nurturing a venture: a venture capitalist's perspective

Nurturing a Venture:A Venture Capitalist’s Perspective

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Venture capital, in an organized way, started inthe US in 1946 after the Second World War.However, the concept of venture capital has been

in existence since time immemorial, though it might nothave been referred to by these words. Any kind of moneywhich is given to start a new business or commence anew venture that involves risk is called venture capital.For instance, Queen Isabella gave money to Columbus tofind a new route to India. That is one of the earliestexamples of venture capital. Venture capital is patientand brave money. The first venture capitalist in theorganized sector was a company called AmericanResearch and Development Corporation (ARDC).

VENTURE CAPITVENTURE CAPITVENTURE CAPITVENTURE CAPITVENTURE CAPITALALALALAL

After the Second World War, a number of technologieswas available and they needed to be exploited commer-cially. These technologies were funded for commer-cialization by venture capitalists like ARDC and that ishow the venture capital industry was born. For morethan 50 years, venture capital has been a major movementin the US with an annual mobilization of more than $ 10billion. Most of the present day companies there havegone through the venture capital investment route. Eachuniversity has an incubation centre where graduates andfaculty members are allowed to start a company.

When venture capital started in India, companiesbased on new, innovative technologies found it difficultto get funding because they did not have collateral tooffer. If the banks did give money, they gave less thanwhat the companies actually needed, resulting in under-capitalization. When the Government of India decided tostart the venture capital industry in India in 1970, similarto what existed in the US, a committee headed by Mr R SBhat, the first chairman of UTI, was set up to examine thisissue. At that time, there used to be a tax on technologytransfer and that tax amounting to more than Rs 10 billionwas given to IDBI for starting venture capital investment.

At the same time, ICICI also started venture capitalinvestment. The first recipient of venture capital fundswas Kale Consultants in Mumbai which got a sum of Rs3 million from ICICI. In 1988, for the first time, thegovernment announced guidelines for the industry inthe Parliament. Thereafter, the World Bank came in. TheWorld Bank selected six institutions to start the venturecapital industry. Gujarat Industrial Investment Corpo-ration (GIIC) was one of them and Gujarat Venture FinanceLimited (GVFL) was set up at the instance of the WorldBank through GIIC with the condition that it would be anautonomous, professionally managed company.

GVFL was founded in 1990. As the Chief ExecutiveOfficer, my aim was to make it a national level company.Between then and now, we have Rs 1.25 billion investedin 56 companies scattered all over the country besidesGujarat. Unlike other venture capitalists, however, wewanted to support only technology-oriented companies.Most of the venture capitalists in the market today operatein the area of private equity which is growth capital.

There are different stages of funding (Box 1). Angelfunding is the first stage. When you conceive an idea andwant to start putting it into practice, you put in your ownmoney or get it from somebody and that is called angelfunding. Simul- taneously, you are in the seed stage withsome venture capital company like ours. The risk at thisstage is maximum—risk of technology, management,market, etc. GVFL continued with the seed and early stagefunding, something that we do even today. Our investeecompanies are very small—we start from Rs 10 million,nurture them, hand-hold them, and bring them to thestage where we try to get the second round of funding sothat they may grow bigger.

NURNURNURNURNURTURING ATURING ATURING ATURING ATURING A VENTURE: VENTURE: VENTURE: VENTURE: VENTURE:CASE OF PERMIONICSCASE OF PERMIONICSCASE OF PERMIONICSCASE OF PERMIONICSCASE OF PERMIONICS

Research on venture capitalists has identified the multipleroles played by them (Box 2). In my experience, a venture

Box 1: Stages in Venture Financing

1. Early stage financing • Seed financing for supporting a concept or idea• R&D financing for product development• Start-up capital for initial production and marketing

2. Expansion financing • First stage financing for full-scale production and marketing• Second stage financing for working capital and initial expansion

3. Acquisition/buyout financing • Bridge financing for facilitating public issue• Acquisition financing for acquiring another firm for further growth• Management buyout financing for enabling group to acquire firm or part of its business• Turnaround financing for turning around a sick unit

Source: Pandey, I M (1996). Venture Capital: The Indian Experience, New Delhi: Prentice Hall.

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capitalist is not just an investor or a fund giver; he is alsoa partner. He would like to make value additions andhelp you build the business. At times, he creates a nuisanceby asking too many questions but he is the biggest assestto your company. Venture capital is called smart moneybecause, by experience and exposure, it helps you in manyways. Venture capitalists allow you to walk indepen-dently; at the same time, they like to hand-hold andnurture you.

