The business of venture capital
is a funny one: you meet many business owners who seek your company’s funds for
their business, yet you invest in about three per cent of them. The analogy of searching for a gilted needle,
one that hopefully will not prick you, in a haystack is possibly appropriate. There is another technique of VC investment which a friend of
mine perfected; he used to invest in everything that came his way (or almost
everything), in the hope that you’d win some and that averages would work out;
in the sophisticated language of finance, this technique is called Spray &
Pray. I am, though, not going to
elaborate on this further, focusing instead on archetype characters who came to
us seeking funds, particularly in the mid-nineties, for their growing
businesses.
Many of these companies were in
Chennai or Coimbatore, run by conservative first-generation businessmen,
largely in engineering. The typical
owner of such a business knew nothing about venture capital (except a belief
that it was free money). Flocks of
intermediaries – in the sophisticated language of finance they are called
investment bankers - would descend on him
promising to present his company’s story attractively to VCs and get (free)
money. The stories were typical – say, an
engineer who once worked for a Tata Motors or an Ashok Leyland strikes out on
his own in an industrial shed by pawning his wife’s jewellery. Much sweat, working capital and toil in the
Chennai heat later, he is ready. Ready?
For, well, more money (so that he can sweat and toil more and beg his Bank
Manager for Working Capital enhancement).
After much persuasion, one intermediary would
get the mandate to raise money for him.
And then the tamasha would begin.
The investment bankers would initially
let us know that there was an incredible opportunity coming our way, at which point I'd fish out a well-used notepad. They
would begin their pitch by asserting that the promoter of the company was
‘God-fearing’, prompting me to doodle a decorated ‘G’ – often with an elephant
head - on my pad. Most of these
promoters were (and are) extraordinarily superstitious and will believe in any vibhuti-spinning
saffroner who tells them that their best times are yet to come and put up his
photograph alongside the pantheon on the stained factory wall.
Inevitably, such promoters, the
investment bankers would continue, came from a ‘Good Family’, enabling the
adding of a ‘GF’ to my scribbling pad.
Evidently, this was meant to illustrate that the promoters would never,
never cheat you.
This assertion always carried
with it a body language of insistence, as if I was displaying incredulity at
the thought that anyone could possibly come from a good family.
Since scepticism is a part of my
genetic algorithm (also called chromosomes), I had two moments of truth to form
my own judgement : the first was to compare the company’s profits with the cost
of the car that the entrepreneur used to drive around in (often an imported Merc). Many businessmen had cars that cost more money than the annual profits of their company. Those were the days before car financing was popular, and an outsized
car (as was most often the case), meant that the business was making more money
that the financial statements cared to admit. In 1990s Coimbatore, in particular, an
entrepreneur’s notch in society was defined by his car, so this was one reckless decision
these fellows normally took.
The second moment of truth came when
you asked the investment banker or the owner (at a subsequent meeting), why the
profit margins were low.
The standard reply would be:
‘Saar, we don’t show all the profits on the books’. Easily interpreted, this means that some –
possibly much - of the business happens outside the company’s accounts in
different names or cash, to evade tax.
Actually, the standard reply was
not just what is above. It would be: ‘Saar,
we don’t show all the profits on the books, but after you invest in us, we
definitely will,’ on the rather sanguine assumption that he was talking to a naïve,
believing optimist (occasionally, one will admit, it was not an assumption).
It never ceases to amaze me that these businessmen
had (and have) compartmentalised sections in their heads: the section on
religion and the one on ethics were entirely mutually exclusive and did not
even acknowledge each other. Most of
them though had a mathematical equation between religion and tax evasion: a
defined part of the evasion was duly deposited in their favourite temple’s
hundi (hence, my belief that temples should be taxed at 30 percent).
But back to the story. So, he was God-fearing, came from a good
family, yet was willing to shaft the Tax Departments, but
would never trick the biggest risk-taker in his business, his equity partner; it was dizzying to make sense of. The standard scribble on my notepad for the
occasion was ‘GAT-F’, for God-And-Tax-Fearing.
(I often wondered, if after our meeting, as these guys gulped their
curd-rice-and-mango-pickle down, what they though of us as a species: idiots
and troglodytes?)
The most important question that
I would then ask concerned the family: if there was a son, what was he doing?
An MBA in Australia instantly meant that he was being primed to take over from
the father, in which case, you could be assured of trouble if you did not exit
at the right time – prompting a ‘Son-in-MBA’ or SiMBA doodle from me on the pad.
As the case headed to a conculsion, the
SiMBA doodle was the most damaging piece of evidence, the
confession-in-open-court, so to speak.
If the page on my notepad contained SiMBA and GAT-F, the final scribble
would be ‘F-O’, which, while left to your imagination, meant a rejection of the
investment ‘opportunity’.
