Being a promoter is really hard. But being a VC is easy. You neither require hard work nor brains. All you need is capital. And in a capital starved country, capital will take you a long long way. Especially if the loss is not yours and a profit share is. That is the reason, we have more VCs than we have good promoters. In 2014, we had less than 100 sebi registered alternate investment funds. Now we have close to 2000. In addition we have at least 5,000 unregistered funds which includes family offices, angels, community funds etc. And then you have foreign funds – mostly operating without any authorisation. Maybe 3000 of them. That makes it, over 10,000 actively investing entities. In contrast, you have maybe 1,000 serious promoters.
To win in such a competitive market, you need to be one of the following:
– have the genuine promoters in their close network. And have their trust and friendship
– move at lightning speed to identify the right promoters and close funding
– have good word of mouth references from existing portfolio companies.
Rule#3
What should VC term sheets say ?
Instead of writing a tome on how to make a term sheet, the simplest would be to share my standard term sheet.
Dear …,
We would like to explore an investment in your company. We would be prima facie interested in investing in 3,000 new shares at Rs 10k per share totalling Rs 3 crores. This would increase your paid up capital to Rs 1.3 lacs and 13,000 shares.
We would require you to change your AoA to the standard format as specified in Table .. of the Companies Act. We would also need you to implement a three way separation between shareholders, board and management. This means that as promoter you would need to choose between being a board member and being the CEO. You cannot be both.
We would require 3-4 days to complete the funding after you have opened a share application account and got a vendor due diligence done from an empanelled agency. Our standard due diligence check list is enclosed.
In case you need to make any cash payments in your business which cannot be accounted for, you can draw on the same in your name as additional remuneration and we will reimburse the tax and tds amount in addition.
You will need to list the company in 24 months on a stock exchange in India or overseas, unless specifically extended by us. In the event, you are not able to list the company, we have the right to terminate your employment with the company without assigning any reason for the same.
We do not believe in incorporating an arbitration clause or a dispute resolution clause in this term sheet as we believe that our working model should be such that there is no likelihood of a dispute. In the event of any dispute, we will auction the shares held by us and exit the company.
We wish you the very best and look forward to the honour of being your partner in …….
Thanking you.