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March 12, Mumbai

Knowledge Partners

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The inaugural session featured a vigorous debate on whether the current euphoria in public and private markets is founded on solid factors versus being just another cyclical bubble.

The stage for the session was set with a presentation by Sridhar Venkiteswaran, Director, Avalon Consulting on Flashback 2014: Beginnings of 'Achche Din'?

The panel was chaired by Raj Nair, Chairman, Avalon Consulting. Sound Bites from the panelists:

Mahesh Murthy, Managing Partner, Seedfund

It's a great time to raise money, but it's a sucky time to be investing. LPs want you to chase E-Commerce where the valuations are ridiculous. And the market is rewarding the cash inefficient companies.

In E-Commerce, the profits have all been sucked out. A) they are discounting heavily and B) they are spending heavily to say that they are discounting. So, it's a lose-lose situation. The most successful companies in the E-Commerce boom are Times of India and Star TV - because they are making a lot of revenues (thanks to advertising spend by E-Commerce companies). At some point, this will stop and economic sense will come back.

The recent Housing.com - Sequoia episode is symptomatic of how much the pendulum has swung in the investor - entrepreneur ecosystem. Just a few years back, the investor was the absolute king. Hopefully, the pendulum will settle somewhere in the middle as far as this equation is concerned.

Indian companies buy overseas startups; overseas companies buy Indian startups. But very rarely do Indian companies buy Indian startups. It's a "not invented here" syndrome. Because the "copy pasted" from the West PE/VC funding model require exits in 5-8 years and the best Indian companies - like Naukri or Justdial - require 11-18 years to mature to provide good exits, we are thrusting an artificial pressure on our entrepreneurs. The best way out, though not natural, is to encourage a culture of serial entrepreneurship, where the entrepreneur goes on to build a newer venture after exiting the first.

V. Anantha Nageswaran, Expert on Global Financial Markets

With 90% of the world experiencing negative interest rates, we are clearly living through abnormal times. To expect that this will somehow not have a consequence is to live in a La La land.

If the US stock market corrects in 2015 - whether due to Fed action or something else - past experience has shown that markets around the world will fall as well. The correlation is almost always 1 - whether we have Achhe Din domestically or not. So, it's important for investors to keep their feet and ears to the ground.

You cannot ignore the 800 pound gorilla in the room - which is the massive Non Performing Assets that the banks are sitting on. The Indian corporate sector is one of the most highly leveraged private sectors in the world and especially among key emerging markets. Indian companies have also borrowed heavily in foreign currency markets - which is what caused problems in 2008 and 2013.
 

Vish Narain, Country Head, TPG Growth India

From the complete negativity towards India among international investors, this swing of the pendulum towards euphoria is not only necessary, but essential.

The re-pricing of assets - including Real Estate where prices in the top cities here are comparable to global levels - has already happened. So, we can't expect asset inflation to help with too much further wealth creation. The hard work is ahead of us - growth will have to come from the real economy kicking in. The new government - with its focus on Make in India, jobs growth and a strong Captain at its helm - gives scope for cautious optimism.
 

Rajesh Raju, Managing Director, Kalaari Capital

The euphoria can be a double edge sword. The global numbers in the technology space - whether the kind of capital deployed or the valuations - are eerily similar to the dotcom boom-and-bust years. Entrepreneurs will do well to plan for a crash, raise capital when they still can and preserve it. Most of the opportunistic investors - who are the most active players in the market today - will be the first to disappear. And even the core VC investors will turn cautious.

The leaders - like Flipkart, Snapdeal, etc - will be able to raise capital even during bad times. They might even have an advantage because (a crash will cause) some of the fringe players to disappear.

Unlike in the late 1990s, a lot of the bubble this time around is getting built up in the private markets. So the shock of a correction might not be felt as much and will not stem the flow of funding to fundamentally strong companies.

The mindset of new age entrepreneurs is different when it comes to tapping public markets and to diluting their stake to raise capital. This will help create a better environment for PE/VC investors to exit profitably in the years ahead.

