Samir Kumar from Inventus Capital
This article contains the summary of the venture capital workshop held during Eximius ’09 at IIM Bangalore. The video of the same can be viewed here: http://coffeewithsundar.com/v-c-workshop-by-samir-kumar-md-inventus-capital-partners/
The session started with Mr. Samir Kumar taking questions from the audience (which included students as well as budding entrepreneurs) to gauge their expectations. The event saw loads of audience Participation (more than 20 questions were put forward even before the event started) and in the end actually, there was competition among the audience to participate. Even in the interim, the session saw avid audience participation – the talk was interspersed with many probing questions from the audience.
Mr. Samir Kumar started off by explaining the nature of VCs – that they are Limited Partners with the objective of Big Financial Returns (typically 10 times their investment). He then told the audience what the VCs are typically looking for in an enterprise e.g. integrity of the team (lone rangers don’t get funded) and credibility (Track Record, Experience..), he explained that probably a Bill Gates or a Steve Jobbs (college drop outs) may not get funded by VCs but somebody like Larry Page and Sergey Brin would get it because of their education (Ph.d students) and hence their credibility.
An insightful quote from Don Valentine (Founder of Sequoia Capital) was put forward which captured what VCs typically look for when investing. The idea of “Unique Value Propositions” of investible businesses was presented – Inventus invests in Co’s that are “Painkillers” (cater to a “need” of the market) and not “vitamins” (solutions that “improve” the businesses of customers). The various exit opportunities like IPOs, M & A, etc and their pros & cons were also discussed at large by Mr. Kumar. He made it clear that VCs do not invest in businesses which are mature & stable and hence do not provide a clear exit opportunities.
Mr. Samir also talked about the various sources of funding (other than VCs) which are available to entrepreneurs, like the 3 F’s (Friends, family and fools), Angels, Incubators, etc. An important point made was that Banks and other Financial Institutions do not typically finance the kind of ventures that VCs are interested in because of the high risk involved. On the other hand VCs look for “Customer Validation” in the form of revenue generating capacity of the service companies or a “Beta Customer” for product companies.
Thus the presentation concluded and was followed by a spate of questions from the audience including the following:
1. How do VCs participate or interfere in the decision making of the businesses? How does the behavior of VCs change prior to the investment (before marriage) and post investment (post marriage) and how do they monitor the enterprises?
Mr. Samir replied that they do not interfere much in the day to day decision making. They carry out a monthly evaluation of the businesses in their Board meetings and talk to the entrepreneurs on a weekly basis to monitor their progress.
2. What is the Outlook of VCs in times of recession?
Mr. Samir explained that recessions are the best times for entrepreneurship and hence also for VCs (e.g. because of lower salary expectations of the employees). He cited the example of great companies like Microsoft, Cisco and Dell that were conceived in recessionary times and went on to become giant MNCs and world leaders.
For VCs, the valuations are really attractive in recessionary times.
3. Why is IPO the preferred mode of exit?
The reply from Mr. Samir was that it leads to better price discovery and unleash more value than other modes like M & A.
4. What kind of stake is held by the VCs in the businesses?
Mr. Samir replied that typically VCs hold 20% – 40% stake in the businesses. E.g.they would invest 1 crore out of the total capital of 4 crores, thus giving them a 25% stake and they expect that the company would grow upto 200 crores and their stake would be worth 50 crores.
5. How do VCs value the businesses, what kind of profit share are they looking for? What is the amount of reliance placed on the financial statements (especially in the context of Indian enterprises)?
To this Mr. Samir replied that there is no fix formula to value an enterprise. Usually they project the revenues of the company at the end of the investment horizon (i.e. when they want to exit) and use a earnings multiple of 10 times to calculate the value of the business at the end of the investment horizon and then discount it to find out how much do they need to invest at the beginning to get a return of 10 times their investment.
If this value is within their range, they go for it otherwise they drop it. Regarding the profitability, he answered that VCs typically take 20%-30% of the profits after they have managed to return the capital of their investors.
Mr. Samir told the audience that sometimes they don’t use the financial information given by the entrepreneurs and use their own estimates. Usually entrepreneurs tend to underestimate sales and marketing costs but have robust estimates of product development and engineering costs.
VCs consider this kind of problems while valuing businesses.
6. Can an enterprise have more than one VCs? What kinds of control problems are associated with it?
Mr. Samir replied that it is possible to have more than one VCs but there is the issue of “Too many cooks spoiling the broth”. So, it is essential for the entrepreneur to have sufficient stake (about 30%) and minimal interference from the VCs to ensure smooth operations.
The session was very engaging as well as enlightening for the audience.
This was evident from the participation exhibited by the audience and the session overshooting the allotted time limit and still leaving the audience wanting for more.
Mr. Samir spent a lot of time taking questions offline as well.
Summary By – Sumit Bhartia