Pavan has over 15 years experience across various industries such as early stage investing, consulting, venture advisory, research, etc. In the recent past, he has worked with Nadathur Holdings and Investments, SRW Advisors and Syndicated Research Group. Pavan is a Chartered Accountant by qualification and holds a Bachelor of Science
degree in Mathematics, Economics and Statistics
How is venture capital different from other sources of funding?
Unlike other sources of finance, venture capital provides risk capital to companies that are either in early stage or developing stage on a long term basis. Most traditional financing sources such as debt require either collateral or history of operating profits and most often are not available to new enterprises. VC investment fills this gap. Also unlike traditional financing sources like banks, VC’s participate actively in building the companies they invest in and share the rewards/risks associated with the business.
VCs get hundreds of business plans every month. How can an entrepreneur ensure that his plan gets noticed by an investor?
First point is to make sure that the business idea is fundamentally sound and is solving a real problem felt by a large number of customers. Assuming that the business is indeed solving a real business problem, best is to approach the investors through a referral either from a credible lawyer/audit firm, incubator, existing founders backed by the VC investor or people such as investment bankers who have worked with the particular VC. While some VC’s may accept blind solicitations, most of them would be comfortable if the opportunity came through someone they know.
How important is the startup team for an investor?
In early stage investments, the startup team is the most important qualifying criteria for an investor. Building an early stage business is subject to lots of uncertainties and challenges and it becomes very critical that the startup team behind the business idea has the right experience, expertise and the skill sets to deal with these challenges.
Are there some sectors that are all-time favorites for a VC?
Sectors of investing interest vary from fund to fund based on the fund size/stage of the fund, etc. In general, sectors which have a large established market (or are expected to see emergence of a large market), sectors which are insulated from adverse economic cycles and sectors which focus on solving a well-defined problem become interesting for investors. Examples of such sectors include healthcare, energy, education and the Web.
What is the role of intermediaries in connecting entrepreneurs to investors?
A good intermediary is expected to map the needs of the entrepreneurs with the right type of investors. In addition, it is important for the intermediary to understand the business which he is representing as well as the drivers behind business. It is also important for the intermediary to understand the dynamics/return expectations of the investors and help the entrepreneurs to get a fair deal.
How does a VC value a business?
Early stage VC valuation is more an art than a science. It is important to realize that investor valuation is not based on a "control" perspective but is based more on the "returns" perspective. For an investor, valuation on its own is a not a significant factor and what is important is to understand the return on investment to him at that valuation.
Early stage valuation depends on the characteristics of the specific deal such as team, stage, traction, risk profile as perceived by the investors, etc. However, in general, valuation more often than not is a negotiated value and is generally based on factors such as:
- Minimal required shareholding for the investor in terms of his funds mandate
- Expected target return from the investment at the time of exit/probability of exit
- Expected dilution from follow-on financing rounds
- Stake needed/expected for the founders / management team to align the interests of all shareholders.
Please e-mail your questions to dare@cybermedia.co.in with the subject line 'Ask The Investor'
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