PE/VC Firms – Creating value and Managing Growth

On July 23rd, Mr. Alok Mittal, General Partner with Canaan Partners , visited IIM Ahmedabad campus to deliver a lecture on “Creating Value and Managing Growth” organized by Leverage. Canaan Partners is a Private Equity/Venture Capital firm. They have been in India for about 4 years now, funding and providing guidance to several technology based companies like Bharat Matrimony, Cellcast, iYogi Holdings Pvt. Ltd and UnitedLex.

Mr. Alok Mittal started the talk with an explanation of the different challenges that a firm faces at different maturity levels. Typically, for a firm in its nascent stages what is important is the Business model, Management team and the product that it is planning to build/sell. As the firm matures, issues like profitability, competition from other players, financing concerns come in. And then eventually, when a firm is stable and profitable, it has to think of governance, scale expansion and execution. Similarly the entity financing the firm will also keep changing from incubators/angel investors to Venture capital to Bank loans/Private Equity to eventually an IPO/Trade Sale.

The first concern that a Venture Capital firm has about any company is its Business Model. The least expectation is a right estimation of the market size of the product. But, what would set any firm apart would be the extra dimension that they can add to their model, especially for firms getting into businesses that already exist. As Mr. Alok Mittal said, “New is better than old, but you got to be different.”

Another important aspect is the network effects in the business. Any business with strong network effects would mean that the initial cost of the business would be much higher than the eventual costs, hence ensuring better returns at later stages. Competition is another deterrent. As Mr. Alok Mittal put it, “VCs always like to get into business with “all” or “none” characteristics”.

Also, a particular business may generate interest among investors a number of years after its initiation depending on industry developments. As an example, he talked about the case of Online Ticketing Industry, which started early, but generated interest in investors only in 2006. Through a fishbone diagram of the developments in the industry, he showed how introduction of cash cards and start of low cost carriers encouraged more participation from customers and hence made the investors realize that it was a good arena to invest in.

After business model, the next concern is the management of the new firm. Here what is checked is if the team has the right skill set required for the business (the skill fit would obviously vary for say, a social networking company and an e-ticketing company). What is also gauged is passion among the people to succeed. Also, the execution capability of the team is very important. Especially in Indian markets, where innovation is at a low and most concepts are remodeled from foreign markets, the margin for error in execution is very low as there is constant danger of other competitors coming in.

Soon the session turned into an interactive one where students enquired on what support a VC firm provides to an entrepreneur apart from the capital. Mr. Alok Mittal answered that the interference by the VC would depend on how much each company needs it. The VC would get involved in board level decisions like budget allocation, business acquisitions, strategy planning etc. They would also get their hands into the recruiting process and their wide network would help in forming business links with other companies.

As for jobs with PE/VC firms, there are two types of roles that a PE/VC firm offers. The first is an Investment Support Role which would typically require an experience between 0 to 6/7 years. The second role is that of a Principal which requires about 10 years of experience, either as an entrepreneur or a very strong operating/marketing background. In fact, the principal is the one who makes the decisions and takes the bets.

Considering the small numbers that PE/VC firms hire, Mr. Alok Mittal’s concluding words for a job in PE/VC were “Shoot for it, but don’t bet on it”.

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