Now at this situation VC comes into the picture. Before going to the deep, we need to know that what VC is?  VC stands for Venture Capitalist, the institution which provides funds for the advancement and development of the upcoming projects in your company. Here the question comes that how much you are going to ask to your venture capitalist for the investment. You need to make them understand about your project, your industry, your product life cycle, existing market capitalization etc.

A VC always looks for the potentiality of the project. They are least bother about the profit. They will evaluate your project on each and every aspect and then decide about the valuation. In mathematical term;

Valuation = market price of the share * total number of shares of your company

Some other factor which should be taken into consideration is brand value, future prospects, market capitalization, EPS etc.

Let us consider that you are average profit making company and you are not satisfied with your current growth. You are more focused to improve the face value of the share. The attitude towards investment will decide that what you will be in future. Your aggressive approach and high risk taking ability can lead you to become more successful and established venture. On the other hand, your conservative approach will keep you as of now. So, it’s better to approach to the venture capital for further advancement or development of the company.

We can better understand this with the help of a example, if VC infuses a sum of amount suppose 90 crore for 15% shares in the company. Then total value of the company will be 90/15% = 600 crore, and your share will be 510 crore. It will increase the face value of the share which indirectly indicates the expected growth of the company.

After the diversification or expansion of the business, the next major objective of the company is to exit of VC or to pay the other obligations of the company. One of the best ways for exit of the VC from the firm is to pay his return within the prescribed period. But generally, the preferred mode of exit is either to sold the company or to go for IPO.

Even if the company decided to go for IPO then also firm should have enough control on interest so that they can repay the interest to their investors. And at the same time they will be all in all of their company.

Sai Kumar (name changed) could not understand what was happening. He thought that he had all the right credentials and was there at the right time. An alumnus of one of the IITs, he had spent a decade and a half abroad, working on prestigious software projects. He then came back to India and set up a software firm with his own money. Unlike the many that opted for project and body shopping setups, Sai decided to go the product route. Five years later, there he was, with a product that he believed was as good if not better than what was available elsewhere and even a few marquee clients. And there were more clients to be had if only he could set up a good sales and servicing infrastructure. That was why he could not understand why VC after VC that he approached for funding was refusing to bite.

Sai Kumar is not the only one caught in this predicament. Take the case of Ganesh (name changed), who again was working on a product idea with teams in India and Singapore when he approached a well known VC firm for funding. The advice he got has put him off from approaching any other VC. “I was told that we will get a serious valuation only if we show sizable income and growth potential or if we can become a real threat to existing players or big competitors.” Or of Stanley (name changed), who gave up after talking to a few, discovering that they were just not interested in the sector he was operating in, even though his idea may be path breaking.

Are you ready for a VC?

As an entrepreneur or a would-be entrepreneur looking for funding, the first question you need to ask yourself is whether you are ready for VC funding. The bad news is that your project may just not be in the stage or size to get a VC interested.

Different stages of a business idea require different levels and types of funding. Unfortunately, a profusion of business model competitions have lumped all these funding options under the umbrella of the VC leaving may entrepreneurs confused in the process. From a funding angle, a business can be divided into four stages – the seed or concept stage, the venture capital (VC) stage, the Private Equity (PE) stage and the initial public offering (IPO) stage.

The seed stage is when the business is pretty much an idea. You do not have a product or clients. Possibly you do not even have a team or a business plan. Perhaps a prototype is ready. And you know that you need more funds than can be organized by borrowing from friends and immediate relatives.

This is NOT the stage to approach a VC.

Laura Parkin has been on all three sides of the table. She has set up two entrepreneurial ventures with funding, has worked in a VC firm and now, as Executive Director of the National Entrepreneur Network regularly acts as an interface between budding entrepreneurs and various funding entities. According to Parkin, VC funding is really not for startup stage companies. “Other than seed fund, most VCs are looking for a proven business model and customers and would like to see their funds used to scale up the operations, rather than test a business model. Even Angels in India would like to see working prototypes”.

