Just saw a couple of side discussions on some comments posted elsewhere on VW. Am bringing this up as a main post as it might be of interest to others as well.
Rad said
What applies to the rest of world, doesnt apply to India. Everybody – Indian Entrepeneurs, Indian VCs, Indian Angels need to think and act differently. If you guys think about your country and strive for a pride that comes from having a Sony or a Google, you would find yourself spending more time with young guys nurturing and mentoring them, rather than than just chasing fund targets.
Whats missing in India is Idealism, Romance and long term vision.
Rad, I understand what you are saying. What we also need to understand is that in the investment business, there is no “long term” unless the fund targets are met. As important the long term vision is, it is equally important one understands how to get there. Sony and Google are prides of their countries because they are business successes, not because they are romantic.
… please tell us what are the things a VC is looking at when he invests in a startup ?
Anon, I think at 30,000 feet, we look for the ability for ourselves to make good returns on investments. That typically requires large markets, great teams and sustainable differentiators in the business. At a high level, it is really that simple. As you dig in, some factors become more important than others. In Internet, a great team might mean passion and understanding of the medium; in enterprise sales, it also includes past experience in selling to enterprises. Sustainable differentiators might exist on day one due to technology, or you might be able to build them over time (as in case of consumer internet companies, where brand and first mover advantage can be significant).
And then, our own understanding of the space and our ability to address risks in that specific business become important. Most successful early stage investors are conscious of the fact that all good investments are not necessarily good investments for them.
Would love to continue the discussion,
and yes, we are adults — we can use our names here 🙂
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Anon, most VCs do not insist on a controlling stage (i.e. they are open to less than 50% ownership). This translates into equivalent board rights. However, most VCs will ask for certain veto rights to protect their interests. So while they do not necessarily want to control every board decision, they do want to control some, such as hiring a new CEO, incurring large capital expenditures, declaring dividends etc. Its easy to understand that VCs dont want, for example, them to put in money and that money being diverted to other means the next day.
How far does it make sense depends on what you can do with and without the VC — both in terms of money and other value add. VC money certainly doesnt come for free. It makes sense if you think this participation can create significantly higher wealth. Otherwise it doesnt.
Alok,
In a startup investment (very early stage), is it true that the investor will insist on having a controlling voting stake. I mean even with 10-50% equity they would insist for more than 50% voting rights. If yes, how far does it make sense if the startup team (though unexperienced) has spent a year or so in crystallizing the idea. Is this what PINK above refers to in his comment when he says that “VC will end up frustrating you” ?
Apologies for the harsh language I used in my comments on VCs/Angels etc.
No, I havent suddenly received funding for something 🙂 Just feel its not right to generalize. People like Alok and Sanjay spend lot of time on this site helping/advicing young enterpreneurs. Hope it will become more common in the days to come!
Anon, sorry to say this again but it varies… At the angel stage I have seen dilutions of 10-50%, and another 20-40% at the VC stage. So post the VC stage you might own 72%-30% of the company. I know its a wide range, but thats what it is.
I remember some of the earlier data I had posted on it here. Even in US, founding CEOs land up holding an average of around 5% at IPO.
I liked the debate on the Gap between US and Indian VC ecosystem. I got curious and felt like exploring some hard data. I found the following extremely topical.
There is a 2nd Annual Global Venture Investment Survey jointly released by NVCA & Deloitte. Just click on the following link and go to the topic ( sub link) dated July 12.
http://www.nvca.org/ffax.html
There is also another link relating to a press release from Deloitte on the Survey.
http://www.deloitte.com/dtt/press_release/0,1014,sid%253D2283%2526cid%253D123691,00.html
This should fuel the discussion further on hard facts. Somewhere inside, I did find interesting facts relating to preference of US VCs to expand into India and China. I am reproducing some excerpts here.
” In the United States, 53 percent of the respondents intend to expand their global investment focus, with China (30 percent) and India (25 percent) identified as the two top foreign countries of interest over the next five years. Both countries are seen as places where it is less expensive to build businesses, where there is an emerging entrepreneurial culture and where there is a high quality deal flow. U.S. venture capital respondents cited India as the number one country outside the U.S. where there is access to quality entrepreneurs. Conversely, they cited China as the number one country to get access to foreign markets. This growing interest in investing abroad is a true sea change for an industry that has historically invested all of its money domestically.
However, both China and India have a number of impediments to investing. In China, the three biggest impediments to investing are: intellectual property laws (33 percent), travel time and effort (29 percent), and lack of knowledge/expertise in the business environment (26 percent).
In India, top impediments are: travel time and effort (23 percent), lack of knowledge/expertise in the business environment (22 percent) and lack of experienced local investors (13 percent).”
Read on and give your feedback. I think it is going to be extremely interesting and with a bit of hope, constructive too – I might add.