The essentials of VC funding

One great thing about being in a place like IIMB is that we get to listen to a whole lot of ideas from a number of big names. In the one year I have been here, I have had the opportunity of being in the midst of people like Dr APJ Abdul Kalam, Subroto Bagchi (MindTree), Captain Gopinath (Air Deccan), Gurcharan Das (India Unbound fame), Raju Narisetti (Editor - Mint), etc. (And of course, KK too :P)

I am planning to put up notes of talks by such people on this blog henceforth. Something to revive this space with :)

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"Essentials of VC funding"

Date: 22-Aug-08
Event: Eximius - The entrepreneurship fest of IIMB
Speaker: Ravi Shankar - a representative from Sequoia Capital

Notes from his talk:

Sources of capital for entrepreneurs:

• Personal Savings
• Friends and Family
• Incubators (like NSRCEL) – friendly money.. cos the intent is to encourage entrepreneurship..
• Angel Investors – High Networth Individuals
• Seed Funds – Band of Angels
• Venture Capital

Why go to VCs?

• Large cheques thru the early life of the company (upto $10 – 15 mn)
• Throw open networks and contacts
• Help in strategic issues
• Help focus entrepreneurial energy on key issues.. entrepreneurs are ppl who work on intuition.. so to ensure they focus on the right things.. (my inference is that this basically means the VC will poke his nose into one’s affairs a lottttt!)

What VCs ask for in return?

• Minority stake in the company (10 – 45%: depending on how much money needed, and how soon)
• Board seats (a third party in the family)
• Affirmative rights (VCs want a say in decisions involving senior management – say recruitment of top 5 employees.. CXOs.. VC contacts too help here)
• Time bound liquidity event (IPO, promoter buying back investor’s position etc)
• Most VCs look for a 5-yr time bound involvement with companies

(Overall, it takes away some flexibility from our way of working)

If entrepreneur wants to exit prematurely, can he?

No.. usually its lopsided.. VCs have the control.. usually there is no statement in the contract that says entrepreneur can buy back the investor forehand..

..

There are times when conflicts arise between VC and entrepreneur..

Once VC is on the board, if we wish to take in some other investor, the VC will want a say in that..

VCs work very closely with the companies.. weekly calls, monthly meetings etc..

VCs are not in the business of risk acceptance; they are in the process of risk avoidance. In India, most VCs rarely take concept risks (“this product will increase height by 5 inches”).. they take only execution risks (things that have worked elsewhere that are being started in India.. say, online DVD rental)

Why not banks?

• Collateral
• They usually ask for 3 years of experience - P&L / Balance sheets

The investing community believes having ideas is not a big thing.. having money is..

When VCs get an idea ahead of time, they advise the company to stay in touch with the market, doing adjacent things until the market is ready..

Is my intellectual property safe when I discuss it with VCs?
It’s difficult for VCs to get into NDAs cos they need to interact with lawyers etc to whet the idea out.. but VCs will be cautious cos of their reputation..

Best way to reach a VC is through references.