Unfortunately, many entrepreneurs choose to approach a VC at this stage; and get badly burnt.

This is the stage at which you should look for seed funding or Angel funding. Your funding requirements are smaller and more importantly your company is probably a long, long way away from value realization (IPO, acquisition etc.). Angels will also probably give you more of their time and expertise, which is very critical and important at this stage.

But, there are VC funds that do look at concept stage companies. GVFL (Gujarat Venture Finance) started by Vishnu Varshney, who is considered to be the father of the Indian venture capital industry is one who invests into concept stage companies. Varshney says that “if you are a startup or an early stage company, private funds will not give you the money. Most of them will ask you to go get the money from somebody else and bring it to some stage where they see fit to invest in. We don’t do that. We will be looking at even early-stage companies. More than 30% of my investees are at the concept stage. We do not wait for them to scale up. If the promoter is good, the concept believable and credible, we do not mind giving money to start-ups”.

The second stage, where you have a prototype, if not a product ready, have bagged a few customers or at least have a few customers interested and have a realistic business plan ready is when you should approach a VC for funding. Here again, too many business plan contests have spoilt it. You can make a great business plan in Excel, but what about market realities? Remember that a good VC like Varshney, who in seventeen years has received over 5,000 proposals, and has invested in 61 companies comes with experience across many companies and many, many business plans.

Will you scale?
Some projects may just not attract VCs because they are not scalable in size or scope. If your end objective is a company that employs ten mechanics making plastic buckets, for example, then you are unlikely to attract the attention of any VC. Like Varshney points out, most VCs look to exit the project in about four years and by then the project has to reach a scale where a PE fund gets interested in them or they become the target of an acquisition. Only very few startups go directly from VC funding to IPO. The message coming from the VC community is very clear. They are not investing in any company for keeps. The entrepreneur has to be clear about this and has to include exit options in his planning and even in his initial presentations. Selling back the stake to the entrepreneur is not a preferred option because as Alok Mittal of Canan Partners puts it, that does not maximize the returns for the investor.

You have been one of the pioneers of venture capital in India. Why do you think a lot of small companies find it difficult to attract funding?

I have lots of hope and am very optimistic about the future of venture capital in the country. One area which is neglected is low-end funding, that is, early stage funding since not too many players are around. Only a few of us who started earlier are now around. I have been in since 1990. We have always focused on early-stage technology startups. However, for a fund like ours, even fund raising is difficult. It is easy for large private equity players to go abroad, raise the money and invest in a bullish capital market; it shows the expected returns also.

In the market, you won’t find many who are focused on small, medium, or early-stage companies since the returns are not that great. The gestation period is also very long — 7 years or so — with the exception of IT. IT is the only area where the company starts to get profitable, starting from the third year or the fourth year.

So, IRR (Internal Rate of Return) gets affected, thereby making it very difficult to make good money. In India, there are not too many buyers of such companies. So, exit from such companies has become very difficult. Of course, we have had some very good exits where the companies were actually bought over. IPOs for small companies like the ones where I invest in is again very difficult since the companies are small and their market capitalization is comparatively low.

I look at companies which are in niche areas and are exceptionally good. Considering the mortality and vulnerability of a small entrepreneur, there are not too many funds who want to get into it. They would like to get into where money can be made. I just invested in two incubatees of Indian Institute of Management, Ahmedabad (IIMA) and one of Nirma University. One company is in RFID (Radio Frequency Identification) business, Rapid Radio and another company is Ceon Solutions.

When I raised Rs 60 crore in 1995, I raised it in six months. Now, I’m raising Rs 250 crore and in about six months I am almost nearing my first closure of Rs 50 crore. It has been far more difficult for me than it was in 1995. That is because people say that they have other avenues and other private equity funds to invest and hence feel no need to invest in early-stage companies where they get smaller returns.

