BY: admin
Challenges During Private Equity Investment Exits Exiting an investment successfully is one of the most critical phases of the private equity (PE) lifecycle. While making an investment involves extensive due diligence and strategic planning, exiting requires even more careful consideration to maximize returns and satisfy stakeholders. Various challenges can arise during the exit process, potentially impacting the value and timing of the transaction. Here are five key challenges that private equity investors commonly face during exit planning: 1. Timing of Exit One of the most significant challenges in private equity exits is determining the right time to invest. Market conditions, economic cycles, and industry trends all play a crucial role in deciding when to exit an investment. Exiting during a downturn or an unfavourable market environment can result in lower valuations and reduced buyer interest, which may lead to lower returns for investors. On the other hand, waiting too long can lead to missed opportunities if market conditions deteriorate. The timing must align with not only the broader economic climate but also the portfolio company’s growth trajectory and readiness for a liquidity event. 2. Preparation of Founders A successful exit requires thorough preparation of the company’s leadership, particularly the founders and management team. Founders may not always have prior experience with exit processes, making it crucial for private equity firms to educate and align them with the exit strategy. Key areas such as financial reporting, operational efficiencies, and strategic planning must be addressed to ensure a smooth transition. If the founders are not adequately prepared, it can lead to miscommunication, unrealistic expectations, and ultimately, delays or failure in the exit process. 3. Valuation Mismatch Achieving the desired valuation is often a major hurdle in private equity exits. Investors may have high expectations based on the growth and profitability of the company, while potential buyers may perceive risks or have a different perspective on the business’s future potential. This valuation mismatch can lead to prolonged negotiations or even failed deals. Private equity firms must manage expectations carefully and use benchmarking, third-party valuations, and strategic positioning to bridge the gap between their expectations and market realities. 4. Due Diligence Failure Due diligence is a crucial part of any exit process, allowing potential buyers to thoroughly assess the financial, operational, and legal aspects of the business. However, failure to address issues during due diligence can derail the exit. Common pitfalls include inconsistencies in financial reporting, unresolved legal liabilities, and undisclosed operational risks. A lack of preparedness in these areas can lead to renegotiations, price reductions, or deal cancellations. Conducting pre-exit due diligence and addressing potential red flags in advance can significantly improve the chances of a smooth transaction. 5. Finding the Right Buyer Identifying the ideal buyer is a critical factor in ensuring a successful exit. Not all buyers have the same strategic vision, financial capability, or long-term interest in the business. Private equity firms need to evaluate potential buyers based on strategic fit, financial strength, and their ability to scale the business further. The right buyer not only ensures a fair valuation but also helps in maintaining the company’s legacy and sustaining long-term growth. Engaging investment bankers, leveraging industry networks, and running a competitive sale process can help in finding the most suitable buyer. Conclusion Navigating the complexities of an exit in private equity requires careful planning, strategic foresight, and a thorough understanding of market dynamics. A well-prepared exit strategy can help overcome challenges related to timing, valuation, and due diligence while ensuring that the company finds the right buyer. This is where the role of an experienced fund manager becomes crucial. A skilled fund manager can anticipate potential hurdles, align stakeholders, and create a structured exit roadmap that maximizes value for investors. Ultimately, a successful exit not only delivers financial returns but also solidifies the reputation of the private equity firm in the investment community.
