When the curd rice goes sour

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’.