When billionaire investor and e-commerce sceptic Rakesh Jhunjhunwala committed to become the biggest investor in Exfinity Fund that backs business-to-business technology ventures, last November, he only did what bricks-and-mortar industrialists have been doing for a while–putting their money into the country’s burgeoning consumer internet and tech startups, trusting them to strike it big. It is also their way to hedge against the disruptive power of online businesses.
Ratan Tata, the 78-year-old chairman emeritus of Tata Sons, has invested in 36 startups, including Ola, Paytm and Bluestone. Marico chairman Harsh Mariwala has invested in Securens, Wooqer and even beauty products e-tailer Nykaa, while Ness Wadia of the Wadia group has invested in Bengaluru-based ticketing platform Explara.
What brought Jhunjhunwala on board Exfinity was the depth of its team. After a 45-minute meeting with former Infosys board members TV Mohandas Pai and V Balakrishnan, the 56-year-old `Indian Warren Buffet’ agreed to add tech firms to his $1 billion (Rs 6,653 crore) portfolio.
Pai, who has backed Exfinity Fund and co-founded Aarin Capital, said promoters of large businesses are slowly getting over their reservations about the technology industry .”We want to promote Indian venture capital. In China, about 60% of the capital is local money , while in India it is 5%. But many are rent-seekers and feel happy about the 14-15% interest. They don’t want to take a risk.” He added that the early movers are building investor confidence.”We ask them to participate in investments only after we have parked our money . We are trying to make it easy for businesses so that more and more entrepreneurs solve India’s problems.”
Fabulous returns reaped by new-age risk investors like People Group founder Anupam Mittal and Orios Venture Partners founder Rehan Yar Khan have caught the attention of the old houses that are now spending money and effort on identifying the winners among startups. Mittal owns 1% and Khan 1.8% in Ola, which is valued at $5 billion (Rs 33,264 crore).
The startup prospectors can spot disruptions to their businesses and constantly scout for newbies redefining customer experience. “We began investing in tech companies when the family office wanted to invest the dividends in several instruments. As the startup ecosystem in the country grew, it was seen as a good investment,” Harsh Mariwala said. His son Rishabh Mariwala has overseen their technology investments in funds, including Exfinity , IndusAge Partners and innovation sandbox AntFarm.”While we don’t have the technology expertise, we do help startups with operational expertise and human resources,” Harsh Mariwala added.
Pai’s Rs 125-crore Exfinity Fund 1 had a roster of non-tech CXOs -former UB Group CFO Ravi Nedungadi, Jain Group of Institutions’ founder-chairman Chenraj Roychand and Havells India joint-MD Anil Gupta, among others. Bengaluru’s promi nent industrialists, including Dilip Surana, CMD of gener ics firm Micro Labs, Rajendra Gandhi, MD of StoveKraft, and Tejraj Gulecha, promoter of Valmark Realty and Infra, are floating a Rs 50-crore ear ly-stage fund awaiting Sebi ap proval to invest in technology startups. In Kolkata, old busi nesses from tea plantations to jute and stockbroking are signing up for Calcutta Angels (CAN). “Traditional business tycoons want to invest 5-10% of their portfolio in startups.
They understand that technol ogy is pervasive and want to get a bird’s eye view of the tech disrupting their businesses. And they find comfort in co-in vesting with lead investors,” said Exfinity’s Balakrishnan.
Mudit Kumar, a fourth-gen eration tea entrepreneur and director in SPBP Tea Planta tion, has invested in five start ups. “We are busy with our tra ditional business but I thought of investing in a startup three years ago. It’s an investment opportunity as well as encour agement for new ideas to flour ish.” The real estate-to-retail Primarc Group has invested in several startups, including Catapooolt, Ketto and iKure.
Siddharth Pansari of Primarc, a second-generation entrepre neur, is also the president of Calcutta Angels Network. Pan sari has floated his seed fund called Primarc iVenture to identify new-age firms. Ronnie Screwvala, who built business es in cable TV , home shopping and media, has set up a ven ture fund that has invested in a range of areas, from agricul, ture to artificial intelligence.Startups have grown rap. idly in India over the past five years. They have raised $18 billion (Rs 1.2 lakh crore) in l the period. A YourStory report said $9 billion (Rs 59,875 crore) spread over 1,000 deals was invested in Indian startups last year alone. Despite the recent funding slowdown, the prom, ising startups are still getting ‘ investor attention.
