Understanding Investors

Now the not so good news.

There’s only so much interest and attention that the India growth and value story possibilities can generate. At the end of the day, there need to be exits aka returns being generated by investors if the party has to continue. And it isn’t a secret that experienced investors are asking the tough questions regarding the state of the Indian entrepreneurial ecosystem particularly as they relate to exits. The state of affairs is therefore not pretty from the investor point of view. Investors are recalibrating time-lines, capital requirements and restructuring of operations. Several companies funded by international funds (most funds in India have overseas money in them anyway) have already shifted their headquarters to locations like Singapore for easier exits, at least on paper.

Different investors are adopting different strategies. It is important therefore for entrepreneurs to be aware of these approaches.

There’s the “spray and pray” approach where investors put in small sums of money (anywhere from Rs 5L to 25L) into an unmanageably large number of companies (30 to 100 companies). It isn’t humanly possible for investors to “add value” in such a situation so the “market” and the entrepreneur are relied upon to get the company noticed downstream. Some investors adopting this approach have a large support infrastructure to help filter the companies upwards.

Then, there’s the “let’s leverage the brand and capital muscle to get in on the category leader” approach. Here, funded companies that have already gained traction, are emergent or clear leaders in a category are approached with a hard to refuse offer. The capital + brand gets the investor in the door into the best deals, valuation isn’t much of a discussion, speed of deal closure is impressive and before long, such investors have yet another winner in their portfolio.

Third, are the purely financial investors who invest based on numbers. No soft warm fluffy stuff on display here. Just the cold hard calculus of returns. Financial engineering, management team engineering, deal making, packaging of the company for an exit are what differentiates these.

Yet another investor is the one who empathises with the entrepreneur , who sees himself as a company builder first and foremost. Such an investor attracts attention from the entrepreneur seriously wanting to build a company as opposed to one seeking valuation. There’s a lot of hard work, tough decision making and involvement here without any guarantee of success. Unsurprisingly, this kind of investor is in a minority amongst the larger pool.

Then there are the opportunistic investors who are recent entrants, driven by the possibility of making supernormal profits, but without really understanding what investing or company building from ground up is all about. These investors have made money in sectors that are far removed from the areas they wish to invest in and tend to have less than complete understanding of the private company investment process. Sometimes, flexible governance standards are also on display. They become queasy at the first signs of trouble in the company.

So, as an entrepreneur what should you do? Ask yourself what stage of the life-cyccle your company and you are in, what kind of investor do you want to have on your side with regard to the understanding of the business, approach and chemistry, what exactly are you wanting to do (eg building a company or looking to get a quick exit). Because raising money from an investor isn’t the end point. It is the starting point of a long hard journey towards your dream. There’s no right or wrong or good or bad answer. The answer depends on what you, as the entrepreneur, wish to achieve, how you wish to achieve your goals and what you are willing to sacrifice and undertake.

What do you think?

Read more articles from Sanjay Anandaram here.