We performed well, have survived and are willing to take a risk with a startup whereas private funds are usually risk-averse since they would like to keep showing results. They usually opt for ventures from which they can exit within 2-3 years. We normally go for building a company. So, even if our investment needs to be there for 7 – 8 years, we continue. For instance, recently I divested from Neilsoft, a CAD/ CAM company based in Pune. I got almost five-and-a-half times of what I invested but it was after 7 years.

At what stage do you think a business should start looking for VC funding?
When they come out of incubation, unless it becomes a must for them, they should try to raise their own money from friends, relatives, and other people. Once their product prototype is ready, and they are ready to get their technology validated, they should come to someone like us. Like say for example, in case of Ceon, the product was ready.

In the past, we used to invest when the guy would come and just sit down with a piece of paper and say this is what I want to do. We just asked them to put it down on a piece of paper, got some experts to evaluate it and when the expert said that it looks like a workable idea, we went ahead and invested. I am not averse to that kind of investment even now, but in such cases where you start at a concept stage, risks are very high.

So you mean, even if somebody comes up to you today without any estimation of cash flow and the likes you are still willing to look at the business plan?
I am willing to look at it provided the idea looks convincing, the product looks convincing, what the promoter wants to do looks convincing; and then he is able to articulate his entire idea. Our board also has experienced people from the industry like Harish Mehta, Pawan Kumar, Dr Madhu Mehta. These people look at it.

As a VC, what are the key things that you look for in a prospective investment?
We look at the promoter or the founder. We look at how passionate he is, how knowledgeable he is, his background and whether he is a team-man or not. Whether he gets along well with people and what kind of team he has gathered. For example, in Ceon, not only was the promoter very knowledgeable; his partners where equally good and committed to the company. We look at the promoter and see how committed he is and whether in the first shock will he run away or hang in there. After making 51 investments, I have developed the kind of intuition that I can easily make it out. Our experience helps us decide whether these people will work or not. So, the promoter and the team matter a lot. In addition
to this, the technology and its stage matter too.

There are two things to be considered in technology startups — stage of technology, whether it can be scaled up or not and finances.

What would you advice to an entrepreneur on making and presenting a case to a VC?
First, they should have a very clear idea about what they want to do and they should develop a proper business model and see how they are going to build a team immediately after they get the money. They would need to see how they are going to build a team of key persons in key areas. There is no need for a large organization but at least two to three people should be there to help in building the company.

Secondly, VCs get many proposals and they have very little time to go through them. Hence, entrepreneurs should be very articulate and should be able to make a proper business plan at the time of presentation. Try to think about all possible questions that experts can ask. In the meantime, if they can come to a stage where there is a working prototype available, things become more convincing. If the technology gets validated and they have even a little proof of the market, it will be accepted very quickly.

Finding the right VC
Once you are ready for VC funding, comes the next question. Who is the right VC for you and more importantly, how do you approach them? Again, many entrepreneurs make the wrong move here. They just email across a proposal to all VC email ids they can get. An average VC today gets anywhere around ten proposals a day by mail. The better ones get many more. Put yourselves in the shoes of the VC. Do you read every mail that you get in your mail box?.

According to Sundaresan Natarajan, a Washington DC area entrepreneur who also advices other startups on getting funding, the name of the game is networking. The best way to get noticed by VCs is to get recommended by someone known to them. If you can afford it, you should get a merchant banker to advise and introduce you. But most entrepreneurs looking for funding may not be that lucky. That is where networking comes in.

Natarajan recalls his own experience in organizing funding for his first startup. “We went through the presentation process. But it really didn’t come out of that presentation or that breakfast meeting. Somebody who attended liked our concept and he forwarded it to another friend who had a similar portfolio. And then it happened that someone in my team knew that person and so it’s all kind of networking again”.

According to Natarajan, organisations like TiE provide networking opportunities that entrepreneurs should make the most out of.

