The start-up investing winds, they are a-Changing OR are they?

In his latest, 'SuperLP' Chris Douvos  writes about the fears of an impending VC apocalypse....., okay to start with, in silicon valley primarily triggered by the capital deployment in start-ups far outpacing funds raised by venture capital firms, essentially affecting that someone else is gaming the system rather than VCs themselves..

Given they appear only once in a blue moon, I couldn't really let go a SuperLP article without a comment... here goes what I posted on his article 'Scents in the Air'

My comment
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Comments

I am wondering if the issue with "capital raised by VC's increasingly falling short of capital invested into start-ups" is about true of all start-up hubs & not just Silicon-valley AND, that probably in general it’s true of all VC activity across the globe (tho' i do understand this data is of NVCA and for USA)

Out of the entities you mentioned, I see the following two as the key contributors to this skewed ratio;

1) CVC: The emerging aggression of CVCs whose enthusiasm to invest is in equal measure helped/ influenced by not having a limitation of capital to deploy AND by their necessity to shortening the product introduction cycle in face of an increasingly unproductive in-house innovation (think... a top-10 pharma major investing in start-up biotech with just one pre-clinical asset....)

2) Angel: The recent market regulatory changes indicate (JOBS et al) that the government is attempting to bring down the dependence of start-ups on the VC's - primarily by way of increasing the available angel base & encouraging HNWIs to risk their money a lot more freely than before.

Surely the above aspects do suggest why there's a scent of fear in the winds blowing through VC quarters.

I personally feel that these newer sources of capital need to establish their longevity & consistency before the start-ups can forget about serenading the VC for funds – particularly given that non-financial companies tend to be a lot more impatient with IRR cycle-times and HNWIs a lot more prone to gravitate towards less complex and shorter-term alternative investment options.

Essentially, IMHO what goes around comes around & VC as a source of start-up capital would remain a lot more relevant in the long-term

Posted by: Murali Apparaju | July 22, 2013 at 01:20 AM

Coordinated rulings by SEBI & SEC - Winds of Market Regulatory Harmonization OR plain coincidence?

Viewed solely from the perspective of rationalizing regulatory framework to support creation & sustenance of new enterprise, a lot has indeed happened in the fortnight between 25^th June and 10^th July in India & USA.

While I’ll desist from repeating what many other bloggers, journalists & analysts have already written on, viz., the obvious v/s inferred derivations of the enactments & how they’d impact the start-up scene et al., my intention in putting together this piece is from my point of view to highlight certain clear similarities, interesting contrasts and some uncanny conjectures these two sets of reform throw up when seen together & what would this coincidence amount to.

Before getting there, below is a quick snap-shot of the regulatory changes (wherever possible, I used the official language of the regulator) that may be cross-referred down the line;

25 June 2013, when the SEBI (Securities & Exchange Board of India) board took, among others, the following three key decisions that impact the start-up investment scene;

      1.   Amendments to SEBI (Alternative Investment Funds)      Regulations, 2012 – thereby recognizing the angel          investors pools as category I venture capital funds

2.       Enabling Listing of Start-Ups and SMEs on Institutional Trading Platform (ITP) without having to make an IPO

3.       Acceptance of recommendations made by “Committee on Rationalization of Investment Routes and Monitoring of Foreign Portfolio Investments”

10 July 2013, when the SEC (US Securities & Exchange Commission) met to approve, among other things, adopting amendments to Rule 506 of Regulation D and Rule 144A under the Securities Act of 1933 to implement Section 201(a) of the JOBS (Jumpstart Our Business Startups) Act that essentially means enabling;

1.       Lifting the ban on general solicitation or general advertising for certain private securities offerings, thus improving the chance of a start-up raising requisite capital

Now coming back to the original story,

What is similar?

The Intent behind the reforms:  Enabling creation & sustenance of new enterprise within the respective countries

The primary approach of making funds available being by way of rationalizing  angel investment framework

Some level of similarity in enabling a regulator supported solicitation**;

o   Solicitation of investments by way of listing on ITP (Investor Trading Platforms) without having to make an IPO

o   Solicitation of investments by way of advertising on online & offline platforms after complying with filing of Form-D & submission of solicitation material with SEC et al

What is dissimilar?

While the intent is similar, it is interesting to note the subtle differences** of approach;

o   SEC comes across as more conservative in its approach of cautious provisions that simultaneously can OPEN-UP (owing to wider investment choices due to open solicitation) & CLAM-UP (some individual angels falling off the radar due to tightening the requirements of accrediting individual investors..) angel funding

o   SEBI on the other hand comes across as aggressive with its attempting sweeping changes to channelling & control of foreign investments while retaining FVCI as an independent investment class with benefits and simultaneously attempting to enhance access to domestic funds for the start-ups

**Just wondering, is this caution & aggression merely characteristics of a government that has just assumed power & one that is facing polls the coming year??

