Sumant Mandal initiated and is responsible for Clearstone’s investment activities in India. Sumant joined Clearstone Venture Partners in October 2000. He represents Clearstone on the boards of DiVitas, Mimosa Systems, Kazeon Systems, BillDesk (India), DiGibee Microsystems (India) and ThisNext.
DARE speaks to Sumant to find out about the company’s strategiesand its future plans.Could you take us through how the talks develop between the investor and the company seeking funds?
There are two parts to the process. The first part is to get a general understanding of what the business is and where is it going. So if there is a common understanding, which means that if both the investor and the promoter think of the business in the same way and if there is enough interest and passion in the business, then you tend to take the next step, which is discussing the dynamics of the actual investments—how do you negotiate the price, how do you negotiate the ownership, deal terms, governance, etc. But if the first part is not done well, then you cannot convince yourself to invest.
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| Sumant Mandal Managing Director, Clearstone Venture Partners |
A promoter must always remember that you cannot convince an investor to invest. The investor does the due diligence to convince them that they are making the right decision and not doing anything irrational. But if there is no common belief between the promoter and the investor—if they do not think of the company’s future in the same way—then there is no way that you can convince them to invest.
What is the role of intermediaries in VC funding?
It depends. We have never worked through an intermediary as a firm. Whoever we have worked with, it has taken us a while to know those people. But a lot of intermediaries add value and take the companies to the right people, thus shortening the cycle of fund raising.
There is always a sense that investors try to call the shots when they come in. How do you allay such fears?
That normally happens when things are not going well. The truth of the matter is that there is a risk of that happening when you take outside capital. If things are going well, then we have no desire of interfering in the companies. To allay such fears, companies should talk to other corporations who have done VC funding and take tips from their experiences; which, usually is quite a common phenomenon.
For us, active funding is like being in a marriage. Divorce is very ugly.
How has your investment strategy changed in view of the economic slowdown?
It hasn’t changed all that much. It has definitely slowed down, as we have a lot more opportunities and a lot more to work on our current portfolio. We are still looking at companies that have a growth potential and can create returns that are better than the markets. That hasn’t changed too much.
Do you invest in early stage companies?
The company need not be a startup or a late stage firm but we do zero in on companies who need the expertise that we have to offer or an industry where we are comfortable.
What is the minimum ticket size of your investment?
The smallest investment that we have made is $3 million, i.e. between Rs 12-15 crore. In the US, we have made investments that are slightly smaller than that also. Our first investment in India was BillDesk.
Has there been any recapitalization in view of the slowdown in any of the companies that you have invested in?
No. The companies have done very well, despite the slowdown. They have grown; their businesses have also grown quite dramatically.
How closely are you involved with your investee companies?
Very closely. As an example, the CEO of Games2Win was in Los Angeles this week and I have have met him thrice already. We have also arranged a lot of meetings for him so that he can take his business to the next level. I speak to all the companies once a week at least, if not more.
So you get a board seat in all the companies?
We generally do not invest without a board seat.
What kind of handholding do these companies need?
The job of a CEO is a very lonely job. Most CEOs do not have anybody in the company they can speak to. So you become their defacto guidance, counselor or whatever you would like to call them. So you end up talking to him about the decisions to help the company in great detail. Second most important thing I think is hiring.
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| A lot of times when investors and entrepreneurs have disagreements, it is because either or both sides have chosen the wrong kind of partners. Be very careful about the partner you choose to work with. |
At every senior level when the company hires, we interview them, give our opinion and also help guide talents to the company.
The third is because we are not involved with the day-to-day operations of the company, we can actually help the company in pattern matching with the other companies that we are involved in, understanding where the markets are moving, understanding what the other companies are doing. So you help strategically guide the companies in their decision-making. At the end of the day, we are not running the company. It is the promoters or the management that run the company; where they help them make the right decision and question the decision if and when required. We are not prescriptive; we just help them get a view of all sides of the decision, when they are going to make one. The most important thing is making sure that we can help them with their financial needs and guide them to the right source of capital as they raise more capital down the road.
What kind of returns do you look at?
What kind of returns we expect and what kind of returns we get are two different things. What we try and do is invest in companies where we can get returns of a minimum of three to five times of our money. Some companies give us much more than that while others don’t. There have been companies from which we got 50 times our money back and there have been companies in which we have lost all our money. On an average, venture funds try to get 20-25 percent of the ROI number. But you are obviously in for higher.
What leads to failures despite the fact that a company has the best team, and there is a lot of interaction between the investor and investee companies?
Most companies fail because they run out of money. Eventually you mis-time the market, you are either too early or too late in the product reaching the market, or you have execution issues, which means you just cannot execute on your business plan. More often than not, people cannot pull together in the right direction and because of that companies fall apart.
Being an investor, you keep a tab on the company. Do you look for a change in terms of people who are running the show, if they fail to deliver?
Yes, that is when people say you interfere too much! But that is part of the job.
What is the exit strategy for an investor in general?
The best exit, where you make the most money, is when you can take the company public. You get a much better return on your capital when you do that. There are three exit strategies – an IPO, an M&A or failure. You cannot sit down and think about an exit strategy when you invest. We always hope to invest in companies that have the potential to be public companies. We have taken more than a dozen companies public as a fund.
How long do you stay invested?
On an average it is about five to six years. Some companies tend to see the exits earlier, say between three to five years. We have also stayed invested in companies for over nine to ten years. So we are very patient investors with companies that are doing well.
What are some of your challenges as an investor?
Part of the challenge is to find the right people to work with. Investing in a company driven by a wrong person can be a grave mistake. We spend a lot of time making sure we invest in the right person. The other challenge is in making sure we can give every company the attention it deserves.
How long does it usually take for you to close the deal?
It takes anywhere between 60 to 90 days. It takes time to know the business, some diligence and then some legal process. But we have also closed deals in two weeks and we have also closed deals in six months.
How have your investee companies performed in the last one year?
They have performed quite well. In some sectors, especially in the online space, they have done very well. I think there is a disconnect between operating results and valuations in the market, that is soon to be corrected. It has already corrected quite a bit.
How upbeat are you about India’s growth story?
I think it is very good. It’s not an easy story to navigate. You have to know the market very well to navigate. I think there are a lot of pitfalls. There are a lot of companies that don’t deserve to be invested in. I think the exit market in the next one year is going to look better than it has in the last two years. The IPO market has definitely opened up. I think the financial markets have matured, and there is money coming into the public markets, etc, that creates for us the right opportunity to see exits.
What is your advice to entrepreneurs out there who are trying to raise funds?
I think there are different types of investors for different types of companies. A lot of times when investors and entrepreneurs have disagreements, it is because either or both sides have chosen the wrong kind of partners. Be very careful about the partner you choose to work with. Don’t get enamored by higher prices, or easy money, because down the road it comes back and bites you. Make sure you get investment from people who appreciate what you are trying to build.
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