April 9, 2011

Vouching for venture capital

Posted in Uncategorized at 7:25 pm by chait83

These are the snippets that I collected from the session organized by NeN on business plan writing, conducted by Mahesh Murthy.

Mahesh Murthy is an accomplished businessman and a VC. His company Seedfund is ranked as the best VC fund in India.

A VC typically has close to 60 secs for any business plan to scan around, based on the flood of business plan they receive each day. In that time a VC has to take a decision to throw the plan or try digging more into it. So how do you compel a VC to do that?

Here is some insight from a investor’s point of view.

A VC is similar to mutual fund business, where money is pooled form people and invested into startups in for some share in the startup. Unlike mutual funds, a VC firm cannot sell it’s shares in an open stock market.

So then how

  1. Does a VC firm book profit.
  2. How is it different from a mutual funds.

Typically a VC firm would return 25% IRR, which is way higher than mutual funds. It’s a high risk high gains fundamental.

Lets assume that a VC firm invests 10 crores in 10 different companies. Generally a VC firm would expect this at the end of 5 years.

3 venture would die
3 would be break even, but there is no exit visible for the investment.
2 will give 5 crores on exit
2 will give 10 – 15 crores on exit.

So ideally an investment of 10 crores, the VC firm has made 30 crores of profit.

Now coming back to original question, is your company worth returning 10x returns on investment at the end of 5 years. VCs have to think with that conviction for every company. A 10x return on the investment is achieved only if the company is no. 1 player in the segment, no. 2 position is far fetched. So do you have in you what it take to be no. 1 in your segment?

Now on to the exit strategy. How does the VC firm book it’s profit.

A VC firm would never want a pie out of your company’s profit. They book profit only when they sell their share to someone and exit from your company.

  1. Management buy back: Typically when the management has 70-80 % share of the company why would it buy more. Deal is uninterestin for the management and a tough bargain for the VC.
  2. Merger or Acquisition : Best option for the VC to exit from the company
  3. Public issue: Very unlikely, a startup making headways into the stock market. None the less this is a viable option. Typically a IT company would have to have valuation of 50 crores, a manufacturing company should have valuation of 200 crores, etc

Now another important question for the VC can you survive with the money that they handover you and thrive thereafter.

Let’s summarise what a VC looks into your business plan.

  1. 60 secs pitch that should arouse interest. So business plan has to be concise and not an encyclopedia  of what your business is all about.
  2. Before getting into the deal, does the investor have a profitable exit door after 5 years.
  3. Can you survive with the money given by the investor to you.
  4. Can you thrive to be no. 1 in your market segment.

For an investor all you need to give is a spreadsheet with shows when the break even point occurs and what happens at the end of 5 year.

So just grab an excel sheet and start filling the numbers. Doesn’t matter if they are right or wrong. Start planning, get it vetted from peers, successful businessmen, investors.

As Mahesh Murthy has put it, business plan is a model not the real thing. In reality no business runs the way it was planned for. The business plan is a blur reflection of your ideas for the investors to which they can relate to.
Some number nuggets:

  1. Typically a VC firm would be looking forward for investment in the range of 2-5 crores, with a share of 20-30 %.
  2. For that share of your company should be close to 50 – 200 crores at the end of 5 years, for the VC to rake in their 10x profit.
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My views on lokpal bill

Posted in Uncategorized tagged , at 1:52 pm by chait83

Well the facebook and twitter streams , my mailbox and my sms inbox are all flooded with “Support for lokpal”.

Something of this significance  and of national importance cannot be simply overlooked and I started digging in.

Anna Hazare is the man who is at the epicentre of it. He is a social worker and a Padma Vibhushan. I haven’t had an opportunity to interact with him personally or really investigate his work, hence would consider his role from a very neutral angle.

Wikipedia mentions that this bill was presented in the parliament for the first time in 1969 and has been unsuccessfully been staged there after. The bill is drafted taking references of similar act implemented in Scandinavian countries in and apparently looks like it worked for them. Sweden and Denmark are least corrupted countries today based on statistics. As Navjot Singh Sidhu would have stated, status are like mini skirts. They reveal a great deal, yet hide the essential things. How can statistics account for White collar corrupt practices.

Lets start listing down key clauses of the bill:

  1. ‘Ombudsman’ / Lokayukta : In simple words the person / entity who can initiate a proceeding on his own for greater cause of the people against a complaint. Now prosecuting culprits or not by Ombudsman, our honourable MPs (Whom we have elected / ignored to vote) would debate on.
  2. Appointment is to be made on the recommendation of a committee. Lokpal will have its own administrative machinery for conducting investigations.
  3. The Lokpal is supposed to complete the inquiry within a period of six months. No minister or bureaucrat will be able to influence their investigations.
  4. He can order search and seizure operations.
  5. If any work of any citizen is not done in prescribed time in any government office, Lokpal will impose financial penalty on guilty officers, which will be given as compensation to the complainant.
  6. Lokpal is supposed to investigate cases of corruption only, and not address himself to redressing grievances in respect of injustices and hardship caused by maladministration.

Now thinking like an electronics engineer.

  1. Now why can’t these amendments be made to IPC / CBI / Income tax / Excise rules, a system already in place for investigation. Why a separate institute?
  2. Lets say there is a separate institute, who are the most qualified personnels (ethically and unethically as well) for this job. Well no prize for guessing, Judges , CBI , Income tax / Excise, etc.
  3. Indians love the game called “Pass the buck” .. Now let’s say that there is a case which lokpal is handling. There is a huge money scandal, like Hawala. Automatically IT (Income tax) dept comes into picture and then a few more committees to audit their reports. Now lets say the guy is a criminal. The CBI/ CIA/ KGB / Crime branch Mumbai, etc comes into picture as well. Now these guys decided to pass the buck. What can Lokpal do? File a lame report?Moral of the story: A scandal clean up drive is not single person’s (institute in this case) undertaking.
  4. Now how do we know Lokpal is not corrupt? Ghourmint of India’s Classic solution… Set up a committee, investigate for like 25 – 50 years and then the parliament has to reject the recommendations unanimously. By this time the kids of the accused person are chilling their heels in some states of Ambrika.
  5. How is corruption not different from maladministration. Lets say I allow a blacklisted vendor to bid for a project, oops I didn’t knew it was a blacklisted company. Thanks to my insightful vision which usually cannot be tried in the court, the vendor wins the bid.. Now is this a case of administrative mismanagement or corruption.

Ok let say all my logical arguments are proven wrong and the parliament passes the bill. This would be truly a landmark event, but are we ready to nurture this sapling into a humongous tree which would protect us from the blaring heat of corruption.

Let’s find out with some simple introspective questions:

  1. Do you have voter’s ID. You might have driving licence and passport, but do you have voter’s ID.
  2. For ZP / municipal corporation elections, which ward do you belong to.
  3. Who is your local corporator. What was the budget allocated to your ward this year.
  4. What’s the fine for not carrying your driving licence, assuming you have a valid driving licence.

So if we don’t know very basic things about the government we are part of, no amount of committees and institutes can help us. We need to participate at basic level.