Finding the right VC is not just about finding someone with money. You need to find someone who can understand what you are talking about, who can understand your language and technology. That is you need to find VCs who have experience in your area and are funding entrepreneurs in the same space. Someone who understands biotechnology is more likely to get excited by a biotech concept than say someone who funds BPOs.

A fair bit of Google search and some networking should help you unearth this information.

Where’s your team?
All the VCs we spoke to emphasized on one point – the team. Venture capitalists do not seem to be too thrilled with one man shows. They are looking for well rounded teams that complement each other. Again, according to Natarajan, “If they have an idea, people kind of jump up and say: okay, I have a great idea. Now I should be able to make this work and make this a profitable business. But the person may be really a technology person and having a great idea but not all great ideas transform into viable businesses. That’s where I see a gap and I am sure when you take this to a VC they will just say, hey, how are you going to execute it and who is going to do the sales and the like?”

A number of VCs do work with projects that they have invested in, to being in the right senior management team. And this is another area of potential conflict. It is difficult for many who are owners of the original idea to being in someone else as a CEO. It takes a lot of guts to, like Steve Jobs did to identify a John Scully and to challenge him whether he wants to “sell sugared water all his life or whether he wants to change the world”? But again, there was a board (of investors) behind Jobs who made him ask that historic question. And then Scully did do Jobs what every entrepreneur fears an outsider he brings in will do – oust him. It is another story all together that Jobs “won back” Apple. Like Parkin says, “At some level, the entrepreneur must understand that by taking funds from institutional investors, he or she has lost independence and control of the company. A VC’s ultimate control, in most cases, is the ability, as part of the Board of Directors, to fire the entrepreneur”.

To cut a long story short, whether there is a team that pulls together and shares the passion or whether it is a one-man show may be all that stands between your dream project and the funding it deserves.

How much equity?
Now comes the deal breaker. This question plays both ways. How much equity are you willing to give the VC in return for the funds? From the other side of the table, the VC will question how much salary the entrepreneur is paying himself.

Nitin Paul of Evangelists was not looking for too much funding. He wanted about half a million dollars, and in return was willing to give a 5% share in the company. Unfortunately, no VC was interested. For most, the money being asked for was too little and the stake being offered was too less. Typically, VCs look for what they call an influencing stake; a percentage that lets them have a say in the board. This typically works out to anywhere upwards of 15% upto about 50%.
In the real estate business, for example, we found funds asking for 50:50 joint ventures.

Sometime back, I was called in by an investor to advise him about a project seeking investment. This was a team of three people, two of them fresh out of college, who had an interesting concept for a technology product. One of the points of disagreements was the salaries that the lead entrepreneur wanted. The investor felt that given the experience of the team and the chances of success, the salary being asked for was exorbitant. He instead offered to incubate the project out of his premises, provided the entrepreneur took a much lesser salary. The entrepreneur on the other hand felt that the investor was trying to shortchange him. Obviously, no deal could be worked out.

Paul says that he worked out his stake in the company after considering his own years of experience, current salary and ESOPs and future earning potential on the same job, including growth and market value of ESOPs. Finally, he opted for financing at 18% interest instead of the VC route. Looking back he says that looking for funding is a full time job that requires a lot of bandwidth and that perhaps single entrepreneurs are going to be challenged taking their projects forward as well as looking for funding.

Is the chemistry right?
That brings us to the final frontier you need to cross. Unfortunately, this is an intangible one. Everyone we spoke to highlighted this one, but none could quantify it – the chemistry between the VC and the Investee.

Ultimately, what the VC is doing is an act of faith; faith that what you the entrepreneur is promising will come through. Like Varshney says, “often we offer tough love”. So, the chemistry has to be right. Like Parkin sums it up — A deal could be lost just because “the VC thinks that the team will not be able to execute, or they feel that they would not be able to work with the team.”

