Reflections - At home, on Father’s Day

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Last nine months have been tough for global business and mine too suffered.  Deal velocity has significantly slowed down with the thawing market sentiment.  Family loves me because I spend more time at home now than ever.  We’ve had three week long outings already and I was home for my daughter to wish Father’s day for the first time - normally an event marked by a terse text message over mobile.  A rare event in my otherwise strung life.

 

Nonetheless, entrepreneurship is indeed challenging and that’s what I like about it most.  Not one boring moment.  You are either hard pressed for time doing deals or you are busy thinking up next best way to sell.  For me, it’s business services like Private Equity fundraising, Business due diligence and research based deal making.  I hate analyst reports if I don’t see a deal at the end. Deals give me the high. This is the only filter I apply when I look for business relationships and the reason why I have so few.  Those I chose to drop off have all been gruesome brainsuckers. They try to feel you up and get their convictions examined with no specific goal.  It’s ok if you think you’re smart; but it’s something else if you don’t realize that it’s entirely arguable.  In the inscrutable world of business, nothing goes unresearched; everything is questioned. 

 

One thing that has always baffled me is why certain people hate capitalism so much. Aren’t they missing something? Ever since I was young I knew that being an entrepreneur was the most fun you could have with your clothes on – it is the greatest adventure modern life has to offer. And if you’re lucky and astute, you might even get rich in the process. Why is that so terrible? Yet all too often capitalism is blamed for many of the ills of modern life, from global warming to poverty.

 

One of the wonderful things about markets is that they self-correct ruthlessly: companies that fail to serve the customer will be overwhelmed by rivals – and go bust – and see their assets reallocated. But governments move slowly, ideologues can be stubborn and damaging legislation can take years to rescind.  Most people focus on the risks of free enterprise and are scared to join the ranks of the self-made. Some have learned to play the system of government and institutions like a game, and enjoy power, pension and profit from their position in the state sector. Why should they encourage choice and competition when they have such a safe haven as a bureaucrat, trade union official, academic, etc?

Churchill understood this when he said: “The inherent vice of capitalism is the unequal sharing of the blessings. The inherent blessing of socialism is the equal sharing of misery.”

You’ve to ride the wave as it comes. Growth is secondary. In this sort of environment question is of survival. Businesses don’t go bust because they make losses. They go bust because they run out of cash.  So manage your resources better. Stay liquid. A slowdown in the economy and rising unemployment might just stimulate more to start their own business as an alternative.  This is the only way to beat a looming recession fueled by liquidity crunch and oil price propelled inflation.  Go create wealth and pay your taxes.  No magic mantras.

 

Entrepreneurs, welcome aboard !

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My PE / VC consulting business is coming off age.  I want to make a difference just like you.

 

My take on Indian I-banking industry can be found here, here and here.  If you think like me and have put in over a decade in the industry, you know what I mean.  The markets are a lot sober now and deals are harder to come by because owners think their businesses are undervalued.  Now is the time when well intentioned and innovative deal structures (not far removed from the realm of common sense) are to be put to work.  The excitement and the reward are ours, up for grabs.  

  

So, I am about to enter my next phase in business.  My boutique proprietary business advisory (PE/VC consulting) outfit is maturing into a full blown business model and I am about to hire the best in business.  The entrepreneurially inclined, battle hardened I-bankers and operational whiz kids that have resurrected many a badly mauled, terminally ill enterprise.  [Not for me the 0.001% fee based deal making.  Leave those crumbs for the rats!] 

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Would you like some piece of action?  You think you’ve got what it takes?  Namaste. Welcome aboard! 

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Get a hang of it here. 

 

 

On my other blog

 Run your mouse over the links below and just click to read my other recent posts.

Not alone, not at all

Buying a shell calls for skill

Why investors don’t trash deals I drive

One reason why VC firms earnestly look at deals that I drive is not just their faith in my level of competence, scrupulousness and fussy due diligence initiatives; they come with “I-know-the-entrepreneur” stamp.  Ho-Hum, how does that matter?  Read this.

Some of my favorite principles in screening deals –

a.   Premium on experience – I avoid teams that has just youthful enthusiasm.  I would any day place a premium on experience.  A venture backed by a mature team that has deep domain skills and expertise is always, always better than a bunch of upstarts with hollow passion.  The youthful team may certainly have some `cool’ quotient about it, but I would settle for teams that have a higher chance of hitting big time.  Youth loses its cheer after first few setbacks that can’t be wished away; experience is more resilient. “It’s my investors’ money on the line; that’s as good as my own.”