The ExperimentThe ExperimentThe ExperimentThe ExperimentThe Experiment

GVFL’s first investment was in a company calledPermionics. It is based at Vadodara and was at a seedstage. During one of my trips to Vadodara, I met MrSatyapal Mayor who had studied membrane technologyfrom Oxford and was managing his own reverse osmosisbusiness. An inventor in his own right, he had developedan ultra filtration membrane which filtered water bymechanical filtration and removed all bacteria andviruses. He had a module fitted in a mud pot in a veryingenious way. I drank the water which had passedthrough this membrane and did not find any differenceexcept that it tasted less salty. I then got the water testedin Mumbai and also locally. To my surprise, it reportedzero per cent bacteria. I did my own research and foundthat this is possible only by the use of ultra filtrationmembrane technology. I thought that this kind of atechnology, which purifies water 100 per cent, should beput to good use. So I decided to fund Mr Mayor ’s ventureand also got actively involved in his business. And thatis how the story of a company now called PermionicsIndia Ltd., started. The raw material for the membrane isimported even today from DuPont. Mr Mayor, who hasnow expired, passed on the technology to his sons and itis a closely guarded family secret. I was guided by threefactors to fund Permionics: technology, faith in theentrepreneur, and potential market. A study in India

shows that integrity, venture owner ’s skills, and his urgeto grow are the most important criteria used by venturecapitalists in screening potential ventures (Box 3).

Designing the ProductDesigning the ProductDesigning the ProductDesigning the ProductDesigning the Product

When the project was started, there were only in-housemembranes. We got the project evaluated to find outwhether there was a market for the product and whetherthe technology would work. Once the module was inplace, GVFL sanctioned Rs 6.4 million which was onlypart of the funding required as it did not want to provide100 per cent funding to the company. We also made somesuggestions on improving the design as we felt that themud pot would not work. Also, we located a husbandand wife team, Pradip and Mala Sinha, graduates fromNational Institute of Design, Ahmedabad, working inVadodara. They were actually textile designers, notproduct designers. But, somehow, I persuaded them to

Box 2: Value-added Services by Venture Capitalists

Venture capitalists provide many services to the assisted ventures. For example, the International Venture Capital Investment Corporationprovides the following services to its clients:• Acts as a sounding board for the investee company’s planning and decision-making.• Helps in building networks of contacts for the investee company.• Provides advice and assistance in a highly professional and competent way in managerial and technical fields.• Helps in raising subsequent finances from banks etc., or by organizing initial public offerings (IPOs).

Venture capitalists generally keep in constant touch with the assisted companies. They also monitor their performance andactivities on a regular basis. They become more active if they find that the entrepreneur is not able to perform satisfactorily, orwhen the venture has reached the growth stage and needs more funds. Venture capitalists are an important source of managerialresources and they provide competence, support, and access to networks normally not easily available to the investee companies.They also help them in strategic thinking and analysis of economic data and trends. They remain active on the board of theinvestee companies and thus complement the management team.Source: Pandey, I M (1996). Venture Capital: The Indian Experience, New Delhi: Prentice Hall.

Box 3: Five Most Frequently Rated Essential Criteriain India, the US, Singapore, and Japan

RanksIndia US Singapore Japan

Sustained intense efforts * 1 1 2Familiar with target market * 2 2 1Evaluates and reacts to risk * 5 5 3Demonstrated leadership * 4 2 *At least 10 times returnin 5-10 years * 4 5 *High market growth rate 5 * 2 4Create a new market * * * 5Liquid investment * * * 5Integrity 1 * * *Managerial skills of venture team 2 * * *Functioning prototype * * 5 *Urge to grow 3 * * *Long-term vision 4 * * *Commercial orientation 5 * * *Source: Pandey, I M (1996). “Venture Capitalists’ Evaluation Criteria in

a Developing Country: Case of India,” International Journal ofDevelopment Banks, Vol 14, No 1, January, pp 3-8.

* Indicates that the factor is not among the top five criteria.

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work on the design and Pradip did a beautiful job ofdesigning the container for the product. Thus, we helpedMr Mayor form the company.

One of the important roles a venture capitalist has toplay these days is to be on the advisory board. It is alsoadvisable to appoint some eminent people who can helpon the board and, in return, offer them equity of thecompany. We structured the board and inducted peoplefrom IPCL, from the membrane technology sector, waterpurification industry, and marketing area. They providedactive support for the speedy launch of the product. MrMayor was not quite sure as to how to launch the product.We appointed an advertising agency—Mudra—who gavethe name CrystalClear to the product. We had about 200pieces for seed marketing. GVFL helped in initial seedmarketing by approaching well-known people inGandhinagar. We also contacted a number of people inVadodara and Gandhinagar and all of them bought theproduct. But, unfortunately, the product failed. While themodule was fine, the design was found to be faulty.

