Lessons from an early venture capitalist

TO VENTURE & TO BUILD
T Thomas
Malayala Manorama;
184 pages; Rs 200

Front page headlines of jaw-dropping venture capital investments are common in the business press these days. This was not the case 25 years ago, when the term venture capital itself would invite quizzical looks.

To Venture & To Build by T Thomas, former chairman of Hindustan Unilever in India (then Hindustan Lever), is the story of Indus Venture Funds, perhaps the first venture fund to start in the early days of post-liberalisation India.

The businesses then were mostly old economy and small in scale. They ranged from "recovery of lube oil base stock from waste oil to integrated processing of cotton knitted fabric". There were a few information technology companies too but generations away from the giants we know today.
 
Many of the businesses skidded because of policy and tariff shifts and, indeed, there were many those days. Added to this were high capital costs, challenging infrastructure and a generally tough, unfriendly environment for setting up or running a business.

Mr Thomas' book starts with him talking about his days at Unilever in London where he was posted as Director after being Chairman in India. He dwells on his experiences as an Indian working in a large western multinational company at a senior level at a time when few Indians had reached senior positions in global multinationals.

Apart from the personal, lots of interesting anecdotes emerge, like the fact that Unilever had some role to play in the Malaysian palm oil revolution, after its researchers managed to accelerate the pollination process in palms with "imported" weevils.

He then moves on, chronologically, to the setting up of Indus Venture Capital Fund-I and then spends a few pages on each investment with a background, investment case, lessons and conclusions.

This is where the book gets interesting. Mr Thomas is brutally candid about the reasons for failure or success. He lists lessons and conclusions for each investment and spares no words for promoters whose lack of capabilities - in his opinion - led to the business shutting down. And many did.

A reading of the failures and successes nevertheless throws up some common lessons that are equally useful today for those starting out and those investing in new ventures. Times and policies might change but the nature of firms do not, to paraphrase Ronald Coase.

Here are some:

• Integrity: A consistent refrain in many of the investments, Mr Thomas notes, is the lack of sufficient reference checks, of not just the key entrepreneur but also the partners in the business. In some cases, Mr Thomas says the entrepreneurs lied about what was going on - or not - in their businesses.
  
  Although businesses will fail, it would appear that the investor would have less nasty things to say if the firm was run honestly and transparently. In reference to one investee company Mr Thomas writes, "Once again, it was proved that good management (integrity, capability & reputation) will always pay in the long run."
  

 

Founding team: Avoid partnerships says Mr Thomas because there is always the risk of conflict. Many investee companies appear to have faced conflicts amongst promoters. In one specific case, the promoter's desire to be "independent" made it difficult to involve any other company or entrepreneur in a rescue effort.

VC companies today obviously have all this worked out and have rigorous checks built into their investments, perhaps too rigorous, some might say. Nevertheless, these are issues for all sides to consider carefully before starting out.

Many of the investee companies profiled in the book were started by late-stage entrepreneurs and technocrats. And in many cases, they lacked the business or revenue experience, which obviously affected cash flow. And in the pre-internet era, investors wanted real cash flows, not eyeballs and promises of a rosy future.

 

Unbridled optimism: Entrepreneurs are optimistic by nature. Should a fund, therefore, invest in an entrepreneur investing in a new business? This might sound anachronistic in the internet age but entrepreneurial capability is something that must be questioned and tested, where feasible, including upon oneself.
 

Exit: Finally, no venture capital investor puts in money without an exit in mind, particularly if it's a time-bound fund. Things may not work out as the company or the investor hoped but rarely will there be a complete write-off. Attempts will be made to salvage the investment. And the process can be painful.

To be fair to the entrepreneurs profiled, Mr Thomas' book is a one-sided view. There might have been many reasons for business failure and not all might have been captured in these quick accounts. Even if it was a successful exit, the promoters may have a different take on how things went.

It is also possible that many promoters may have been uncomfortable with a venture capitalist being actively involved in the business and seeking more control than perhaps anticipated. This is a lesson that holds good today as well.

Mr Thomas' experiment of the nineties is now a full-blown industry with billions of dollars of venture capital flowing into companies, spurring new businesses and creating a new class of young entrepreneurs.

Reading the book also tells you that India has lots of embedded entrepreneurial energy waiting to be unlocked. Indeed, if entrepreneurs of the kind profiled in the book could take the plunge in 1990s, then this is a much friendlier era. In a much larger sense, we are still in the early phase of the journey.

On a final note, Mr Thomas is a good storyteller but evidently not a useful source for "inside" news - except one or two, this writer cannot recall any of these stories making it to the business papers at that time.