Managing the VC

The following is a nice article from The Economic Times on start-up and fund-raising. I thought it would be a good article for all the start-up buddies here.

To raise risk capital from a private equity or venture capital investor marks a high point for most start-up companies . It sets to rest one of the biggest concerns in the initial months of company formation and while many entrepreneurs are loath to admit it, being funded by a venture capitalist is a prized validation.

However,once the initial euphoria fades away, most entrepreneurs find that raising money was the easy part, managing the intricacies of having an investor on board and minimising conflict while maximising the benefits is the more arduous task.

When to raise funds?

India Emerging spoke to a roster of start-up entrepreneurs who have successfully managed this transition. Taking on investment at the right time is essential. “Do not raise capital to keep it in the bank for mental comfort. Raise it when you need it,” says Manav Garg, whose firm Eka Plus develops risk management software for commodity firms across the world. However, entrepreneurs say the timing of the fund raising depends on the business model and the stage a company is in.

Eka Plus was started with seed funding from Thailand-based GP Group and later took on venture investment from Nexus Venture Partners. Garg says most companies take on investment when they are developing a product, or to invest in sales and marketing and in operations when they are expanding . “We took on funding when we were expanding internationally to the US and the UK and needed to hire international talent,” says Garg. Still, others do not have the luxury of choice.

Sourabh Jain launched JiGrahak Mobility Solutions, which runs mobile-based shopping solutions product ngpay, in 2005. But funds started running out in 2006. “We took on funds for survival . It was as simple as that,” he says. Jain raised funds from Helion Venture Partners in 2006. However, Jain says it is best to raise funds as late as possible .

The earlier the investment , the more time required for returns to come through. “How long can the VC wait without numbers and clear direction ? Life is easier for the entrepreneur and the VC if the investment is done later,” he adds.

Amount and Valuation

Once an entrepreneur decides on when he needs to raise funds, he also needs to decide how much equity he is willing to dilute for the required funds. Typically , VCs look to acquire over a fifth of the company going up to owning almost 40%.

They could stay invested for up to five years and would expect to earn at least a three-fold return on their investment .

“Entrepreneurs must also know that with every subsequent round of funding, promoter’s stake will reduce,” says Manish Sharma, co-founder of Printo, a printing and documentation solutions venture, which received funding from Seed Fund and Sequoia Capital at different business stages. Eka’s Garg says an entrepreneur should build in a buffer while raising funds as sudden expenses can come up. He says the investment should last for around 24 months.

The role of a VC

While money does matter, that should not be the only consideration , as a VC has a say in the running of the business. Most entrepreneurs also expect strategic direction, business contacts and help in hiring talent from the VC. Garg compares an entrepreneur-venture capital relationship to marriage.

“It is one of the most important relationships an entrepreneur can have. The chemistry is important ,” he adds. IT management services venture Appnomic Systems raised funds in two tranches from Norwest Venture Partners in 2009 and 2010. The company’s co-founder D Padmanabhan says they wanted Norwest’s managing director Promod Haque on board.

“Participation from Promod is very high and that was very important for us,” he says. Padmanabhan says the strategic and sometimes practical advice Haque provides is invaluable . He says that in their hurry to expand internationally the team considered acquiring a company. However, Haque told them to first partner with the company as Appnomic was still getting its structure and processes in place. “This was very good advice . We finally expanded organically and did not acquire the company,” says Padmanabhan.

Dealing with conflict

In an early-stage venture, most partners, including VCs, cannot know for certain which decision will lead to results. Entrepreneurs feel the VC must not interfere in operational issues while their counsel is important on strategic matters.

Ngpay’s Jain says there was a time when he wanted to stop a particular segment in the business , but the Venture Capitalists wanted to keep it going for some more time. “I did not want a delay in decision taking and we agreed to stop it immediately,” he adds.

Knowing that such disagreements can happen and handling it maturely will steer the relationship away from break point. “Communication is important. The VC should be kept in the loop, especially if the decision will have an impact on the fund,” says Eka’s Garg.

Tempering Expectations

Managing expectations is also important. “Expectations change as an entrepreneur matures . When I set up my first company, I was literally expecting ‘hand-holding’ ,” says Alok Kejriwal, who straddles both lines of the entrepreneur-investor divide. A serial entrepreneur, Kejriwal also invests in start-ups .

He says now he expects industry contacts. Printo’s Sharma says the Indian VC ecosystem is still in its infancy and so many of them cannot contribute more than funds to a start-up . “Entrepreneurs need to temper expectations and should do extensive homework before opting for a fund,” he adds.

Finally, entrepreneurs say it is still all about the money. The fund can help in getting excellent valuations in further rounds of funding. Kejriwal, whose Mobile2win China was acquired by Walt Disney, says: “VCs help in exits, not because they love you, but because they love themselves.”