There is a deep sense of pessimism in the air, with most of the markets down on fears of recession and a few others impacted by the market outwitters - the biggies who pump in capital to inflate a few bubbles of hope, as a bait to the brave and then snap out the funds to further augment the irrational and ever changing logic of the cautious brokerage houses and I-bankers. Considering these interesting dynamics, the launch of vcSyndicate at this juncture may not seem prudent. After all, to the watcher by, vcSyndicate is just-another-dot-com founded by a no-namer in the industry in one of those bouts of enthusiasm, which almost everyone gets - in which one thinks that one is the best of god’s own creation and smartly plans to conquer the world.   Well, I felt it is time for me to clearly state the goal behind the idea, a seeming reason to a possibly irrational move. My vision for now is to establish a HNI savings pool to support high potential ventures in seed and expansion stages. My goal is not to monetise on the petty sums received from the cuts on transactions conducted on the website. With growing prosperity in emerging economies, there is a greater drive to leverage the exposure and move into a the role of a leader. I want to tap such resource pools to support new ventures. A collective development through a symbiotic relationship in a globally integrated economy is the only means to sustain prosperity. Individuals perish, teams succeed. I want to build a team of investors to see opportunity in teams built by entrepreneurs. Hope your cooperation in converting the above vision into reality in the near future.  Feel free to comment.

There is a fine line of difference between a high recession and deep recession. A high recession is like shooting the economy with a bullet. The impact is quick, sharp and very targeted. However, a deep recession is like piercing a saw-tooth knife through the body of the economy. The death is prolonged, the pain excruciating and impact a complete bloodbath. With the decline in pretty much all the economic indicators of the US economy, further accentuated by the multi-billion write offs by no less known names in the industry, the economy is clearly into recession. In this context, it is interesting to observe the impact of a deeply recessionary economy on investments made by the trillion dollar private equity firms around the world and explore correlation with the sub prime mortgage crisis.The sub prime mortgage crisis stuck the US financial institutions after the banks realized that the securities traded for loan payments, which were expected from high default rate individuals, were bad investment vehicles. The big names in investment banking  had bought and sold these securities without being fully aware of the underlying transparency of the individuals responsible for loan repayments. All this was again based on an assumption that the housing prices would keep shooting towards the sky and gaining a refinancing for houses was a child’s play. Compare this with the investments made by private equity firms in high risk firms. The illiquid PE capital invested in firms which promise a high rate of return tend to be defaulted under a deep recession scenario. As is typically the case in debt financing for a leveraged buyout, the typical trend is that the firms rollup the interest payments after the expiry of the credit period (often 3yrs). As a PE fund is mostly an illiquid fund (with capital locked in for a min of 5yrs), a recessionary economy could result in the invested firm not performing to pay off the debt capital realized from PE firms.

From the Finance Minister’s Union budget speech: “Venture capital funds are a useful source of risk capital, especially for start-up ventures in the knowledge-intensive sectors. Since such funds enjoy a pass-through status, it is necessary to limit the tax benefit to investments made in truly deserving sectors. Accordingly, I propose to grant pass-through status to venture capital funds only in respect of investments in venture capital undertakings in biotechnology; information technology relating to hardware and software development; nanotechnology; seed research and development; research and development of new chemical entities in the pharmaceutical sector; dairy industry; poultry industry; and production of bio-fuels. In order to promote business tourism, I also propose to allow this benefit to venture capital funds that invest in hotel-cum-convention centres of a certain description and size“

As on date, the VCs have pass through for all the sectors. Pass through would essentially mean that the tax on capital gains on investment is completely passed on to investors, instead of being double taxed at both the VC LP level and the Investor level. Pass-through was essential for all the sectors to foster greater participation of VCs in the Indian economy to increase access to funds for the well deserving entrepreneurs. However, India is at a cross-roads. It can choose to compete as a low cost country or a high innovation quotient country.

Contrary to what most qualified writers have commented on the above, the provisions made by the Finance Minister in his Union budget speech are prudent and show the focus of India on encouraging development in the growth/emerging sectors as mentioned above. While Infrastructure and Real estate are sectors which need a lot more development in India, giving VCs a tax grant for pass through in all the sectors would drive VCs to look for avenues of easy capitalisations rather than focussing on what is good for the economy. The above tax provision by the Finance Minister would now encourage DVCs or FVCs to bring greater technological depth to the Indian market, instead of pure play outsourcing of low end jobs that the previous decade has seen.

My two thumbs up to the Finance Minister for this proposal!

As mentioned in my earlier post, there is a significant asymmetry of information between an entrepreneur and a venture capitalist. Given this, how exactly does an investor make a decision to invest in a high risk venture, with typically significant negative cash flows and a high risk long term return? There are different approaches followed at different firms. While some firms believe that if the proposed investment is so good as to gain an immediate consensus among the participating memebers, then there is no looking back on the decision to invest in that firm (though how much & when to invest is often a much debated topic). However, in most of the traditional VC firms, the voice in debate is proportional to the carried interest. A VC firm operates in partnership mode - a partnership of experts from multiple fields wherein a VC focusses. The experts get a greater percentage of the capital gains on investments and are typically the deal champions and therefore have a larger say in the decision making process.

Please feel free to comment.