The ChallengeThe ChallengeThe ChallengeThe ChallengeThe Challenge

When the product was installed in high-rise buildings,the water pressure started creating problems. The uniqueproperty of this product is that it works on gravity anddoes not require electricity. Because of the pressure ofwater, the cover used to get filled up with water veryquickly which led to its cracking. The material chosen forthe cover was also not right. However, the product’sefficacy as a water purifier was unaffected. The wrongdesign created differences between the designer and themanufacturer. Since entrepreneurs do not acceptrecommendations of venture capitalists easily, we had towork hard at persuading them.

In this particular case, I had faith in the designersand in the product. I continued to have faith in thetechnology. I personally sat down with all the concernedparties and resolved the dispute. I told Pradip to re-designthe product, because, primarily, the module was good.

Marketing the product was the next major challenge.So, one of my friends, Raj, got involved. He went to everycustomer, took the feedback, and also sat with thedesigner. This led to a much better product design. MrMayor was a very ethical manufacturer and ensured thatevery module was tested. When the product was ready,we tested it in different high-rise buildings in Vadodara,Ahmedabad, and Mumbai for three months. We alsohelped the company hire a chief of marketing.

We approached Prof Vora of Indian Institute ofManagement, Ahmedabad who was in marketing, to beon the board. He got actively involved and the productwas re-launched successfully. The cost of the product wasonly Rs 2,000. Soon it started giving AquaGuard of EurekaForbes a hard time as it had technical advantages. InAquaGuard, the water goes through a UV tube but itdoes not get purified completely whereas the watercoming out of an ultra filtration membrane technology-based device purifies water completely.

Strategic TStrategic TStrategic TStrategic TStrategic Tie-upie-upie-upie-upie-up

The company made a huge profit after the product wasrelaunched. It was sold in Pune, Mumbai, and Delhi underthe brand name CrystalClear. We also helped the companyget media coverage and visibility through exhibitions.However, venture capitalists always look for growth. Isuggested to Mr Mayor that we should have marketingtie-ups. So, we approached Godrej, TTK products, andEureka Forbes for strategic tie-ups. Eureka Forbes showeda lot of interest because they wanted to buy it and kill itas it was giving a lot of competition. At that time, AchalBakeri was manufacturing Symphony water coolers. Iconvinced him that the product would fit his marketingstrategy as the cooler season would end in July and therainy season would start and there would be more fear ofbacteria and viruses. After a lot of convincing,negotiations, and demonstrations, he agreed to do themarketing. The name was changed to SymphonyCrystalClear. The company started selling 2,000 to 3,000purifiers per month as against 7,000 purifiers of EurekaForbes. We would have caught up with them very shortly,but, as the product started picking up, the partners startedfighting with each other over some issues. The companybroke up and, due to some disputes, it closed down forseven months. I was very concerned because I had workedvery hard to build this company. It was not just a matterof an investment of Rs 6.4 million; it was a matter of faith.We made an out-of-court settlement. We surrendered thebrand name CrystalClear and the marketing network.

Product RelaunchingProduct RelaunchingProduct RelaunchingProduct RelaunchingProduct Relaunching

The company became as good as a start up company witha very strong product. At this point, we were back towhere we had started! Most of the venture capitalistswould have given up at that time. But, somehow, I didnot lose faith. I convinced my board to give an additionalRs 10 million to the company on the sheer strength of the

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product. Though I had collected a number of testimonialsfrom the users, I had a hard time convincing the board ofdirectors, but eventually, I succeeded. We provided activesupport in relaunching the product and hired a lot ofpeople for them for marketing, accounting, andsupervisory support. We ensured that the company didnot get demoralized. Within a year, Mr Mayor died andthat gave us a shock. After much deliberation, we madeMrs Mayor the chairperson, the younger son, who wasfamiliar with the technology, the Managing Director, andanother son, the Executive Director. Now, the companyhas started making profits and, in the last two years, theypaid back Rs 14.2 million. The company is exploring newterritories and sales are growing every year by about 30to 40 per cent. This December, we sold 702 units. We havealso introduced five new models. Some of the leadingbrands are buying from them and putting their names tothe product. After this success, should I quit it now? I feelI should continue.

CONCLUSIONSCONCLUSIONSCONCLUSIONSCONCLUSIONSCONCLUSIONS

The point I am seeking to make is that venture capitalistshave to be patient and the inherent ability to take a risk.Some money will be lost in some ventures which mightnot take off as projected due to a variety of reasons. Butthey have to keep on going and some day some deal mightgive windfall profits. Moreover, a venture capitalist hasto nurture and hand-hold the investee companies andconstantly guide them and advise them. It is a spirit ofhealthy partnership. He has to use his experience andknowledge to enable the investee company to realize itspotential. This is what venture capital is all about.

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nurturing a venture: a venture capitalist's perspective

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