As I get ready to hang up my boots as an investor to embrace the social sector, I thought of jotting down the key learning’s from my 40 years of investing. Just summarising my own learning’s for next generation of VCs.
Rule#1 of VC Investing
How to deal with promoters ?
Trust your promoters
Do not interfere in their work
Help only when asked
Be available if there is a problem
Take on some of their pain voluntarily
Do not share their limelight.
Being an entrepreneur is not easy. Anyone pursuing this path deserves to be applauded, irrespective of the outcome.
On the other hand, VCs are not good enough to be promoters. They usually lack knowledge or age (are too old) or don’t have the skill set or the guts or all of these. They are just distributors of capital – which is a commodity. In most cases, it is not even their own money. They are just there because someone has to play that role. There isn’t much competence required to be a VC. Anyone can spray money and pray – esp if it is not your own. VCs are partners in profits and not in losses. Whilst they encourage promoters to take risks, they are themselves risk-averse.
Unlike popular misconception, frauds in the VC industry are far more prevalent than those among promoters. Even the big and mighty like SoftBank or Citibank have been hit by fraud of unbelievable magnitudes within their own organisations. So pot calling the kettle black is probably not the right thing to do.
All said and done, one has to understand that Venture Capital investing is not an arms length business. It is a related party business. VCs invest with their friends, batchmates, neighbours and relatives. They do not find promoters through head hunters. They deal with known people. There aren’t many hard and fast rules about investing or valuations or term sheets. It is all very flexible. Celebrity fund managers are rarely visible. What you read of in the media are junior employees of VC funds. Everyone is called Managing Director and it would be a good idea to grade them. The person who brings in the money and actually controls the fund is called Sponsor and only SEBI knows who the sponsor of a fund is. The Sponsor raises the money and makes the investment decisions in consultation with his investors. Everyone else is part of overhead.
Except the Promoter. That is the most important piece of the ecosystem. Any VC who believes he can bully him or dominate him has probably invested in a wrong promoter. Promoters believe in themselves. That is why they take the absurd risks involved. They are often also very competent. The VC works for this promoter. It is not the other way around. The promoter is irreplaceable. All others are dispensable … actually disposable.
The commodity of value is trust. VCs should only fund people they trust. And once they fund, they should continue to trust.
My next post:
Rule#2 of VC Investing
Should VCs be transparent ?