Mon, 24 Apr 2000 03:27:18 +0530
Re: Dumb VCs versus Smart VCs in India

A few issues are raised here and one is not sure they're ascribed accurately: There is a due diligence process referred to that is ascribed to "institutionalised VCs and knowledgable angels" and a gut-feel and averaging-driven process that is ascribed to "opportunistic moneybags".

A few thoughts from an angel who feels he might be knowledgable, opportunistic _and_ gut-feel driven - and hence probably needs to be institutionalised:-)

1. The due diligence process is, usually in reality, anything but. How do you do due diligence on a new idea that can change the world? Imagine the church calling a Big 5 firm in the middle ages and asking for due diligence on a strange idea somebody called Galileo had - or the Government of Spain asking for an analysis and recommendations on what this fellow Columbus wanted to do. Due diligence efforts are undertaken by VC firms and institutional investors (i.e. where it's not their own money) - and one risks excommunication and fanny-spanking from both these communities for the statement one's about to make - but it's a process perhaps more designed to offer a justification and defence should an investment not pan out. (In Latin, it's referred to as coverus ones gluteus maximus.) One is not detracting from the basic checks that need to be done to verify claims made by promoters - but one believes that any promoter who seriously wishes to hoodwink a due diligencer will do so virtually every time. (This may well explain some of the wondrous sums of money being thrown around on average ideas in India today.) Aspiring entrepreneurs, one might add, shouldn't worry all that much about due diligence - it may more often be a security blanket for the investor than a judgement on your business idea. Keep your papers and back-ups ready - and go on with your work.

2. Which actually leads to another contention: one believes that nothing matches gut-feel as an indicator of comfort in a promoter or a plan. Yes, the gut feel may come as a side result of months or years of familiarity with the business - or with people one believes will be successful at what they do. In the final analysis, this gut feel will probably be far more accurate than any given shelf of well-bound Forrester reports. (Ouch - more fanny-spanking coming my way.) Gut feel also works both ways. One believes entrepreneurs should also choose to work with funders who drink the same kool-aid, and truly believe in their dream, as opposed to those who merely rationally approve it.

3. Which brings one to averaging. Money managers do averaging. The true investor wants a ten-bagger - or a hundred-bagger - on every single investment he/she makes. Many - if not most - VCs are money managers who need to show year-on-year and quarter-on-quarter returns for their investors. Many are happy giving their investors a ROI of 50% per annum. Which sounds quite all right. (In contrast, quite a few angels don't really need to demonstrate performance to anybody other than perhaps their spouses (okay, cheap shot:-). So some of them take risks on every investment - some others average.) But if you are an entrepreneur, do think about this a while. Do you want to be with somebody where it's okay if you're the laggard in the group that averaged 50% and where you are NOT spanked if your share price has gone up only 25% in the year? Is it important for you to be led, cajoled or pushed to perform better? Or would you rather be commisserated with and left alone? One believes wise investment counsel does not solely reside in either VCs or angels of predefined IQ levels. People, firms and attitudes differ.

With that supremely non-useful summation, and a nod to the Marquis de Sade,
I offer my $0.02,
Mahesh

From: Ramesh Lakshman
To: indiaentrepreneurs@egroups.com
Sent: Monday, April 24, 2000 9:27 PM
:Re: [IndiaEntrepreneurs] Dumb VCs versus Smart VCs in India

Having initiated this discussion at the Mumbai meeting and noting that the exchange is moving tangentially into motives or otherwise of VCs, I thought it pertinent to put the original discussion in appropriate context. It would be rather impertinent(and presumptuous) to be bracketing all VCs in one or the other categories and generalising. The original discussion related to smart and dumb MONEY and NOT VCs, and the context, quite simply, related to an aspiring entrepreneur's path of least resistance to accessing money. The context was smart money as defined by VCs( and more institutionalised and knowledgable angels) generally and dumb money as defined by general opportunistic moneybags who sense a major environmental shift happening with huge upside, do not have the wherewithal to a structured due diligence or appraisal process, but nonetheless apply an averaging principal to a generalised basket of opportunistic investments(with some advisors and go betweens) in the estimation that all it requires is one or two multi(or mega) baggers to compensate for the other sins and make money. In this respect, dumb money with it's empirical, 'gut feel' approach may not end up too differently from it's smart counterpart in a relative risk/return scenario. Question is, for an entrepreneur looking at quick level 1 and 2 funding, is this route much less arduous and much less dilutive than accessing structured VC funding, while giving up on the obvious advantages of the latter(mentoring/network/access etc. etc.). Open to responses and experiences, especially relating to the so called dumb money in India.

cheers