Should family businesses in India fear external investors?
By Anirudh Damani
About six months ago, I was surfing through the listings on Amazon Launchpad (my favourite shopping site after Indiegogo) and I happened to stumble upon a filter coffee decoction that comes in a PaperBoat type of packaging. It’s simple, you add a small dab of the liquid paste into a cup, add hot milk, sugar and viola – you have a fresh cup of filter coffee! I couldn’t resist it and immediately ordered a couple of sachets to taste it myself and absolutely loved the taste & smell of the product. Channelling my inner venture capitalist, I reached out to the founders but didn’t get a response, so after a couple of reminder mails, forgot about them.
Fast forward to when I was in San Francisco last month. I met a friend from Bangalore who was in town for a conference. Over sushi & sake we somehow ended up discussing innovative Indian products that were meeting a daily need. His eyes lit up immediately and he began raving about some filter coffee decoction that he had tried. You guessed right, it was the same one! He is a filter coffee enthusiast, so for him to tell me that he had gotten rid of all his filter coffee equipment and replaced it with this coffee concoction, piqued my interest and reinstated my pursue to invest in this start-up.
I asked my team to suspend all other activities and focus on finding a way to get in touch with these founders by hook or by crook. We peppered them with emails, LinkedIn emails and even asked our local Bangalore contacts (where the company is headquartered) to find this elusive founder. Our efforts bore fruit when one fine day the founder finally replied to us. Unfortunately, his email quickly doused any hope of joining this disruptive company’s investor list. The founders were open to having a conversation but made it very clear that they weren’t looking for any investment since it is a “family business.” I haven’t replied to him yet because he brings up a very interesting question – should family businesses invite or reject venture capital investment?
I have openly advocated that, any business whether it is a family business or otherwise should look at venture capital as the last resort for raising money. The hierarchy of raising finance starts with internal accruals and is followed by personal savings, bank loans, friends and family and finally the venture capitalist right at bottom of the list.
Why should the VC be the last to be invited to your party? It’s the math!
For the same rupee raised from all the sources of financing (I mentioned above) – the venture capitalist would expect maximum control, inflict the toughest restrictions all while demanding the highest return!
A VC fund manager has convinced its investors that he will provide whopping returns to their investment portfolio. The only way a fund manager can achieve these goals is by investing in businesses that have the potential to grow exponentially. Therefore, a VC is expected to (post investment) look at the business objectively, chalk out the alterations that will result in rapid growth and then drive this growth by actively working with the management team towards achieving the highest set target. These changes may include adding people to the management team, changing marketing strategies or even developing new products & services. The aim is to substantially increase the revenues of the business thus, increasing the value of its shareholders i.e. the founders & the VC.
The family business owners (FBOs) should be willing to hear-out and incorporate the changes and advice offered by an outsider to their businesses. If the incoming investor is seen as (and treated as) an outsider, it will only cause friction between shareholders. A VC will not massage a founder’s ego for him to make the suggested changes or even hold back any criticism when the chips are down. A VC will also restrict the salaries & perks for the founders and bring in his own auditor to keep a check on the expenses. In some cases, the VC may even remove the founders and bring in a completely new management team! If the FBO isn’t prepared for accelerated growth often on the back of disruptive changes – they shouldn’t accept venture capital.
On the flipside if the FBO’s have prepared themselves, set the ground with their management & staff and are ready to welcome the new addition with open arms the venture capital route does have a lot to offer. When the monetary investment is just a means to initiate the relationship and the real objective is to utilise the knowledge, network and processes of the VC to transform the business, then and only then will venture capital benefit a business/FBO.
So, I will reply to the founders and enquire why they don’t want a VC to invest in their company, but I am almost certain that their reasons won’t be too far off from the scenario I have explained above!
The writer is Managing Partner, Artha Venture Fund