You have been on all three sides of the table (as described above). What are the most common points of disconnect between VCs and potential investees? Where is it that things go wrong most often, during the pitch?
In India, more so than US, a fundamental disconnect is that many people who approach VCs have businesses that would simply not work for VC funding; usually because the companies are not scalable. I presume this happens because VC-backed entrepreneurship is relatively new in India and entrepreneurs are not as familiar with the VC investment model.

Otherwise, obvious though it may sound, if the VC is comfortable with the opportunity and market size, the disconnect is simply that the VC can’t get comfortable with the team. Either they think the team will not be able to execute, or they feel that they would not be able to work with the team.

Is there any difference in the way Indian VCs act compared to western ones?
Indian VCs and US VCs are becoming one and the same! With the advent of Matrix, NEA, Sierra, Canaan and other US firms, differences in behavior are fading. However, I would say that perhaps the average US VC may be able to add more value to portfolio companies, and may be able to realize value through exits more effectively, simply because more US VCs have had the advantage of decades of experience in building and selling companies. Even the young VCs in the US have more opportunity to “apprentice” with experienced VCs.

VC firms in India seem to be looking at investments in later stage companies than VC firms in the US. That’s probably driven by several dynamics: one, the amount of funds that VC firms invest — VC firms in India seek to invest between $2-5 million per deal. In India, that is a very large amount of money, though in the US it’s a startup amount. Another driver is simply that the opportunity exists to invest in later stage deals that have not previously received institutional funding.

Smaller number of savvy entrepreneurs here in India – though that is changing with more experienced senior managers stepping out to start companies. But generally, there’s just a much larger pool of experienced entrepreneurs and senior managers available in Silicon Valley and Boston/Cambridge and other entrepreneurial “hot spots” in the US.

In the US, it certainly helps to be part of the network. Business plans that come in “over the transom” – or without connection – have basically no chance of getting funding.

In India, perhaps the entrepreneur or the team doesn’t have to know the VC, but they should be known in the industry, or to someone the VC trusts. It’s a relatively small world, so if you’re operating in an industry, and a VC is investing in that industry, there should be some connection, if not directly then atleast one or two hand-shakes away. Given that VCs are really not looking to fund raw young entrepreneurs, it’s even more likely that they would at least know of the entrepreneur or part of the founding team that they are considering funding.

Once the investment is made, what are the key milestones in the relationship? Any advice to entrepreneurs on handling these?
As long as the company is hitting targets and milestones, then it’s pretty easy to have a good relationship with your investor. The true test comes when the company misses some targets – almost inevitable in a start up with aggressive goals. Best advice is to keep the investors informed. As soon as something looks like it’s not going as planned, bring the VC into the picture. Don’t wait. Make the VC part of the solution.

Of course, the biggest potential source of conflict between an investor and an entrepreneur comes when the VC feels that the company has “out grown” the entrepreneur and would like to bring in more seasoned management. The VCs probably discuss this eventuality with the entrepreneur during the due diligence process – but at that time the entrepreneur usually thinks, “let’s just get the cash, and I’m sure we can work things out…” When the reality hits, it’s a whole different thing and can result in real conflict.

At some level, the entrepreneur must understand that by taking funds from institutional investors, he or she has lost independence and control of the company. A VC’s ultimate control, in most cases, is the ability, as part of the Board of Directors, to fire the entrepreneur.

Many thought that 2009 will be when startup obituaries would be written. But, miraculously, venture capital funds, who invest in startups, did survive the storm although deals fell sharply.

So, what do we have in store in 2010? For most VC investors, the India growth story is still exciting with a majority 50% hoping to snap more deals in 2010 while a little over one-third (35%) of the Neytri Deal Outlook 2010 respondents feel deal pace will continue at the same pace.

This optimism may be due to the fact that in early stage VC deals, valuations may not be such a deterrent compared to growth capital or PE deals, where benchmarks are often public listed companies.

VCs are keen on chasing themes that are recession-proof and are non-cyclical. Education has won hands down with 71% of the participants wanting to invest in the space, up from last year’s 61%. The sector has already seen some traction in terms of deals this year.

