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Venture Capitalist's role in starting a 'start-up'

A number of young entrepreneurs are discovering that venture capitalists are not just investors, but are also mentors and partners.

Venture Capitalist's role in starting a 'start-up'
BANGALORE | MUMBAI: Entrepreneur Arunima Singhdeo had a major problem last month. Her online babycare and mothercare retail venture, babyoye, needed storage facilities and the 35-year-old, first-time entrepreneur did not know of anyone who outsourced warehouses. She called Prashanth Prakash, partner at Accel Partners India, who had invested in the company. Prakash rang up his contacts in the industry and within days, Singhdeo had found her warehouse.

A number of young, greenhorn entrepreneurs are discovering that venture capitalists are not just investors, but are also mentors and partners who have a wealth of industry knowledge. "The inputs from Prashanth have been phenomenal, be it in marketing or in operations," says Singhdeo, who co-founded babyoye with her husband Sanjay Nadkarni in late 2010. Accel Partners and global private equity major Tiger Global invested $2.5 million in the e-retailer in March 2011.

The in-depth sector knowledge that many VCs possess is one of the many advantages. Accel has invested in internet-based ventures like Flipkart, LetsBuy and Myntra, and Singhdeo says Prakash brings his experience from these companies to his work at babyoye. Prakash says for an early-stage venture, VCs spend at least two to three hours every week interacting with the founders and management.

The support VCs give range from the operational to the strategic. An important area where VCs help new start-ups is in hiring. "There are always gaps in the start-up team during the initial days. A VC should identify the gaps and help the entrepreneur," says Prakash. In the three months since receiving investment, Singhdeo and Nadkarni have hired their head of operations, head of marketing and head of merchandising.

When 31-year-old Hitesh Dhingra, founder and CEO of LetsBuy, an electronic e-commerce venture, received $6 million from Helion Venture Partners, Accel Partners and Tiger Global, he needed help to get systems and processes in place to ensure the business could keep up with its growth. This is another area where VCs, with their many years of experience in other start-ups and companies, provide support. "This e-commerce business is growing at 30% to 40% monthly and both people and processes should be in place to manage that," says Kanwaljit Singh, senior managing director, Helion Venture Partners. Dhingra says his sales and revenues have shot up post the funding, which mainly went into hiring resources, putting a leadership team together and ramping up infrastructure.

Helion's Singh says most young entrepreneurs are corporate executives with knowledge of working only in large organisations and might not be prepared for the challenges of setting up a company on their own. Many founding teams require handholding from investors for even functions like accounting, like the founders of quick service restaurant chain Mast Kalandar.

The chain raised their first round of funding from Footprint Ventures in 2008 and in 2010 received their second round investment from Helion Ventures and Footprint Ventures. Gaurav Jain and Pallavi Gupta, the husband-wife duo behind Mast Kalandar, had a problem with their accounting function and presented it to their investors. "They came in and spent time understanding our system and helped us with a solution," says Jain. Helion and Footprint have also provided inputs for scaling up and investing in IT to manage backend and frontend processes.

Many venture investors have had entrepreneurial experience as well and understand what the founder is going through. Accel Partners' Subrata Mitra had founded and grown two companies before becoming an investor. "I started my first company at 31. Entrepreneurs today start as young as 25.

We understand the issues they face as we have been entrepreneurs ourselves," says Mitra, who serves on the boards of Chennai-based medical equipment company Perfint, online entertainment community Chakpak, e-retail ventures Flipkart and Myntra and payment solution provider enStage. Flipkart's 29-year-old CEO Sachin Bansal says this empathy makes life easier for the founders. In 2009, Accel invested $1 million in the e-commerce venture, which started out in 2007 by retailing books online.

"As board members we have the fiduciary responsibility of ensuring the company is run in a proper manner. In a start-up board, strategy is very important and we participate in a lot of discussions on this," says Mitra. He adds they also help the start-up get the right people. At times, they even support the company in day-to-day operations. "But that is an exception," he says.

Bansal says the investor's role changes according to the stage the start-up is in. "When we started out, we needed help in processes, finances and hiring. Now the support is in formulating strategy and for future funding plans," he says. However, Sarath Naru, managing partner at VenturEast, cautions against backing entrepreneurs who are too young and might not have enough work experience. "After all, we are putting other people's money at work so cannot look at fresh graduates, there is a seeding process that needs to happen," says Naru.

Many investors say their relationship with their investees is akin to a partnership. However, for founders like Richcore Lifesciences' Subramani Ramachandrappa, the relationship is a friendship between people a generation apart, as Naru puts it. For Ramachandrappa, Naru is clearly a mentor he can run to whenever he faces difficult decision-making at work. "I did an independent study on Sarath on what VCs look for as a student in ISB ( Indian School of Business) and it became a mentoring relationship where a student looked up to an external mentor," says Ramachandrappa.

Ramachandrappa met Naru in 2003 when he was a student at the Indian School of Business during a business plan competition. Ramachandrappa went on to win the competition and found a mentor in Naru. Five years later, when Ramachandrappa approached Naru with his business plan, the team at VenturEast did not hesitate to bet on him. The fund invested $3.5 million in two rounds in Richcore, which operates in the biotech and clean technology space to conserve food, water and energy using biotechnology and has an annual turnover of $1 million. "My relationship with Sarath and his team is like parenting where I put my best effort and they would be okay, whether it works or not, which is unlike a typical investor who would come down hard if a call goes bad," says Ramachandrappa.

Both VCs and entrepreneurs also emphasise the importance of a good working relationship. "In many instances, there is no one right answer. There should be mutual respect for the relationship to work when there are differences of opinion," says Mittal.

VCs also say the time and effort they spend on the founders arises out of self-interest. "This is the fundamental model of the VC ecosystem. We do not want the companies we invest in to fail," says Alok Mittal, MD of Canaan India. However, investors say investing in a company and working with young entrepreneurs is not just about getting high returns on investment. "It is exciting to watch from the outside each step a company takes towards success," says Accel's Mitra.

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