      While SEBI was at pains to formulate investor minimal requirements (min investment size, maximum angels in a particular scheme to be NMT 49 et al) – SEC seemed to have left the due-dil to the “issuer” by setting only some guidelines

      Finally, while the solicitation provisions are similar, the motivation/ rationale itself was pretty different with SEBI aiming to help improve exit-options of investors & SEC aiming to help raising of capital by the start-ups.

What are those uncanny conjectures?

Ponder this tango of “Accredited Investor” (SEC) ~ “Notified Investor” (SEBI);

-                  Portion of text from section 3.3ai of “Amendments to AIF Regulations” (SEBI):

“Such investors shall also be required to have tangible net assets of at least Rs. 2 crore excluding the value of the investor's primary residence”

                    Portion of text from text under Rule 506 of “New Rule Making” (SEC)

“An individual net worth or joint net worth with a spouse that exceeds $1 million at the time of the purchase, excluding the value (and any related indebtedness) of a primary residence”

Contrasts apart, the similarities & conjectures make it appear like the market regulators in USA & India have been comparing notes, if not working in tandem, while formulating these acts, amendments – I wonder if this is some sort of market regulatory harmonization effort going on? – Surely not unlikely!

Food for thought!

There's some traction (in exits') for Indian VCs & that ain't bad!

Expectedly, there was some excitement & some skepticism over the recent acquisition of redBus by Ibibo. My comment on one such recent article "Is the redBus exit really good for the VC ecosystem inIndia?" on StartupCentral is as follows;

My comment:

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What you have said above sounds (to me) like;

If only the ‘sheer-return achieved on one exit’ by the VC is looked at in the broader context of ‘performance of the fund’ as such (disbursed funds?) rather than merely as a nX return on investment made into that particular company, only then will the overall picture emerge.

Now, just because you mentioned 200mio USD fund in your article, I wish to know if I can assume that one of the three VCs (or all three as an average) who disbursed funds of ~200Mio USD across past 7 years among multiple portfolio companies has hitherto managed only one attractive return of ~15-20X? (of RedBus) & this sheer return still doesn’t amount to being anything substantial to the LPs from whom the 200mio fund was raised?

If the answer is yes, I agree with you that for the Indian VC universe ‘Dilli abhi dhoor hain..’ (loosely translates as ~miles to go before resting on ones' laurels...)

Of course I’d also be cautiously optimistic when I say that if only the VCs that invested into RedBus used a similar good-sense & judgement while identifying, nurturing the other portfolio companies within this 200mio fund, then it is likely they’d still see some more good exists, including some from an IPO even.

Overall I guess there’s some traction & that aint bad. 

Professional Bias: The most damning kind of 'Modern Prejudice'?

Thanks to Mahzarin Banaji & Anthony Greenwald, authors of the recently published book "Blindspot: Hidden Biases of Good People", I now have a term to use when I crib about that intangible, all pervasive, frustrating, subtle but highly damaging prejudice one has to face in the corporate life.

Below is my comment* posted against the transcript of a rather surprisingly** unbiased interview of Banaji by Shankar Vedantam on NPR Code-switch

*one among the 214 highly engrossing comments as on today

**or may be not-so-surprising considering the topic is of 'bias' & avoiding that makes definite sense :-) & also because Shankar himself authored a book that establishes the existence of unconscious biases (The Hidden Brain: How our Unconscious Minds Elect Presidents, Control Markets, Wage Wars and Save Our Lives)

Let me admit upfront that the comment i made about the book in the penultimate paragraph below is hardly unbiased as 1) I haven't (still) read the book & 2) I was prejudiced by the choice of examples Banaji made.

My comment:

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Ouch! that hit a raw nerve…

Considering the many instances I encountered and still experiencing, it’s apparent to me that I unfortunately am on the wrong viz., receiving side of this bias - No wonder, I am not really able to smirk in tacit understanding of this form of subtle prejudice like Banaji & Greenwald can!

I probably faced this first as a kid transitioning from vernacular education to an 'English medium' school wherein I joined this phantom club of under-dog vern-pretenders. Even as I overcame this initial bias over a few precious school years, I have had an extended rendezvous with this intangible discrimination that followed me most places & most worryingly, into my career – an aspect to an extent demonstrated by the number of times I riled against ageism, rankism & even heightism on twitter in the past few years.

