Venture capitalists (VCs) seem to be losing their appetite for risk in these times of slowdown. Fresh ideas by first-time entrepreneurs or business school graduates that carry high risk are no longer exciting them as much as they used to some time back.
Instead, they’re opting to fund serial entrepreneurs or ventures with management teams that boast of experienced industry hands. This assures them guaranteed returns on their investments. Also, in ventures promoted by serial entrepreneurs there is, what is called, “skin in the game”, which means shared risk because of the promoter’s stake in the venture. Abhishek Goyal, an associate at Accel Partners, said, “It (slowdown) has affected us a bit. We are comfortable working with second-timers (entrepreneurs) as they put skin in the game by bringing in a part of their profits earned from previous successful ventures. They are also easier to work with because they understand protocols better.” Serial entrepreneur Shekhar Nair, the CEO of Elina Networks, who has raised funds from Columbia Capital and others for his ventures in the past, said that VCs were leaning towards serial entrepreneurs because of less money chasing more investments. “They are minimising their risks on whatever little they’re investing. By putting their money in ideas backed by someone who has successfully executed a business, they are ensuring a certain return on their total investments in new ventures,” said Nair.
Generally, of 10 ventures that a VC puts its money into, two succeed. This means that it would need to earn 200-300% returns on the two ventures for 20-30% returns on total investments.
Picking sound management teams has become another priority.
Arun Natarajan, the founder and CEO of Venture Intelligence, said a down economy has put the management team of those seeking funds from VCs under scrutiny. “There is an increase in the VC community’s concerns over the management of companies they are investing in due to the slowdown. The perceived risk in an investment as lower when firms are backed by people who have a thorough understanding of the industry,” he said.
Kartik Srivastsa, associate at Lightspeed Venture Partners, said VCs are going for people with good past track record to ensure smooth growth of the company once it takes off. “For mid to high growth stage companies, it’s essential to have experienced management guys who have either set up other ventures in the past or are high-level executives from related industries. When it comes to scaling up a new business, those who have gone through the process in the past come in handy,” said Srivastsa.
Rahul Chowdhri, vice president, Helion Venture Partners, said, “It helps to work with a strong team that has experience in running a venture from a related industry. This makes the job of a VC much simpler and its focus is also more defined.”
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