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Multiplying funds, dividing risks

Mr Balaji Srinivas (left), Managing Partner, Aureos India Advisers Pvt Ltd; Mr Parag Dhol (middle), Director, Inventus Advisory Services (India) Pvt Ltd; and Mr G. V. Ravishankar (right), Managing Director, Sequoia Capital India Advisors Pvt Ltd. Olympus Capital and Singapore Government-owned GIC together invested about Rs 500 crore ($100 million) in Sequoia-funded Vasan Healthcare. Kohlberg Kravis Roberts and Goldman Sachs jointly invested Rs 268 crore in TVS Logistics. For Goldman Sachs, this was an add-on investment in the company, which in the earlier round had raised funds from Goldman Sachs and TVS Capital

Mumbai Angels led a Series-A round of funding of about Rs 5 crore ($1 million) in United Mobile Apps, a 4G technology company, jointly with Blume Ventures, India Venture Partners (Mauritius) and Christopher Preinz & Associates.

They are close, competitive and collegial. This best sums up the environment in which the venture capital and private equity funds operate in. They are a closely knit community. Each one is aware of what the other is doing. They sometimes informally tap one another’s expertise while working on a deal, despite being competitors.

That also explains why the funds increasingly invest in tandem in the same company, one taking the lead and the other quite happy to play along once it is assured that its interests will be protected.

It is not just for risk mitigation that funds increasingly go in for syndication, but having more than one financial investor widens the knowledge base.

As Mr Parag Dhol, Director, Inventus Advisory Services, a tech-focussed early-stage venture capital firm, says: “Two pockets, two Rolodexes, two sets of eyes and ears are good for an early-stage entrepreneur.”

Or, as Mr Sanjeev Aggarwal, Senior Managing Director, Helion Advisors, says, two heads around the table can add more value to the entrepreneur. And, two pockets can fund a company for a longer period than one. Helion is a venture capital firm that invests in early to mid-stage companies in the technology and consumer services sectors.

Complementary Interests

Generally, funds look for complementary interests before they invest in a company. Like-minded funds will ensure that the company stays on track and there will be closer monitoring and mentoring of the company and the entrepreneur than with funds with conflicting interests.

Syndicating a deal can be initiated by any or all the players concerned — the company, the investment banker or advisor or the VC/PE funds themselves. From the company’s perspective, it should be prepared to deal with more than one investor on the board. Most often the requirement of funds and over how many rounds of financing will determine the number of investors.

Risk Mitigation

In all this, spreading the risk is a key element. When the money required is large, of the order of $20 million, says Mr G.V. Ravishankar, Managing Director, Sequoia Capital, “you try and bring in other investors to share the risk.” “Over a period of time,” he says, “people find who they are comfortable with.” Sequoia is a venture capital firm that does seed-, early- and growth-stage funding.

According to Mr Arpan Sheth, Partner, Bain & Co, a leading private equity player, one of the main reasons for syndicate deals is risk diversification. “When either the probability risk is quite high (in early stage deals) or the quantum of the amount of capital at risk is large (some PE deals), you will see investors look to club their investment. This is similar in some way to how banks syndicate loans.”

If the capital required by a company is more than what one fund can handle on its own, it will try and rope in other investors so that they can jointly build the enterprise.

Complementary Skills

The lead investor would typically look at a co-investor that would bring in skills that it did not have. Most often it will be lead investor that will set the valuation for the company, says Mr Rama Bethmangalkar, Principal, Ventureast, an early stage venture capital firm focussed on technology, life-sciences and emerging sectors. In smaller PE transactions, co-investors are generally well acquainted and work together as equals and have similar rights. The quantum of investment by each fund is decided mutually.

“PE funds are approached by either a co-investor or banker, but all co-investing GPs (General Partners) have some previous relationship,” says Mr Balaji Srinivas, Managing Partner, Aureos India, a specialist emerging markets PE player investing in small and mid-size businesses. In the larger PE deals, the banker or company has a significant role in deciding the investors and the amount to be invested by each.

While the VC and PE players discuss with the company the funding requirement over subsequent rounds too, there is generally no commitment on funding subsequent rounds. That is also why the funds try to get as high a stake as possible in the first round of funding itself, as during subsequent rounds their stake may get diluted. According to Mr Rahul Khanna, Managing Director, Canaan India, an early-stage venture capital firm, each investor would like to have a target ownership in the company and hence would like to ensure this at the first round of funding itself.

The lead investor, would typically, take 50-60 per cent of the first round funding and then work with co-investors for the balance. There will be inter se agreements between the investors, the investors and the company, setting out and specifying the rights. The players point out that there is nothing typical in the VC/PE business. “We have seen situations where two investors exchanged notes and negotiated the terms with the entrepreneur together,” says Mr Dhol.

In early-stage investments, says Mr Khanna, the business will require significant amount of capital as it grows. Therefore, creating a coalition of investors early on makes sense from the investors’ perspective.

Early rounds are also high risk, so there will be multiple VCs to reduce the risk and because it gives comfort that others see value in the investment. As subsequent rounds get larger, there will be PE funds that are willing to take on the entire risk themselves, but sometimes the amount required is large that PEs also club together on the deal.

Finally, the success of a syndicated deal depends not just on the investors, but also on the entrepreneur and his or her company. It depends on how many investors the entrepreneur can handle on his or her board.

“Every investor brings a set of beliefs to the table and too many moving parts cause issues as we all know,” concludes Mr Dhol.


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