b.   Fee Filter – “Can’t afford $2500?  Don’t suck up.” That’s pretty much in-the-face, right?  I wouldn’t have it any other way. Teams that start up with scanty bootstrap will not survive to see beta, is what I think. No point in wasting precious time with teams that want `FREE’ consulting; “brainsuckers” as I call them.  So I quote my engagement fee upfront that gets rid of a lot of milk babies and some nags. Most beavers don’t ping back (and serious teams do sign up).  Seldom do they get far in their venture if they can’t engage a $2500 independent professional to scan their faint idea, vet up the opportunity, run viability checks, beef up with industry survey, forge out a sound business plan after several rounds of brainstorming and vouch for the team before connecting them with an investor that has a fair grip over the domain.  “All of this costs money, pal. So, call me only when you’re ready.”

c.   Technology that sells – Most founders begin with a big fuss over their technology.  Scratch the surface and you’ll find that it is the 25^th idea with the same theme.  I tell them openly it’s of no use unless their business model screams customers. Keep your tech to yourself; give the customer a sexy application that rids him of worries, costs and complexities. “Does your tech do something of the kind?  Then let’s get talking.”

d.   No investor bets on vaccum - Technology business is not loaded with physical assets to salvage sunk capital. No large swathes of land, building or fixed assets as in a standard manufacturing operation. The big bet is on the juicy idea and execution skills of the team.  If your project is meaty on these lines, you’re sure to get funded as well. I don’t mince words. I advise them to save up, start something small and then pitch for the next big thing.  “Do yourself a favor; stick with that sucky job.”

e.  Track record – “How many deals have you closed?”  This question makes me smirk.  You don’t close startup deals with investors as fast as you do large Private Equity deals.  PE deals are closed faster because it is done with listed companies that have a track record. To that extent, the risk is limited. Investors get to control a real business. They can replace the sloppy CEO with the best-of-breed that can turn fortunes around. But startups are concept bets. They take time to mature, undergo cycles of refinement that makes the diligence process tighter and hence, tardier. I don’t let them pitch unless I am satisfied of their pitch worthiness. Then investors come up with their own set of observations that make them go back to the drawing board.  It’s an iterative process.  It’s gotta’ be, because in the end somebody is gonna’ put his money on the line.  “Remember, your parents refused to bet their farm!”

f.    People traits – I co-habit with the founding team for quite a while when I prepare them for the pitch.  It helps me in getting to know them personally upclose.  That awareness is essential since it yields early clues into their lifestyles, habits and attitudes which are equally important to an investor as are their domain strengths.  “Can I trust this team with my capital?“  I realize it would’ve been yielding fair returns elsewhere and I’d better give them a good reason to take it out and invest in a startup. If you move closely with the team and influenze them positively as much as I do, you most likely will get the answer - “Trust them with the best you’ve got.“

So now you know why investors don’t trash the deals I drive; why fewer deals qualify!

 

 

In control of my destiny

Old chums meet is a lot fun.  I look forward to it especially after delivering up on weary assignments.  Last weekend I met up with a couple friends from college days and we had a go at a nearby watering hole.  We caught up on a lot of things but given our age and times, it centered mostly on our careers and life in general.

They all envy me. No office policy enslaves me, no boss to rankle me.  I decide what to do, how to do, every day.  I am at liberty to pick and choose my clients.  I operate singly and have a home office for added comfort. No long and tiring daily city travel.  A very lucky man – as they see it!

While I have some of those liberties, my hassles are more from a business angle.

Lack of institutional steam:  Clients want big names. They are not ready to suspend their disbelief that individuals are capable of driving PE deals.  My first 15 minutes are invariably spent on convincing them that even in big firms, they operate as silos.  PE firms have no problem.  In fact they are kinder because I am available 24×7x365 as opposed to big firm executives that stick to workdays.  I now even get tipped by them on deal prospects over after dinner chats.  But I lose deals as well for this apparent old fashioned one-on-one work model, that some see as lacking in glamour.

Knowledge is a curse: Before approaching any client, I do a complete top-down and bottom-up research of its business and its industry.  Then I compare with global and local peers, last few transactions done by others, inter-firm comparison, cyclical nature of industry and apprise myself of its prospects in the short, medium and long term. This knowledge often is a baggage. I give presentations of case studies why a client should do a deal only after he goes a few notches up over competition that could be easily achieved with some minor tweaks to his operations. Clients are desperate sometimes to get into a transaction that is clearly against their interests.  Wary investors seize this moment and offer pittance seeing the client’s level of desperation. A couple weeks later, I get enquiry from another investor for that price I had indicated earlier but the deal is no longer there. The client had sold out in a hurry.

Dilution issues: In India, majority holdings in most enterprises are held by one or two families, sometimes over generations. It takes a lot of convincing to explain that it makes sense to cede control if it entails holding 40% stake in a Rs.100 crore ($25 MM) Company than holding 100% stake in a Rs.25 crore ($6 MM) business that took  generations to build.  Believe me, I’ve lost a lot of deals on this count alone.  Sometimes I get excited seeing their successors returning to business with advanced B-school degrees from Wharton or Harvard.  But after a couple years, they go the elders’ way instead of turning the elders around.