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After divesting a 74% stake in his first entrepreneurial venture - Luminous Power Technologies - to French major Schneider Electric for INR 1,400 crore in 2011, Mr. Rakesh Malhotra has expanded the SAR Group across sectors like Water Purification, Energy Storage, Clean Energy, Telecom and Electricals. The Group�s investment arm, Ncubate Capital, partners with PE/VC firms to invest capital across multiple entrepreneurial ventures. As part of his address, Mr. Malhotra shared facets of the Luminous journey, experience with private equity and the new initiatives of the SAR Group. Some Highlights:

On the Schneider Transaction

Unusually, for a MNC buyout, we mutually agreed that we (the Indian promoters of Luminous) will retain a 26% stake. The business has grown well over the last three years and we continue to remain invested and engaged at a strategic level. This arrangement has ensured continuity - so much so that it has become a case study for MNC buyouts of Indian companies at leading international Business Schools.

Experience in turning investor

Post the Schneider transaction, we dabbled in a few different things - including in investing directly in some growth stage companies. We did not however figure out for a while that our DNA as entrepreneurs, will remain that of entrepreneurs and that, being an investor, requires a different DNA. Putting your hands on the wheel and wanting the intangible payoffs out of an investment - having the fun of building a business, of excitement in working with people, etc - these are not things that you get with growth stage businesses, since things are kind of set in such businesses and their promoters do not wanting you meddling in the affairs of the company just because you have invested some capital.

So, we decided to have twin focus vis-a-vis investing in private companies: we moved a part our (Family Office) team to focus on investing into external PE/VC funds to get exposure to the broader private equity asset class and to internally concentrate on getting involved with fewer businesses especially where there is a clear strategic fit and where they need our active involvement. We are also setting up an accelerator focused on energy storage and its applications and consumer brands and appliances.

Family Office vs PE/VC Money

A Family Office can bring an entrepreneurial flavour to specific business that they invest in - but it may not work for all kinds of companies. For instance, we cannot add any great value to a tech startup (and such entrepreneurs would be much better off dealing with regular VC funds). But to an entrepreneur in say the tech appliances space, we would be able to present so many different dimensions - based on our sheer experience in the sector - in a way no financial investor would be able to.

Sachin Tendulkar

On request, Mr. Malhotra also shared some great anecdotes on his interactions with cricketing legend Sachin Tendulkar whom he had signed up as a brand ambassador for both Luminous and LivPure. Including how the values that Brand Sachin represent - Trust, Durability and Reliability - provided a dream fit for these ventures. So much that Tendulkar is now a stakeholder in LivPure (and works closely with its Foundation).

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A discussion on the lessons learnt from the latest �boom-and-bust cycles� to distil a list of �Dos and Don�ts� - for both PE/VC investors and Entrepreneurs. The Speakers Included:

• Arvind Mathur, President, IVCA
• Prakash Nene, ‎Managing Director, Multiples PE
• Sesh AV, Managing Director, Basiz Fund Services (Session Chair)
• Nilesh Mehta, Managing Partner, Access PE
• Chinnu Senthilkumar, Partner, Exfinity Ventures
• Hetal Gandhi, Managing Director, Tano Capital

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• How do Family Offices view the world of private company investments?
• What are strategic objectives / benefits of investing directly (vs via PE/VC funds)?
• From PE/VC funds, how do Family Offices compare (in terms of working relationship) with other traditional sources of capital?

The Speakers Included:

• Sumit Dhanuka, Senior Investment Manager, NCubate Capital
• Benaifer Malandkar, CIO, RAAY Global, Patni Family Office
• Salil Musale, Executive Director, Astarc Ventures
• Srikrishna Ramamoorthy, Partner, Unitus Seed Fund India
• Navin Kumar, Executive Director, Milestone Capital

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The session provided a flavour of the various issues entrepreneurs should be prepared for as they plan the financing, growth and exit strategies for their enterprises.

