At VC industry gatherings, I am often asked “what degree of transparency should a VC fund offer to its portfolio companies”. My response has always been, “the very fact that you are asking me this question is reason enough to conclude that you don’t deserve a reply”.
Rule#2
Should VCs be transparent
– Charity begins at home
– Don’t hide behind opaque dark pools
– Register under AIF Regulations 2012
– Do not trust in trusts
– Use the investment company format
– Do not fool promoters with legalese
– Do not cheat on govt dues
Just because you can get away with something is not a good enough reason to be doing something you should not be doing. Opaqueness is one such thing.
These very same VC funds expect full transparency from their portfolio companies. They expect promoters to reveal anything and everything. They even hire private investigators and due diligence agencies to look beyond public domain data. Is this even remotely fair.
But more important; what are they trying to hide. Actually helol of a lot. Firstly their portfolio success claims are mostly bunkum. You will find that almost every VC fund from the valley claims to have invested in anything successful from Google to Uber. What they won’t tell you is how much and when ? They will also not tell you what return they generated. Why do they do so ? The answer is simple – because they are lying. You can buy 100 shares in Reliance and claim that Reliance Industries is your portfolio company. It means nothing. What each VC fund needs to disclose to the world at large is what they invested, when they invested and what price they exited? Show me one VC fund that does that. Isn’t it a simple enough excel sheet.
The next is this great structure invented in India called Trusts. The Indian Trust Act dates back to 1860 or thereabouts and has seen few modifications since. The Registrar of Trusts which registers these is like a scrap yard. There is no online filing and you can make a file disappear, change or reappear. VCs can also register as companies under the Companies Act 2013 and anyone can see their filings, ownership structure, constitution etc. Berkshire Hathaway is an investment company. So why are Indian VCs hiding behind trust structures. The answer is simple – to avoid transparency, to evade legitimate govt dues and probably do things that should not be done – from real estate investing to participating in businesses which are not open to FDI. Multibrand retail to agricultural land ownership being areas that foreigners should not be investing in.
Also VC funds should not be Trojan horses hiding enemies of the portfolio entities within them. Large Corporates hide behind the opaque structures to peep into young challenger companies, steal their secrets and do things that they should not be doing. Why do the VCs not be required to disclose who controls them and who their investors are. The answers are predictable.
My next post:
Rule#3
What should my term sheet say ?