Valuation mismatch: “Big firms can fetch us better valuations”, clients say. I tell them “go try”. I follow up after a couple weeks, status quo. I pay another visit with hopes of getting “defogged” signal after illusions get dispelled. Some do come around.  Others settle for big firms for the same or lower valuation than I had indicated, grudgingly bearing a 4x fees than what I had quoted.

Does it read like a sales pitch?  So be it.  Who can stop me?!

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Industry expectation from I-Bankers

IDC, the global IT industry tracker brings out some insights on what the industry expects from IT vendors.  The top 3 expectations are (a) very competitive pricing (2) support for industry standards (3) industry/vertical knowledge. 

I wish there were some trackers for India’s half baked business advisory firms that masquerade as investment bankers.  So I imagine what business would expect from such crass performers.  Here’s my wish list.

Ok, stuffed suits, hear me out. Be something more than just -

a) EPS calculators and BS aggregators [BS - I mean `balance sheet’ here; not the popular expansion though it fits better contextually ] ;

b)  template runners; Dump that smug one-size-fits-all assumption.  Don’t take the mandate if you are not sure how to go about the transaction.  Don’t screw up.

c)  pushers of outrageous merger proposals; we know your slogan is “anything so long as it earns us fees”.

d) crass creators of PowerPoint slides throwing back at us not much more than what we had discussed with you;  we know you are too dumb to learn about our business.  We just use you to run some errands for us. Can’t you do that bit nicely, mate…?

e)   compliance service providers; we know how to file forms with regulators.

f)  pretenders of industry knowledge; do some research and bring back some useful insights adding value to our business.

g) fawning client-pleasers ; No we don’t want you to grovel. Make sure the transaction is not just earnings accretive, it should result in customer delight as well.

The points (a)-(f) is general industry perception (including PE fund managers) about quality of I-Bankers and their deteriorating service levels while (g) above is an insider perception from fellow I-Bankers. I’d discussed about this to some champion advisors.  They all had agreed it’s a valid point yet they have no choice in this dog eat dog world.  When I checked last, each of their last transaction had destroyed phenomenal value for both shareholders and customers.  I have blogged about other potential value destroying FCCB transactions here in detail.

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The subtle shift in Private Equity

So I notice this subtle shift happening in the PE industry.

As more and more funds enter the Indian market, it gets tougher and tougher to find “diamonds in the rough.”  Coupled with rapidly deteriorating global cues, PE funds are cagey about signing deals and don’t hesitate to pull out, a practice that was once considered sacrilege. Already we’ve noticed even the frontliners reneging on commitments.  But this can’t go on; a solution has to be found. What could be that?

I suggest looking at the problem from a different angle.  Before the next opportunity shock springs up, make a new beginning by avoiding some pitfalls.

a) Stop competing with other funds:  Control investment ego. In terms of exit and capital return (to LP investors) decisions, the funds that faced tough competition while making their investments take longer to mature.  Often funds under pressure to invest make more marginal investments that take longer to liquidate.

b) Raise funds when markets lag:  The corollary is never raise funds during a boom era.  This reduces the psychological pressure of having to invest while valuations are stretched. Most real estate and infrastructure funds face this problem. In the end, investors will supply capital to PE funds until their risk adjusted expected returns equal the opportunity cost of capital. So scan the worth of other opportunities available to the investor.

c) Commitment v.drawdown – Research has shown that most funds can draw only about 16%, 20%, 20% of the committed capital during the first 3 years before they slow down, why then accept large commitments upfront? By the end of its cycle, it is seen that even some of the best soak up only about 93% of committed capital on an average. Not all LP investors would see this as prudence, they recognize it as inept judgment if not gawky fund management.

d) Develop strategic skills fast: Learn on the run - from every roadshow, every investment and every exit. PE fund managers (arguably though) are expected to possess unique venture skills that are not duplicated overnight.  The skills in question include screening investments and monitoring managements. Steven Cohen, Carl Icahn, John Doerr, Michael Moritz, Stephen Schwarzman, Steve Bondermann all keep a hawk eye over their portfolio companies.  It’s worse than a public company undergoing SEC or SOX watch, yet for all the right reasons. The message is clear – never dither on shareholder commitments. Ed Zander of Motorola learnt it the hard way.

e) Dump that slack – Returns are rewards. They don’t come without extracting sweat. Fund managers give scant respect to reports from portfolio companies and read them only on the eve of a board meeting. While they arm themselves with questions, they have little to offer by way of solutions. They develop this distinct `slack’ post investment and pick it up only a few years down the line, when it’s time to return capital. By then, even Viagra can’t get it up for you!

