Investor Outlook: How Much is Too Much Control by VCs
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Funding is an integral part of a startup’s lifecycle, and to attain it at the right time can make all the difference. But unlike traditional businesses where, a bank loan is not subject to operational scrutiny as long as the money is returned on time, investors in this domain can get really tricky to deal with. While it’s justified for them to have constructive recommendations, just how much control is too much by VC’s when it comes to controlling the companies they invest in.
While most investors do not want to be recognized as sharks who take control of their ventures they spend in, they do feel that for certain decisions their advise and control is necessary.
Advising on Big Spending Patterns
While some VC’s and angels are comfortable with giving a complete free hand in letting entrepreneurs run the business, some feel it is necessary to have cautionary warnings for the senior management where spending patterns are concerned.
“ Expenditures need to be made wisely. While expansion and scaling are necessary many entrepreneurs especially in the last couple of years have made futile spends, which could have been used for a better purpose,” says Vikram Gupta of IvyCap Ventures, India’s largest home-grown fund. “In terms of getting a team in place and hiring the right people, entrepreneurs, specially the younger ones overspend on their CEOs and CTOs, not realizing if the person can actually add that much worth to their companies,” he added.
Growth and Balance Sheet
The simplest way to judge a venture’s growth story is to assess their balance sheet along with their growth figures. This necessarily does not mean that losses are a bad word, they are a part of the lifecycle of a business, but only to a point it can be borne.
“Some of the businesses we invested in were not making money initially and that’s fine because you need to settle down in the market. But to have business propositions drawn out that lose money is dangerous. After all there is no infinite pool of money,” said Ben Mathias of Vertex Ventures.
The Right Time to Take Control
But is there a right time to take stock of a situation if it gets out of hand? Bajaj feels definitely, especially if it has reached a point where the ones running the business lose their grip on it.
“We don’t take things into our hands unless the entrepreneur himself loses control of his businesses. In that case some harsh decisions need to be made monetarily, and in good faith of the business, the employers as well as the investors,” he said.
And finally comes the exit process for a VC. While exits are still at a nascent stage in India, it’s the lifeline of an investors cycle. However, aiming for short term gains is a mindset investors should not enter the field with, feels Vikram Godse of Mayfield Fund, India.
“Exits are ultinaetely the goal of a VC and that's why we invest. But yes, short term gain aspirations cannot be pushed on the entrepreneur," he said.
As to why VC's in India have not been able to make shiny returns from their ventures compared to the west, Gupta of IvyCap says,"It was the same in the US some 20 years back and now that's the phase in India. Having said that, VC's in India need to think of a longer term if they want productive returns, typically 8 to 10 years unlike the current scenario where it's hardly five years on an average."
So when is the perfect time for a VC to advise on an exit? “When the company can be bought off the market and is not desperate to get sold,” says Bajaj. "Whether the entreprenur wants to stick to the business and keep running it or whether he/she too wants a timely exit is totally their call, we woul not stop any passionate entrepreneur from giving up their business even after we exit the firm," he added.