Hands-down, the title of the most damning kind of subtle prejudice goes to professional discrimination that manifests itself in multiple forms in multiple contexts right from Existence of highly exclusive informal academic/ alumni groups; Caste (in Indian context), region triggered favoritism to Inherent bias of domain-Gods prejudiced against wannabes that are trying to break-in into their sacred bastion – most of which I am experiencing right now with my own seemingly self-defeating penchant for periodical disruptive re-invention of self by making/ attempting a lateral career move with no pedigree, justification other than my own belief.

If it sounds like I’m demonizing these ‘quaint’ prejudices as if they were a bigger evil than the regular discrimination types like age, color, disability, gender, race, religion, sexual orientation etc., I have a reason for being so. Unlike these more visible & blatant discrimination wherein the discriminator most times cannot morally or at least legally justify the bias & hence the biased can seek refuge in the regulation & the brotherhood of communities that are similarly affected., the victim, if I may say that, of a subtle prejudice/ bias/ discrimination is without any recourse of fighting this anomaly & hence is perpetually screwed.

No one is above a little-bias in their lives - My own biases & how they impacted the under favored is something which now I’ll keep mulling on, so as to avoid. I however like to believe my fleeting prejudices never trampled on any career aspiration nor on real merit, but aware I am pretty much of any bias I have & when I do, it’s intentional. Given this, I’d argue most of these prejudices aren't unintentional but very consciously employed – while I haven’t read the book, the tone, tenor and the case-studies used by the authors make this book come across as a guide to these subtle perpetrators on “how not to feel guilty while favoring your own kind” – It’s a great service nonetheless by authors to highlight this aspect so very bravely.

The biases may be quaint, but the impact is real and it hurts real bad.

Static & Staticy

10th July 2013

When the search is of existential angst, trust the search engine to fill your bucket of woes.

Why really? 

My question, merely rephrased, is still open - IRR v/s Impact Investing: Do financial institutions necessarily go through this dilemma?

So I now can save some breath by saying 'Impact investing' whenever I have something to say about social impact of investments - that still doesn't mean I get the whole picture now! 

Below is my comment on a recent article on Forbes titled "Pierre Omidyar, Steve Case And Mike Milken On The BusinessCase For Impact Investing"

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Comment:

Earlier in Jan 2013 I posted a poser on my blog titled "IRR v/s Social Impact: Do financial institutions necessarily go throughthis dilemma?"

Even as I am still unclear how social-impact can coexist with bang-for-the-buck at the macro level (~LPs), I see a definite hope in the approach being pursued by Omidyar Network, which made a great start just by terming itself as "a philanthropic investment firm' – The document “From the Field: Lessons Learned in Impact Investing” goes on to showcase how ON takes this moniker seriously – Bravo!!

From all I could see, ON is still an investment firm that’s funded (largely) by its philanthropic founders & there is no ‘raising of fund from LPs’ involved in this unlike most VC/ PE firms that dabble in similar volumes of investments/ portfolio.

That brings me back this intriguing question of how the likes of JPM measure their social impact? – I am sure I am missing something here.

I'm dumb with cool apps 'cos my phone ain't smart when I'm travelling overseas!

Ever heard an international traveler bitch about how cruel the data roaming tariffs can be - well, here i go...

My comment on a recent post on the HBR Group on LI;

Link to the LI discussion:

Follow Ania

Have you ever used Airbnb, Hailo, Uber, or other "sharing economy" innovations?

Or are you opposed to or wary of them because of the legal implications? In this blog post, HBR author Larry Downes explores how these innovations are disrupting traditional economies--and at what price.

Airbnb: A Spare Room for Debate 

Airbnb's legal travails raise the question: how free should you be to rent out your place?

6 days ago

My comment:

Never heard of any till now……. checked them out & loved 'em all.

AirBNB: Sure sounds like something i'll try when i'm travelling and looking for an overnight accommodation next time.

Uber: I am guessing I may not need a chauffeured sedan anytime soon, but am sure excited by the opportunity it provides to make a rather grand exit from a sad rendezvous :-)

Hailo: Hello... this is something I could use when i'm in London or NYC next - my only issues are; a) When in the near future would the corporations of London & NY enable city wide Wifi?.... enabling data on my international roaming plan can be pretty killing. AND b) What if I don't actually know where to stand while 'Hailo'ing the cab? .... just kidding :-)

Getting serious, the bottom-line is that till the time WiFi is all prevailing and FREE in all cities (are you listening Google??..), an international traveler like me will not be able to use many of these cool apps for want of connectivity....

Plan B anyone?