Around 50% say, they will bet on mobile value added services, consumer internet and IT-related companies, giving credence to the fact that Indian consumption-driven sectors would see traction. Other sectors on top of the VC radar are healthcare, clean technology and microfinance.  While 42% of the VCs surveyed want to invest only in early stage, the rest are looking for a mix of deals between early, mid and late stages.

With Silicon Valley scripting a recovery, there is a feeling that more venture capital funds may seek a global presence. “It is likely that some of the global VCs who slowed down in 2009 will re-emerge,” said Kanwaljit Singh, managing director at Helion Venture Partners. The casualty in 2009 is Battery Ventures, a US- headquartered VC, which shut down its India office this year.

Nearly 46% of the respondents surveyed feel that more investors will find their way into India while a nearly equal number (38%) think otherwise.

The popular perception is that last year’s downturn sent performance milestones of portfolio companies and VCs’ exit horizon into a tailspin. But, surprisingly, nearly half of the respondents (46%) say that over three-fourths of their portfolio companies have met their targets. And, 38% say that between two-to-three quarters of their portfolio firms achieved the targets.

Did VCs escape massive write-offs on their investments? If yes, then it could be a big achievement because this class of investors enters firms at a stage when they are fragile and vulnerable.

Private equity (PE) and venture capital (VC) firms cut, on an average, one transaction a day in November 2009, indicating clear signs of a pickup in deal activity. Although the absence of large PE transactions meant the total deal value was lower in November this year compared to same month last year, the number of deals rose to 29 against 22 in November 2008, according to data from VCCEdge, the financial research platform of VCCircle.

This was led by strong growth in VC and seed funding which accounted for more than half of all PE/VC deals last month. In the VC space those striking multiple deals include Intel Capital, Mumbai Angels and Gujarat Venture Finance Ltd’s SME Technology Venture Fund.

Of the total 29 deals struck in November, 15 were VC/seed funding deals against just seven such transactions in the same month last year. In the same period, PE deals continued to lag with 14 deals last month as compared to 15 PE transactions in November 2008.

Given that PE deals are typically of larger size, the overall deal value last month stood at $374 million as against $484 million in November 2008, a decline of 22%. A few PE/VC deal transaction value stands undisclosed for both the period but that it unlikely to swing the overall picture in value terms.

The top three deals (above $50 million) last month included Apollo Management’s investment in Dish TV through a GDR issue, Dar Capital deal for Indian Premier League’s theatrical rights and Blackstone’s investment in Gateway Distriparks. Over half of the deals were in the sub $10-million range.

On October 21, 2009, NR Narayana Murthy sold Rs 174 crore worth of Infosys shares to capitalise Catamaran, his venture capital fund. If Murthy ever needs advice for this new venture, he won’t have to look too far. He just has to call the man who could have been the second CEO of Infosys but turned down the job in 1999 and quit the company in 2000. Nadathur Raghavan doesn’t even live too far away. He is right there in Bangalore.

In India, the terms ‘innovation ecosystem’ and ‘angel investor’ are frequently used but rarely seen in practice. Nadathur Raghavan’s fund Nadathur Investments is a rare fund in the country that has truly done this. Over the last nine years, it has invested USD 65 million in technology, lifesciences and healthcare start-ups. Companies such as Impulsesoft, Metahelix, Connexios and Medi Assist owe their existence to Raghavan’s love of financing new ideas.

For instance, Raghavan told a bunch of bewildered scientists who had approached him with a business plan and excel spreadsheets predicting revenue for their company in 2000, “I don’t understand much of these things, and even though you’re all great scientists, I’m not sure you do either.” However, the scientists had a cheque for Rs. 6.5 crore the very next day, even before the term sheet — a legal document that specifies the quantum and value of different shareholders in a start-up — was prepared. Today, the company is a promising agriculture biotech company: Metahelix.

