.

VCs investing in early stage ventures today don't make investing decisions based on a `bright idea' alone but let it not mean that VCs don't give value to a innovative or promising business proposition.

VC today is very conscious of the team's capabilities, its commitment and the customer interest/commitment generated by the business. Any business which has a good differentiator creating entry hurdle for competition, good potential for high growth and a forward-looking fired-up team is an attractive proposition for VC investment.

Venture capitalists look for companies with unique and superior products or services targeted at fast-growing or untapped markets with a defensible strategic position. Venture capitalists need to be confident that the firm has the quality and depth in the management team to achieve its aspirations.

The venture capitalist will also want to ensure that the investee company has the willingness to adopt modern corporate governance standards, such as non-executive directors, including a representative of the venture capitalist. Lastly, venture capitalists look for clear exit routes for their investment such as public listing or a third-party acquisition of the investee company.

Your

tips to young investors.

As young entrepreneurs looking for exciting careers, my recommendation is not to get carried away with your business ideas without actually conducting a complete feasibility of the proposition.

Also, once your business starts growing, learn not to become complacent with your achievements. The drive and ambition to grow should be a continuous invigorating process and not a lifestyle requirement.

As an experienced player in the industry, how do you zero in on the right venture?

Venture capitalists are higher risk investors and, in accepting these higher risks, they desire a higher return on their investment. The venture capitalist manages the risk/reward ratio by only investing in businesses that fit their investment criteria and after having completed extensive due diligence.VCs investing in early stage ventures today don't make investing decisions based on a `bright idea' alone but let it not mean that VCs don't give value to a innovative or promising business proposition. VC today is very conscious of the team's capabilities, its commitment and the customer interest/commitment generated by the business. Any business which has a good differentiator creating entry hurdle for competition, good potential for high growth and a forward-looking fired-up team is an attractive proposition for VC investment.Venture capitalists look for companies with unique and superior products or services targeted at fast-growing or untapped markets with a defensible strategic position. Venture capitalists need to be confident that the firm has the quality and depth in the management team to achieve its aspirations. The venture capitalist will also want to ensure that the investee company has the willingness to adopt modern corporate governance standards, such as non-executive directors, including a representative of the venture capitalist. Lastly, venture capitalists look for clear exit routes for their investment such as public listing or a third-party acquisition of the investee company.

Your

tips to young investors.

As young entrepreneurs looking for exciting careers, my recommendation is not to get carried away with your business ideas without actually conducting a complete feasibility of the proposition. Also, once your business starts growing, learn not to become complacent with your achievements. The drive and ambition to grow should be a continuous invigorating process and not a lifestyle requirement.MuraliDe@gmail.com

(This article was published in the Business Line print edition dated February 25, 2007)
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