Source – ET Retail
A term sheet essentially is a nonbinding agreement with the basic terms and conditions under which an investment will be made. But it can also be ridden with clauses that could come back to haunt an entrepreneur and his company and needs to be negotiated carefully.
For investors, term sheets help assign rights, carve out protections, and, if necessary, haggle over claims to future returns when a company is being sold or listing its shares on a stock exchange.
For entrepreneurs, it is important to consult with their peers and mentors before starting negotiations on a term sheet, listing clauses they would be willing to discuss and what they consider non-negotiable.
An entrepreneur would do well to have ready a so-called ‘best alternative to a negotiated agreement,’ or approaching an investor for Plan B or even a C. This becomes even more important for entrepreneurs during times like now, when wary investors seek to wrest as much control as they can before agreeing to put money into a startup.
Among the most important terms for entrepreneurs to consider are those relating to a company’s valuation and how much stake they would have to dilute. Clauses such as ‘liquidation preference’ could reduce the founders’ equity worth to much lower than what it appears to be.
Terms like these are widely misunderstood in the industry, and entrepreneurs should negotiate carefully. “Liquidation preference is fundamentally a downside protection instrument, which disincentivises entrepreneurs from selling a company at a sub-optimal price,” said Mukul Singhal, cofounder of venture capital firm Pravega Ventures, who has over a decade of experience in early-stage deal making.
“Some investors have started using it to juice up returns by negotiating a three-four times liquidation preference.” Liquidation preference, though, is meant to help investors recover their capital-in other words, a 1x return on investment before founders and employees start making money from a sale.
Another important term for founders is sweat equity. “As a founder, if you are able to sell a company in two years, but haven’t put in the clause of ‘accelerated vesting’ during a liquidity event (M&A or IPO), then you suffer even though you made a perfectly salable company,” said Aprameya Radhakrishna, cofounder of TaxiForSure that Ola acquired for $200 million in 2015.
While, typically, stock options are vested or allotted after completion of each year over 4-5 years, accelerated vesting allows employees to get the benefit of all options rather than having to wait as scheduled. Another point to consider is how many approval rights an investor can have in areas like new loans taken by a startup, fresh offering of shares or hiring an executive above a certain salary level.
“Supermajority rights are critical, which are things (an entrepreneur) cannot do without the approval of investors,” said Vipul Parikh, chief financial officer of online grocery BigBasket. Entrepreneurs should also watch for clauses such as ‘private matters’-a fine print typically inserted at the end of a term sheet.
It controls all top management hiring, any change in business strategy and the creation of any subsidiary. Even if a founder plans to take a home loan above a certain limit, the ‘private matters’ section will govern his decision.
Many investors also try to lock in promoters for periods of 45-90 days during which time they cannot negotiate terms with other investors.
While investors use this clause so founders do not shop term sheets with others to get a better offer, the standard period for this should not be more than 30 days.
“Fund raise, in my experience, has been a trust-building game. It pays to be honest, transparent and to not shop around in the early stages,” said Amarendra Sahu, chief executive of home rental startup NestAway. “In a way, good investors vet the moral compass of founders in addition to business acumen and passion.”
Source – ET Retail
For an entrepreneur, hiring a CXO can be an exhaustive task, albeit one that if done right, can be deeply rewarding, and in the same breath one small mistake while recruiting can be extremely detrimental to the business.
Because the entrepreneur’s view and vision of their business in unique, hiring the right leaders becomes an entirely “strategic” necessity, which unfortunately given the entrepreneur’s paucity of time is often reduced to a transaction with very limiting outcomes.
Entrepreneurial firms need to take a divergent route to hire the right fit for their business and work culture. They not only need to assess thoroughly for potential but also for the ability of the candidate to fit into an environment which is dynamic, where decisions need to be taken on the fly and the candidate’s ability to work with ambiguity. Another interesting observation is that entrepreneurial firms don’t want to invest the time and money that is required to hire the right leader.
It’s a classic Catch-22″ situation – “I want my business to grow, and I want the right leaders to help me grow the business. However I cannot incur the cost/time associated with the hiring, and the business paradigm challenging that is that the right leader can help you grow your revenue exponentially”.