Act while you can. Develop innovative deal scouting skills.  Go do some propreitary research. Have your skin in the game.  Trust me. I talk from experience.

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Inadvertence is sin

During my career spanning over a couple decades, I’ve come across several carelessly drafted legal documents. It takes painfully close combing and sanitizing to weed out the malcontent and a pair of wide open eyes to build in seemingly innocuous omissions before presenting a clean set of documents for clients to sign on.  Often on my way back home after such clean up efforts, I meditate over its outcome had the slip up gone undetected.  But then it takes a callous client to sign a document before it’s sufficiently vetted.

Here we have one such outcome. SET India, (of which SONY Japan is a 61% majority holder) which operates channels like Sony, MAX, SAB TV and AXN, recently asked its minority shareholders (32%) to infuse fresh equity of $40 million (Rs 156 crore), which they turned down. Now they are considering suing SET India terming the capital call illegal. The capital is to finance SET’s commitments to the upcoming Indian Premier League tournament, for which the company has won the broadcasting rights with another agency. 

I say this is the silliest of omissions on the part of minority shareholders. Silly because, they got into bed with a monster not expecting to get screwed.  This is normally the route taken by majority shareholders to buyout minority holders on the cheap. This is precisely why in most JV agreements, you’ll find a clause that mandates unanimous shareholder approval BEFORE critical decisions are taken on proposals for major new investments. There will also be mitigating covenants like “all dissenting shareholder(s) be protected by a call/put option at pre-agreed premia or should be exempted from participating in the fresh round [with] or [without] anti-dilution guarantee or that a new class of shares be issued to raise fresh funds without altering the rights/status of dissenters”. 

In this agreement between SET India and its minority shareholders, I suspect inadvertence. They will go thro legal hell.  Deservedly.

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Have you stopped by my other blogs, lately…?

Lots of interesting stuff in there….

www.go-rhythmic.blogspot.com  (Mile high view of the ground)

www.sequellventures.blogspot.com (Tech trends /business ideas)

www.gpsurvivalkit.blogspot.com (India PE/VC, I-banking stuff)

www.sequelventures.blogspot.com (My business card) 

Wanting to score only in unmanned goal posts

Why are investment bankers so smug?  Deal after deal, they sort of convince me as fair-weather surfers. At the slightest hint of a challenge, they opt out.  It’s like saying “bring us deals where we have ready templates. Something that we’ve done before, where we’ve already been.  Unusual is not our business.” 

Pssss…. I am exasperated. I’ve faced it so many times that now I have an expression for it.  See title – wanting to score only in unmanned goal posts.  The soccer metaphor is not just because I am a big fan of the game, most people “get it” better with a sporty allegory.

A little digression will be in order because it is not. I’ve spent more time playing soccer during my school days than inside the class room. Even when I had been alone, I spent time practicing shots from difficult angles, dribbling around imaginary opponents (pieces of rocks randomly placed), ball control, head butts, block and tackle etc. We’ve had very little match practice since the favorite game for many was cricket.  Soccer was meant for renegades like me. But I still practiced and eventually when I moved to New Delhi for work, I played for a local club and has been their major scorer in almost every game.  What if I had waited for match practice to sharpen my skill? 

Getting back to I-bankers. Over the last couple years, I’ve brought at least 20 odd deals to these shmucks that they rejected because they found it “non do-able”.  Some, they felt was “just too much sweat”.  Others, they just had no templates !  Structuring something original is “just way too much sweat” for them. I wonder how they get by when the market ebbs down.  That’s when deal flow dries up and you have to run helter-skelter picking up anything that remotely looks or even smells like a deal. That could be their nuclear winter. Oh, by then they would’ve swapped jobs or would even go without jobs.  To re-emerge only when the sun is shining and lollipops abound.  But then life won’t be so easy always.  If things ever go even slightly off-track in their lives, these guys will just freeze. I haven’t met their families yet, but it’s likely they could be a whole lot sulking over their sissy-hood.

For them to do a deal, the business should be so very predictable. Already doing very well, have a great track record of profitability and paying regular dividends. Anything short is just not up.  The fact is, those that are doing so well don’t need you.  It’s the one that is in the trenches that needs your connections and support.  Many of those were in a spot not because they were bad at business; they are trying to scale up and it’s likely that they could be tomorrow’s multi-baggers. Ironically, I-banking itself is so cyclical that after every five years or so, they hit an airpocket.  They get bailed out ever so often. Still they hardly ever learn.  It’s because in life they’ve not gone much beyond cut, copy, paste.  Not for them the joy of `creating’ something.  

I sometimes wonder how people settle only for the obvious. Isn’t unknown exciting? You don’t have to be a Christopher Columbus alright, but can little challenge be just too much sweat?  When will they man up?

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