 Speakers Included:

• Chandu Nair, Member, Chennai Angels
• Ashwani Gaur, Founder, Oku Tech & Playcez
• Krishna Kumar, Founder & CEO, Simplilearn
• N.K. Dilip, Partner, Tatva Legal
• Parag Dhol, Managing Director, Inventus Capital

Sound Bites from the panelists:

Chandu Nair on how investor behaviour has changed (since the time he had raised capital for his previous venture, Scope eKnowledge, in the 1990s):

The ecosystem is much more mature and there is specialization - in terms of Accelerators, Angel Investors, Seed Funds, etc. And entrepreneurs today have a generation of previous entrepreneurs - who have been through at least one cycle - to learn from. There is also not much disadvantage vis-a-vis age - investors are not necessarily running behind only younger entrepreneurs.

And what's not changed:

Herd mentality. "Everyone is doing tech deals, so I will also do tech only. Everybody is doing B2C, so I'm also in B2C".

Ashwani Gaur on Accelerators vs Angel Investors:

As a first time entrepreneur, especially straight out of college, friends and family funding is not readily available. At this stage, Accelerators are a good option.

In India, angel investors seem to come with their own agendas. At the very early stage, when you might have to pivot your business model a couple of times, to have someone breathe down your neck might not be such a good idea.

Accelerators are however professionally run and they give you sufficient flexibility and exposure to attract the next round investors.

& on Why Entrepreneurs Should Avoid Agreeing to an All Stock Acquisition:

You are riding in a bigger ship and you are buying into some else's vision. If the vision does not match, it could be a disaster - since if the business does not do well, you have not made any money upfront and you are also not going to make any money going forward.

Plain talking by Krishna Kumar - the Education industry entrepreneur whom no one seems to have told that Education is no longer in fashion among investors. (In Jan 2015, Simplilearn closed a
$15-M third round led by Mayfield, after earlier raising capital from Helion Ventures and Kalaari Capital.):

The way to scale is to hire guys better than yourself. Between hiring good guys and raising money, I would say the former is more difficult. That's the main reason we raised out first VC round. (Raising capital from name brand investors gets a lot of media attention and adds credibility to your business. And this helps attract talent at the senior level.)

Once you raise VC money, you get into a loop of constantly raising newer rounds. While on the one hand, as your business scales, your vision becomes larger and you look at things like acquisitions to grow faster, another aspect is that, in the absence of an actual exit, existing investors feel good when you raise a follow-on round at a higher valuation. As an Entrepreneur, you need to be prepared for this.

After the first round, every subsequent investment has been owing to inbound interest. Investors came to me and said Education is a sector we think will grow and are you prepared to raise money? And we said yes. It's not good say no, right?

N.K.Dilip on "standard" investor term sheets:

There is nothing called a standard term sheet, but only a general perception about what is acceptable and not acceptable. It is important for entrepreneurs to realize that that the term sheet sets the commercials - the investor might, based on due diligence, re-negotiate to set the commercials lower. But it will never become higher.

Parag Dhol on E-Commerce, Hedge Funds & Redbus:

It's become so easy for some of the B2C Internet led and E-commerce business models to raise $20-30 million (going up to $100 million and in some cases even $500 million), while entrepreneurs in other sectors are finding it as hard as ever to raise money that it is causing a lot of heart burn.

The transactions of recent months, where investors who used to talk to only companies that are EBITDA positive, are now writing cheques to companies that have hardly any revenues, is going to lead to lot of pain. A strategic acquirer paying out real money to acquire a company would be real test of whether the valuations in the earlier rounds were justified or not. In that sense, Twitter's recent acquisition of ZipDial and Google's reported talks with InMobi, etc. are a good sign. But since significantly large deals through that route are still yet to happen, the Jury is still out.

The Redbus story, including how the company leveraged the Internet to build and operate a trusted marketplace (between bus operators and travelers) in a very capital efficient manner - the company had raised a total of about $9 million - will be a case study (for other starups to learn from) for a long time.

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