The old adage “penny wise and pound foolish” is so apt, because several incredibly conclusive studies also show that the cost of a wrong hire on business can be more than – 5X of the revenue.
I firmly believe that the captain steering an entrepreneurial ship needs an entirely different set of skills than those at the helm of a more established business.
Here are 7 ‘stellar’ tips to help you navigate your next CEO/CXO hire:
1. Choose Potential over Pedigree:
A utopian hiring is one where the candidate hired has an excellent pedigree and tremendous potential. But that is utopia, and not always reality.
For Entrepreneur led businesses, it’s imperative for chose potential over pedigree. For start-ups, this is particularly the case, “leadership potential trumps experience”. Businesses need people who have the zeal to learn new skills, flexibility to adapt and the courage to persevere in the face of ambiguity and failure rather than experienced candidates who perform well, but have absolutely no desire to learn or change. I personally believe this is an area where the right recruitment partner can make all the difference. Choose an entrepreneurial firm to partner with, and the difference is evident in the outcome.
2. Focus on authenticity and maturity:
Take a measure of the candidate’s authenticity and maturity. Most CXOs are seasoned interviewers and can easily impress with ‘just the right answer’. How does one assess authenticity and separate the wheat from the chaff? Again, the right HR Head or the right Executive Search partner can add tremendous value. We use several techniques, assessment tools and tests to find the best fit.
While hiring can be open in your search and interactions, CXO hiring’s often get derailed due to inbuilt biases for candidates with a substantial same industry experience. Candidates with the right set of competencies irrespective of industry experience are often the ones that create greater value. They bring to the table a fresh outlook, many times a new perspective on an old problem. Willingness to adapt ensures survival and proliferation of the fittest. Charles Darwin’s theory holds true for organizations too.
4. Zoom Out with an External Perspective:
It is a good idea to involve your board or external advisors when hiring for senior positions. An outsider’s perspective adds diversity and color into the hiring, often challenging thoughts and ideas that an entrepreneur could have overlooked in his zealousness to hire.
5. Vision drives the process:
When we marry, we look at the long term. We see ourselves getting old with our partner. CXO hiring is akin to marriage. It’s a decision that affects all other decisions and will determine the course of your business in the long term. It should not be a ‘here and now’ decision. It needs to be completely aligned to the entrepreneur’s long-term vision.
6. Hiring is a Science, but Retention is an Art:
In retrospect, hiring is just the first hurdle crossed. Retention, of course, is a marathon run. As much as hiring deserves the full attention of an Entrepreneur, retaining the right individual is a bigger challenge. I recall an incident when after considerable time and effort our client, a billion dollar entrepreneurial company hired a CEO One year into the role the candidate quit. The client’s feedback was “he doesn’t live up to our expectations”. Over a cup of coffee the candidate told us that the Entrepreneur had not met him more than three times in the last nine months, so understanding expectations needed crystal ball gazing. A great company, a fantastic hire and a situation easily avoidable if both parties had spent time communicating more.
Entrepreneurs need to have well-defined & documented KRAs for CXOs and a robust, seamless mechanism of communication and review. Correct and timely communication is the key to retention.
7. Focus on candidate’s professional needs
Lastly, it’s always a smart idea to do a reverse evaluation. As you assess the candidate’s fit into your company, do take time out to check reverse fit also. Review your candidate’s career path to predict what would appeal to him/her as the next great challenge with reference to his/her professional strengths and skills. A right fit between a personal growth plan and organizational growth plan can point to your next Dragon Warrior!
Source – Entrepreneur Magazine
Founders need to chase funders, and one of the most frustrating things for entrepreneurs is to meet up with an investor who seems to be interested in giving them money, and then not hear from them for a long time. This radio silence can be very difficult to deal with because you are not sure how to interpret it. Does this signal the fact that they are no longer interested in giving you money? Were they just taking you for a ride? Or is that they are very busy, and you just need to be patient? Should you remind them? Or will this irritate them? If you keep on pinging them, will they interpret this as a sign of desperation on your part, and use this as a negotiation tool to drive down your valuation?
