In the last few posts, we have looked at various startup situations from the perspective of an entrepreneur. In this and future posts, we will look at how the people on the other side of the table, ie venture capitalists, work. Gaining perspective on how the other party thinks and works is important if you want to build a mutually beneficial relationship.
It is important to recognize that the entrepreneur and the VC are on the same team and have a congruence of goals, namely building a successful company. Everything happens before the investment. As in all partnerships, if the relationship between the venture capitalist and the entrepreneur is viewed suspiciously and antagonistically, the fight between the venture capitalist and the entrepreneur in the boardroom will kill the company. With that being said, let’s take a look behind the scenes at how venture capital firms operate. In this post, let us understand the general situation of VC.
Venture capital firms raise money from investors and then invest it in a handpicked series of fast-growing businesses. In the US, venture capital firms are usually partner firms. In India, VC firms follow a structure more in common with a mutual fund structure (due to legal and tax reasons, VC firms are not viable in India).
The VC industry in India has been clamoring for an American-style structure for a while now, but that’s another story.) That is, there is a venture capital fund in which multiple investors invest, and there is an investment management company (commonly known as an asset management company or AMC) that manages the fund’s investments.
In the US, typical investors in venture capital firms are pension funds, university endowments, insurance companies, corporations, wealthy individuals, etc. In India, typical investors are wealthy individuals, financial and development institutions, and a few corporations. Laws do not allow pension or insurance money to be invested.
Universities in India have no real funds or endowments even if they were allowed to invest! Therefore, it is quite difficult to raise funds in India for venture capital purposes. The tax treatments of Indian venture capital firms also act as disincentives. That’s why a lot of VC funds operating in India are really offshore funds, based in places like Mauritius, with foreign investors, ensuring operational flexibility, tax benefits and speed.
Compare this to venture capital activities in a small country like Singapore: A small country like Singapore, for example, invests large sums of money (from a corpus of over $100 billion) around the world in various venture capital activities. risk capital. These government-controlled investments are made keeping in mind Singapore’s economic development, strategic reasons (eg new technology, entering new markets), etc. Singapore is also the source of capital for many of Silicon Valley’s most prominent venture capital firms. There is a lesson for India somewhere!
In India, the traditional investors in venture capital firms have been development and financial institutions like ICICI, IDBI, SIDBI and the like. These venture capital firms have had to deal with various operating constraints and have found it difficult to deal with high-risk investments due to the very nature of the structure within which they had to operate. Indian venture capital firms must be registered with SEBI (Securities and Exchange Board of India).
In recent years, India has seen the arrival of a number of Silicon Valley-style private independent venture capital firms, including Draper (which pioneered this movement in 1995), Walden, Chrysalis, and Infinity Capital. Many more are in the pipeline and will bring world-class venture capital investment styles and standards with a deep understanding of technology, finance and strategy. India is expected to attract about $10 billion in venture capital funding by 2008. It attracted about $300 million in 1999.
Against this backdrop of the VC situation, we will look at how a VC fund/company operates in our next post.
This article was originally published on Venture Katalyst, India’s first ezine for entrepreneurs, started by Sanjay Anandaram.