Raghavan has backed entrepreneurs. He has created an ecosystem in lifesciences. But he hasn’t made much money on his investments. Raghavan may like to continue funding innovative companies but he will need money to do it. Some companies that he has invested in also agree. “No other group in India has thought out how to support innovation as systematically,” says Suri Venkatachalam, the CEO of Connexios.“ But if Nadathur has to survive and grow, exits are needed.”

Raghavan’s two sons – Sriram Nadathur, 37, and Anand Nadathur, 35 – both left their careers in the US (Sriram in 2003, Anand in 2000) at their father’s calling, to join Nadathur Investments. Their plans include creating new entities and reshaping older ones. They are changing the way Nadathur Investments works. They have formed a separate entity Ojas Ventures that will invest in pure information technology investments and will work as a professional venture capital firm.

Further, the new Nadathur Investments that will become a creator of synergistic ecosystems. Such firms used to be called incubators in the past. Nadathur will have mostly lifesciences and healthcare investments. “Anand and Sriram are literally becoming owners instead of investors. They are building physical assets for the group much like what Tatas did a 100 years back,” says Nitin Deshmukh, head, Kotak Private Equity.

As the new order takes over, the genteel and old-fashioned way of Nadathur Raghavan will disappear.
Both have made the new investment norms much tighter and stricter, putting more emphasis on the viability of business plans, including often steering away from funding paper ideas altogether. Younger brother Anand says, “Because we don’t have someone shoving discipline down our throats, we need to have the maturity to discipline ourselves,” he says.

There is an increased focus on exits, especially from companies where the brothers don’t see long-term value. “In three years, we will exit all the legacy investments, like Cades, that are not being managed by Sriram or Anand,” says Raghavan.

The next step is to separate the risks. Both brothers know that in this business there is an extremely risky angel investing phase and slightly, less risky venture capital (VC) phase. In the VC phase the invested companies all have a proof of concept and usually real revenues. Ojas will invest in such companies. Ojas is a USD 35 million venture capital fund that operates independently of Nadathur Investments. Headed by a family relative and serial entrepreneur Rajesh Srivathsa, Ojas will operate like any other early stage venture fund, including an 8-10 year lifespan within which it has to return of Nadathur Investments’ money along with profits.

It will also try and raise money from outside investors. It diversifies risk for Ojas and also gets them to fund larger deals. “If Ojas cannot raise the second fund on its own, then there is no point to it,” says Sriram.

Then comes the new Nadathur Investments. Sriram has spent the last six years meticulously funding and incubating life sciences companies. It will follow the Japanese philosophy of ‘keiretsu’.

Outside of Japan the keiretsu concept has been applied with less emphasis on formal cross-holding and more on productive collaboration within a trusted network.

“We don’t start with entrepreneurs now, we don’t fund ideas. Because both can either already be found or created within our network. We just bring everything together,” says Sriram. His network is already fairly rich.

The approach takes a longer view. “Since they can invest and stay invested over a long term, they’re building pretty much everything from scratch. It’s a good strategy but the proof can be only be seen in a couple of years,” says Gautam Nadig, one of the co-founders of Metahelix, a Nadathur group company.

Raghavan left Infosys because he thought the company had become too big and impersonal. “I had to convince Murthy for 2-3 years before he let me go,” says Raghavan. NSR, as Raghavan is popularly known, was one of the few guys who could get into an argument with Murthy and even win it. When he left Infosys, he held 5% of Infosys that would have been worth over Rs. 385 crores.
He didn’t try and build another Infosys or jump into real estate or telecom. He decided to back entrepreneurs. “NSR came out of Infosys strongly believing that the entrepreneurial opportunities in India were being limited because of inadequate angel capital,” says Venkatachalam of Connexios.

How did he decide who to fund? The approach was a curious mixture of idealism and a moment of paternal regret. Sriram wanted to be a doctor. “He even cleared his MBBS entrance examinations but I couldn’t afford the capitation fee back then,” says Raghavan, whose current net worth would be upwards of USD 500 million. His idealism outlined the way he could blindly trust entrepreneurs if he thought they were honest and hard working.