Many investors seem very enthusiastic and encouraging when you first meet them, but they then keep on asking for additional data and more information before they are willing to engage further. This can be very frustrating, because most startups have very limited runway and cash is a major constraint for them. They usually need to raise funds urgently, and it’s hard for a founder to provide all the minute details which an investor demands when he is are trying to run a company at the same time. While founders understand that investors need time to do their due diligence, what upsets them is that often seem to be using delaying tactics as a bargaining tactic. This delay can cause a lot of frustration, specially when the founder goes out of his way to promptly provide whatever information the investor asks for, no matter how pointless it seems to be. The problem is that their thirst for more data seem to be never-ending, which means you are always trying to play catch up in order to satisfy them. Your hope is that if you can keep them happy, they will be much more inclined to give you a cheque, which is why you are very reluctant to do anything which may upset them, and you do your best to comply.
Founders need to understand that investors have to follow a process because they are investing someone else’s money, and this can often be time consuming because there are so many people involved. For example, with large VC firms, there will be an India office who will need to get approval from the US head office before they can invest. You will need to talk to multiple people at the firm – for example, an analyst, and then the associate, and finally the partner, who will need to get approval from his board. A major problem is that if even one person says no, the deal gets shot down. You need everyone to say yes, and it takes a long time to get all the ducks aligned in order. Each of these people is extremely busy, because they’ve got so many other things to do, so it’s hard even to get an appointment or to get them to pay attention to your particular deal.
While getting the money is a high priority for you, it’s fairly low on their list of things to do, and you need to learn to live with this reality. Try to look at it from their perspective.
Investors see lots of deals day in and day out, and they are not going to get penalized for saying no to you. This is why they prefer passing on a hot opportunity – they know that another one will come by soon. It’s not the end of the world if they fail to invest in the next unicorn, but the last thing they want to do is to put money in a dud, because this reflects badly on their judgment. They will have to do a lot of explaining if they invest in a company which goes belly up, and they don’t want to risk damaging their reputation by taking too many long shots, as this can harm their career.
This is the reason why lots of investors don’t mind building up a huge anti-portfolio, and why they’re very conservative about which companies they will allow into their portfolio. Even though they are supposed to be venture capitalists, their processes are designed to reduce their risk, so that most would prefer to be conventionally safe rather than sorry because they bet on an outlier.
Some of the delay is also a power-play dynamic, because investors understand that cash-strapped startups don’t have the luxury of time. Some will leverage this urgency as a negotiating tool in order to be able to get better terms. However, most good investors value their long-term reputation, and will not take undue advantage of the fact that they have more power in the funder-founder equation. When they take their time, please understand that they are doing it in order to protect their interests. Even though they may have a lot of money, they also have a fiduciary responsibility as to whom they give the money to, which is why they need to be cautious.
Source – Inc42.com
Mergers and acquisitions have picked up significantly in the startup space with 48 deals in the past three months, according to Xeler8, a platform that tracks startup activity in the country. This is in line with the trend towards consolidation among startups.
Whether it is a strategic move to eliminate competition, or to take advantage of the conducive market situation, startups are looking at acquiring other ventures.
Online fashion marketplace Voonik Technologies recently made three acquisitions Zohraa, a marketplace for designers and boutiques, Styl and Picksilk that helped it enter the premium ecommerce segment. “It wouldn’t have been possible to acquire them in some other market,” said Sujayath Ali, cofounder of Voonik. “They were also looking for a chance of M&A because they weren’t able to scale up.”
While capital is flowing out of the bigger startups into the smaller ones, industry players believe that their money is well spent as they end up acquiring a technology they otherwise would have to work towards. There are others who spend their money to acqui-hire – that is, buyout for the employee skills and expertise other startups.
Bengaluru-based online gifting platform Giftxoxo recently acquihired BookMyInterest, a marketplace for hobbies and leisure activities.
Experts in the field say there are a lot of small deals in the markets, and soon mid-size deals would pick up. “Small deals are a good thing, but there are no mid-size deals at the moment,” said Sanat Rao, fellow at iSPIRT M&A Connect programme. “Mergers and acquisitions are higher than what they used to be a few years ago, but we need more mid-size deals, which I think will pick up soon.”
InnerChef, a Gurgaon-based food technology startup, has acquired two firms in the same space to expand their presence to other cities. Its cofounder Rajesh Sawhney said it is looking at more acquisitions in the future.
Voonik officials said the company is now looking to acquire from the fields of machine learning and artificial intelligence.
Source – ET Retail