Caselet: Are you ready for VC investment?

Many persons in Bengaluru are becoming entrepreneurial and venturing on their own. We also have many venture capitalists (VCs) who are here in the city as well as those outside looking to fund promising start ups. However, sometimes, even if an idea is promising and the team is good, the venture may not be ready to go to a VC. Kumar and his start up are a case in point.

Gyan, an advisor, was interacting with a group of entrepreneurs and potential entrepreneurs in Bengaluru in late 2006. Kumar was one among the group and asked many questions about how the business plan should be written and how one should approach a venture capitalist for funding. Kumar mentioned that he had a degree in law and had pipeline customers and infrastructure in place and was in ITES industry. Kumar further went on to give his experience, which was quite creditable; he had close to 15 years work experience, in India and in the US. He had in fact helped establish the Indian unit of a US multinational in India. In addition to all this, he had worked for some years in a senior position in a leading BPO in India and was therefore aware of the opportunities and difficulties in this industry.

Based on this information Gyan said that this looked like a promising case for funding since VCs were looking at the KPO sector, which was essentially looking at moving up the value chain in the Indian outsourcing industry. Kumar was pleased to hear this and then set up a one on one meeting session with Gyan so that he could actually understand how he should approach a VC.

At the next meeting, Gyan and Kumar started to get into some details. Gyan explained to Kumar that if a company was not investor ready, it did not make sense to approach a VC at that stage. This could in fact be counter productive in some cases, since the VC may perceive that the company had many gaps. Such initial perceptions, whether right or wrong, could sometimes lead to a long term issue in fund raising. The other thing to be considered was the fact that if one approached a VC too early in the business; perhaps one could lose out on the value of the business. "Of course," Gyan added, "this is the general case and there could always be exceptions. Let us look at your business in more detail and see whether you are investor ready or not."

Kumar then gave some further details about his company. The business in the pipeline was the connections he had with a law firm in the US and they had prima facie expressed interest in the fact that they would like to outsource business to India. Discussions were really in the very early stage in this case. Next re the infrastructure, Kumar said that his brother was in the real estate business and had allocated some office space to him. His brother was also interested in diversifying and saw this as an opportunity for him to branch out. He would contribute to the infrastructure and Kumar could manage the day to day operations and the marketing. Kumar mentioned that he had some preliminary discussions with a few potential employees who were willing to join provided he was willing to pay them market rates. Kumar now wanted funding to hire these employees and then get the contracts on hand from the overseas legal firm.

Kumar was in a peculiar situation, typically VCs would invest in a company which showed high growth potential, had a potential market and had the ability to reach out to the market and deliver. Kumar’s firm was still in the very early idea stage and much had to be proved to attract a VC. While Kumar did have the experience in other companies, he had not really been an entrepreneur who had run a company. While the market was big and opportunity was there VCs would like to understand how Kumar would be able to translate all these factors into a successful company in his specific case. Further, VCs would also like to understand who the senior management team consisted of. In this case, the key shareholder, would be Kumar’s brother and the CEO would be Kumar. There was no depth in the existing team and hence this would also need to be strengthened.

Gyan then suggested that Kumar take stock of the position and first undertake projects on pilot scale. This would help him refine his process and prove to potential customers that he could deliver. Once he had a few customers lined up, he would be in a better position to seek external funding.

Learning for Gyan: While prima facie Kumar’s business looked like a promising case for VC funding, on closer examination, the gaps became visible.

Think about your entrepreneurial venture or another entrepreneurial venture that you know – Bengaluru has many such ventures – they are not hard to find! Do you think you (or they) are ready to approach a VC for funding? Why or Why not?

Anjana Vivek
About Anjana Vivek 45 Articles

Anjana Vivek, Director, VentureBean Consulting Private Limited, is a consultant, teacher, writer; CA & visiting faculty at IIM(B). Her specialties are business models, funding strategy, entrepreneurship, M&A and valuation.