Straight talk > What are VCs really looking for?

Market: large or growing fast
One is the size of the market. When I say size, there will always be qualitative trends to the nature of the market and so on, but essentially you cannot build large businesses in small spaces. So either the market has to be large, or it has to be growing fast enough so that it will become large in the next 3-4 years. That's the one key aspect we look for.

Industry structure - allow for consolidated position?
The second aspect that we look at is how the industry is likely to shape up. Is this going to be a space where 100 companies each get 1% of the market share? Or will there be one company with 30% - 40% market share, a relatively consolidated position?

Is this the Company?
And will this business be that company? Is there enough of a sustainable differentiator here? Is this business going to keep 3 paces ahead of the competition? We never believe that there will be lack of competition because if it's an attractive opportunity, more and more people will go after it.

The key success factors are different for each business. So some businesses will rely on technology, others will rely on early mover advantage - those specific factors tend to be different.

Can this team make it happen?
I think the third part, perhaps the most important part, is the team. Is this the team that can make it happen? All business plans undergo change. All businesses faces crisis. We need to be confident this team has their ears to the ground; they have the passion; they have the staying power to see the finish line.

So I think those are really the 3 main factors. There are lots of details to each one of those but, yeah, essentially that.

What is the problem?
What problem you are trying to solve, how big is that problem today? Are people resolving the problem in some other way today? Are you making it easier or better for them? What is your solution? It is very important to identify the problem and map that with the solution.

Then we say: is it a big problem? The bigger the problem, the bigger the opportunity of to create a large company, that's the way we see it.

Your consumers: Where are they?
Second is how do you find the consumers? How do you make them aware of your service? How will they reach you? Do you need to spend a lot of money on advertising? That will define your capital requirements. Do you need to work through physical stores? That's a different kind of challenge.

How will you reach your consumers?
How you reach a consumer is an important question to answer, because the harder it is to reach your consumer, the harder it is for your consumers to find you, the more money it requires. And fundamentally there isn't any product that you can't sell. If you do not have a very innovative solution, it just takes that much more money to convince people to buy it. I mean, you can create another Pepsi or Coke today. If you have a billion dollars.

On the team you want complimentary skills. You want somebody who is more finance driven, somebody who is more market driven, somebody is more technology driven. Or for whatever important elements there are to the business, there must be those skill sets within the group.

Complimentary team
The ability of the team to get along is extremely important. Do they have the same value system? Do they trust each other? Do they believe in each other? Do they all carry the same passion about the business? The softer aspects are very important, because after you have funded you don't want to go through the hassle of each one thinking he or she can be the CEO and not the other.

And enough businesses have failed because of team dynamics - more than because of bad market or bad technology.

The importance of The Big Picture
So, first thing, you are taking a call on the sector, saying that this sector is good and will continue to grow, and India has an advantage in this sector. You first have to be able to see the big picture.

Company - will it be a player?
Then you are saying that this company has the right elements in terms of business model, customers -- whatever it takes to be a player in this industry and capture market share.

Team compatibility with the VC
And thirdly, as I told you, the most important thing after all this is: do you really like the promoters, the founders of the company? Do you somewhere think that these people are compatible?

Compatible is very hard to define. I know I did a deal, I said yes, because of the promoter, and there was another fund which said no to the same deal because of the promoter. That is why I said it is very personal. The same reasons may be why you like a person, and somebody else doesn't like the person.

Fourth, you see the valuation - only after all this valuation comes - and it has to be acceptable.

Of course things keep moving; I haven't figured a magic to see how these work perfectly all the time.

Market opportunity: is it for real?
Overall, you look at the business that you are evaluating: what opportunity does that business fall into? And the overall market opportunity: how large it is, how scaleable it is, is it sustainable, is it for real?

So if somebody comes and says: I have a great business idea where I can take 80% share of a 50 million dollar market, there are two problems. First, 50 million itself is too small, and secondly getting 80% of the share is unrealistic.

So that's the first evaluation: does this business fall within a large market opportunity, so that is scale can be built.

Business scaleable?
Second question: is this business itself scaleable?

You could say that outsourcing is a one trillion dollar opportunity. Great. So we try to understand, how can this business take advantage of that big opportunity? That has to do with the team; it has to do with the idea; it has to do with how they are executing and so forth.

Sustainable differentiating factors
Then you look at the differentiation factors or the sustainable advantage of this business. So yes, initially the BPO industry is hot and everybody will succeed. But over time, as the business starts becoming commoditized, as the competitive pressures come in, does the business remain strong?

All these are assessments; there are no 100% answers. Everything is something you are evaluating. So we talk to outside experts, we use our own judgment. For these reasons you will see that we focus on certain sectors because we come from those spaces.

So essentially we are trying to evaluate these three criteria: is there enough opportunity, can this business take advantage of that opportunity, and can it sustain that advantage over time.

The team: most important factor
All around this is the team. Is this team scaleable? Is this team competent? Do they have the right experience between them? Do they have the right chemistry? Do we feel comfortable with them?

If we like the first pitch, we try and go into the team first. We do reference checks, we compare notes. All five of us in Helion have to meet the team before we say yes or no.

We put a lot of effort into understanding the team, because we believe that is the key difference. Business plans, honestly, will keep changing. You will keep finding new things to do. You will keep finding things you assume will happen that do not happen. And the team that can navigate through that fairly crazy environment - that's what we are looking for.

Minimum $500 million market
Number one: is the market opportunity large enough? When we say large, we are looking at whether is there a current market of at least 500 million dollars or a billion dollars. So I think that is the first thing.

Team track record of success
The second thing that is extremely critical is: how good are the entrepreneur and the team? What is their understanding of the market opportunity, and what is their track record?

We look for various clues, because it is almost impossible to predict who will succeed or not. But typically our view is that success and achievement are not accidents. They are the outcome of a very methodical process followed in life, though of course there are outliers to this. You know: what have been they been their academic achievements, what have been their professional achievements, what do other people think of them?

Industry dynamics and the company strategy
Thirdly, we focus on the industry dynamics within that opportunity: what is the state of competition, how can these guys grow. It is little bit more about the strategy the company is following in order to be able to take advantage of that market opportunity.

So you said great market opportunity, great people…now, are they understanding their environment and how they will have to operate? And do they have a differentiator by virtue of which they can create a sustainable business?

So that is really the framework.

Potential for IPO exit
Then we obviously look at exit potential. But then, like I said, at least for us, we don't invest in the business if we don't feel it is large enough to go public on its own. So for us the exit is always an IPO, and if an acquisition happens along the way at the right price, then sure. Would we fund a business if we feel it is only an acquisition possibility and not an IPO? Never. At least not at Matrix.

India needs more early stage funds
My personal opinion is that we need more early stage funds even now. A situation could still exist a wherein an entrepreneur with a credible story is going around, and because he can only go to 3 different investors, he may not have enough exposure or choice to get funded. I think diversity in investing judgments is required to create a thriving market.

Yes, the venture industry in India is growing. So all the signs are positive at this stage. Who knows, at the end of the year instead of a dozen firms investing, we might have a 20 funds playing in that category. My view is that we definitely need more.