TiE Entrepreneurial Summit – 2

Cash is God. Such was the mantra of Venture Capitalists at the TiE Summit 2008 Bangalore.
Money has always been expensive, but since the economic meltdown, it has now become more of a rarity.
The mechanisms for the financing of small-time start-ups are breaking down.
The future looks bleak, if you are looking for funds.
At the TiE (The Indus Entrepreneurs) Summit, many questions were asked of the panels of VC who dared to face the entrepreneurs who would soon come to them for the rarity of the economy.
“What do VCs look for?”
“What should an entrepreneur look for in a VC?”
Even in the current economic turmoil the VCs tried to maintain a tone of optimism. Entrepreneurs were told to look at funding as an including mechanism rather than an excluding one. When you go out into the field for funds, you have a choice. Entrepreneurs were told to develop their own sets of criteria of what they want from a VC and to set expectation.
“The alienation is unwarranted”, a VC was quoted as saying.

The challenges thrown at the entrepreneur are merely tests to ascertain the level to which s/he is capable of understanding his/her business: “Do your homework.”
If it’s a partnership you’re involved in, the VC needs to know if you can gel. The VC needs two areas covered in such a situation – “someone who can build and someone who can sell.”
On the flipside, the entrepreneur needs a number of things of his/her VC. Number one on an entrepreneur’s list of priorities is chemistry. The question must be asked: “Is this someone you can disagree with.” The VC must be the first person you are willing and able to call when you are struggling with a problem. You must be able to ask of the VC if future rounds of financing are safe. Are your operating values soon going to be seen by the VC as operating problems?  These and many other questions relating to compatibility or chemistry must first be answered before jumping to conclusions about how the relationship is going to work.
Secondly, what do you need? The stage in which your enterprise is in and the ability of the VC to understand future variations in revenues depending on the timeline of the business are vital.
There was plenty of debate regarding valuation and liquidation references, but the simple core of their advice was this:  create demand for the product, get people excited in it and you are in the driver’s seat, with the VC riding shotgun.
Of course businesses have different gestation periods depending on the models they use, but as long as you have found a VC who understands the machinations of the industry, there shouldn’t be a problem.
Questions were soon raised about the general fear of ideas being stolen. The panel was quick to retort that the only way to protect an idea is to run with it. Ideas are meaningless without execution. The cost of making and executing the idea must be less than what the customer is willing to pay. And naturally the scalability of the idea depends on the market for it.

Some VCs saw the coming year in an optimistic light drawing attention to the fact that this downturn will result in a lot of experimentation with new business models and constant innovation.
Essentially however the tone was Darwinian at best. “The bar is being raised”, “Survival of the fittest” and other such phrases were designed to assure entrepreneurs that funding would be available to those who adapted to changing situations.

Chairing the special panel discussion titled ‘From Adversity to Advantage: Opportunities for Growth & Investment’, Sonjoy Chatterjee, Executive Director, ICICI Bank suggested that the entrepreneurial ecosystem in India was finding sustenance despite the economic downturns. Atul Punj mentioned that this could also be opportunities for companies to make good acquisitions/investments as the price point of some of the companies would provide attractive upsides in the times to come. Hari Bhartia on the contrary mentioned that cash is king and companies must be conservative in spending cash and use Lean and Six Sigma techniques for process improvements.

In a session titled, “Are you ready for venture capital”, a star panel with varying expertise addressed issues relating both to the availability of capital and whether or not acquisition of that capital is a good idea.
Sudhir Sethi of IMD-IDG ventures that deals primarily with early stage enterprises, spoke about the question being how to expect the funding market to change. Sudhir Sethi is Founder, Chairman and Managing Director of IDG Ventures India, a US$150 million early-stage technology venture capital fund backed by IDG, the world’s largest IT-focused media company. He founded IDG Ventures in 2006 after 26 years in the technology and venture industry.

He classified this impact of uncertain capital markets under the following:

Fund-raising and general partner/team quality

Limited partners, he said, would become very selective as regards the quality of teams they bet on. Few general partners in India, he believes, possess a “full cycle GP experience of deal flow generation, investment, monitoring, exits, and fund raising”. In effect, first-time funds with teams that do not have much chemistry will hit road blocks raising capital. On the other hand, second time funds with a well-planned investment strategy and a “full cycle venture experience”, will find it easier (in terms of adaptability to the market) to gain funds.

Deal flow

Panellists expected a slowdown in deal flow. Start-up venture funding saw a decline, as the number of newer start-ups fell. There appears to be a slowdown in entrepreneurial movement from corporate to start-ups. Expectations abound, in an optimistic VC atmosphere, for the quality of deals to grow.
Tier-two cities such as Pune, Coimbatore & Mysore may also see a piece of  the action in terms of deal flow.

Valuations

Sethi also mentioned having seen falling valuations in deals with early stage ventures. This trend will probably continue.

Exits

Dependence on IPOs will continue to fall as companies are being constructed increasingly to exit by acquisition. Founding teams may be pushed to build significantly tech differentiated models so as to harness greater valuations at exit.

Co-investments

Yet another impact of unstable capital markets discussed at the summit was the increase in co-investments. Sethi quoted the example of his own IMD-IDG ventures where out of 7 investments, 4 are together with co-investors.

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Some challenges that the industry may face in the near future were addressed. The Venture industry will be seen in the next 4 years to be one where opportunity management is vital.

The industry is however currently strong and flexible enough to support more funds. This was evidenced by fact that IMD-IDG met numerous limited partners who communicated the intention for IMD to continue to focus on venture investments. The difference between first time and second time funds in the near future would be the latter’s ability to raise funds easier and faster.
There appears also to be a healthy trend in terms of greater numbers of disruptive product ventures.
Another big challenge however is that of maintaining the teams they have gathered while private equity firms are cropping up.

Venture funds will face a challenge of retaining their teams with more private
equity funds being formed.

Clearly, there is much to be considered in the coming year. Funding will be scarcer than ever and survival of the fittest will function in its bluntest form.
That is not to say that VCs are now a completely excluding mechanism. If you’ve got the idea, the passion and the vision, coupled with effective execution, funding should not be a problem.