“The first time we met him, he spent an hour talking to us, and then asked us how much money we needed. Within an hour we had a cheque for USD 500,000 with us,” says Baskar Subramanian, then a 25-year old entrepreneur who was trying to get funding for his two-year old mobile Bluetooth solutions company, Impulsesoft.

“If you see the companies we have invested in, there seems to be no connection at all,” says V. Sarangarajan, Raghavan’s brother-in-law who has worked with him since 2000. “But we were very clear about the values of the people we would invest in — integrity, honesty and capability.”

When entrepreneurs fail the money invested in them goes down the tube. This is why it is tempting to call Nadathur Investments a failure compared to other VCs.

Seasoned investors are a little chary of such a judgement.  “Their gestation period will be higher because they come in at the seed stage and help build a company right through, instead of selling out to another 1st round or 2nd round investor,” says Deshmukh, who has close to 20 years of venture investing experience in India.

That’s a legitimate view and it is Raghavan’s own money after all. And because the money being invested by Nadathur Investments is their own, they don’t have the pressure of a finite exit. This lets them be more flexible and understanding with a start-up that is trying to attempt a mid-way course correction. “See it’s like this – if I give you a hundred attempts to crack the IIT-JEE entrance, you will inevitably do it,” explains Sarangarajan. This is compelling logic but perhaps faulty.

“Having a long rope is obviously great for an entrepreneur, but I wouldn’t term Nadathur very successful from a financial point of view,” says Subramanian, now CEO of a new company, Amagi, also funded by Nadathur Investments.
Now Raghavan’s holding in Infosys is below 1% and if Nadathur has to continue investing, it needs cash. Sriram and Anand both understand this. “We are in this to make money, not for the fun of it,” says Sriram. His intent is marked by a series of deliberate steps taken by both brothers to ensure Nadathur Investments becomes as good at making money as it is at helping entrepreneurs.
There are two issues that Anand and Sriram will have to grapple with. The first issue is that the incubator model has not really succeeded.  Idealab, CMGI and ICG were part of a new breed of companies that emerged in the USA in the second half of the 90’s.

These business incubators raised money from the public and investors in order to fund the creation of new companies, mostly in the technology and Internet spaces. At its peak Idealab housed over 50 companies in various stages of incubation while CMGI was valued at over USD 40 billion publicly. But they ran a portfolio risk since most companies were dotcoms. These companies collapsed after the dotcom bust.

The problem with this model is that if biotechnology innovation moves along a different path then large parts of Nadathur Investments portfolio may lose value. They will need extraordinary entrepreneurs in their network to make sure that Nadathur doesn’t miss out on any breakthrough idea. “There are entrepreneurs out there in the larger world who keep on innovating,” says Kiran Nadkarni, one of the grandfathers of venture investing in India.

That’s where the current model has its second risk: The belief that the current set of entrepreneurs are all that Nadathur needs. Technological innovation is no one’s preserve. “I’m personally an
open-architecture person. Nadathur could be constrained by the fact that many of its investee companies are located in Bangalore, therefore they can’t access entrepreneurs in, say, Calcutta or Delhi,” says Deshmukh.

Also, the incubator model needs one great champion around whom the rest of the incubator companies revolve. At the moment neither Indegene or Connexios have made a mark yet. They still have some way to go. “For example if Infosys decides to do this then they can build a number of companies,” says Deshmukh. Maybe that’s something Raghavan and Murthy can easily exchange notes on.

Narayan Murthy

After a decade or two long evangelism spree of healthy Entrepreneurial Ecosystem in India, The Infosys Chief Mentor has become a VC. Murthy, who divested some 0.13% of his Infosys shares to raise INR 174.3 Crores said – “The fund will primarily invest in India and may, on a case-to-case basis, consider investing overseas”.