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BY: admin
Don’t Fall, Stay Rooted Background & Context Building a business is a multi decadal journey. More so when the goal is to transform your startup into an institutional legacy. Focusing on long-term results can really suck sometimes and requires a lot of discipline, perseverance, pivoting and mental strength. It can feel like a grind for the founders, and it can leave one frustrated with the lack of immediate results. How do you build that unending stream of intrinsic motivation? With this simple formula: Values > Value > Valuation When your values – principles, beliefs, mindsets & behaviour drives you to create value for your customers & stakeholders which in turn soars your valuation. When you chase them from right to left, you are putting off anything that appears difficult, in order to do something that’s a lot simpler, and usually offers instant and noticeable results. In this day and age, when founders look for quick wins and play a short game they are bound to make mistakes compromising on values which lead to governance issues creating a deeper hole for themselves and their startup. Current State & Paradox Let’s put this straight, the global acclaim of Indian entrepreneurs is undeniable. A study conducted by Ilya Strebulev, Professor of Finance at Stanford Graduate School of Business, revealed that 90 of the 1,078 founders behind 500 US unicorns were from India, almost double the number of founders from the next two nations—Israel and Canada. Additionally, 35 of the Fortune 500 companies have Indian-origin CEOs. Besides, Indians are increasingly leading many influential family offices and sovereign wealth funds in GCC countries. These achievements are a testament to the traits often associated with Indians: leaders, innovators and hard workers with strong moral values, ethical conduct and a law-abiding nature. Yet, despite this track record, a stark contrast is evident in India’s start-up ecosystem. We have seen corporate governance lapses from Unicorns – BharatPe & Byju’s to e-commerce marketplaces – Zilingo and Trell to auto-workshop platform GoMechanic and health tech startup Mojocare. Here, we encounter many governance challenges that mar the startup ecosystem landscape. This raises a critical question: Why do Indian entrepreneurs face such challenges in their own country? This paradox shows an anomaly in our societal conduct, which prompts us to question whether the Indian start-up ecosystem might inadvertently nurture a culture that compromises governance. Hence, aligning our domestic success with our international reputation is critical to sustaining India’s entrepreneurial spirit. Embracing Change If Ashneer Grover had to exit today over glaring corporate-governance issues at BharatPe, his 9.5% stake, currently worth Rs 2,000 crore, would shrink to Rs 95,000. That is, if one considers the new “exit clauses” that are implemented in Shareholder Agreements (SHAs) by leading Venture Capital (VC) firms. This clause, part of the ‘Promoters Lock-in & Vesting’ section of the SHA ensures departing founders exit at ‘nominal value’ and not ‘market value’—sharply reducing potential payouts to them specifically when they are part of a ‘Bad Leaver situation’. Imagine a founder who owns 10% of a company with 100,000 shares, each valued nominally at Rs 10. That means, their stake is worth Rs 1 lakh (US$1,200) [10,000 shares * Rs 10]. But if the market values each share at Rs 500, their stake balloons to Rs 50 lakh. But if constrained to the nominal value, they would pocket only Rs 1 lakh when they are leaving on bad terms from the business. Who would be defined as a bad leaver from a VC perspective? Typically, founders who exit due to serious misconduct, criminal charges, breach of non-compete or shareholder agreements, voluntary resignation, or leaving before hitting key milestones like full vesting of their shares. Exit of founders on account of gross negligence and wilful misconduct also triggers bad leaver provisions. Negotiations—once fixated on valuations—now dance around affirmative rights, information rights, liquidation preferences, board-seat composition, and founder exit terms. There is a renewed focus by VCs to conduct reference checks at customer sites, employees and at vendor partners of the startup to ensure that there are no surprises in the future. Importance Startup governance is critica! A commitment to strong governance is not just a matter of compliance, it’s a strategic imperative for sustainable successful business in the dynamic world of startups. Yet we have seen that it is the most neglected aspect of a startup journey. Governance, often viewed as a non-financial aspect, has a direct and substantial impact on financial performance. Good governance is about being fair, having a long-term vision. This can be done by maximizing shareholder value, creating symmetry in information dissemination across stakeholder groups and by building a culture and value system. Transparency in operations, not only builds trust but also elevates brand value, not just for individual companies but for the entire industry and country. Today governance also goes beyond governance in the sense of how you run a company. It also involves environmental issues, sustainability and ESG is a big issue. A New Dawn No matter how many checks and balances are put in, there is nothing more important than Self-regulation. Doing Things Right when no is watching over your shoulder holds the key for startup founders. Now more than ever – India’s start-up ecosystem, Founders and VCs need to realign their focus towards creating sustainable and robust firms, capable of withstanding various market conditions. It’s encouraging to see a shift in the ecosystem, where profitability is starting to gain the recognition it deserves. Startups should create value by unlocking innovation, generate employment, satisfy customers and impact society positively. This is the only path for Viksit Bharat and it starts with the founder first! #governance #startup #venturecapital #values #principles
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BY: admin
The wildly popular Instagram, when a16z invested $250,000 in the photo-sharing app in 2010, it was a relatively unknown startup. However, with the right timing and market conditions, Instagram quickly gained traction and was acquired by Facebook for $1 billion just two years later. This investment turned out to be a massive success for the investors, but it also involved an element of luck, as this rapid rise of Instagram was not foreseen. Similarly, the story of Slack, an internal tool for a gaming company pivoting to become one of the fastest-growing software tools. Or Reddit which started with the idea of building a mobile delivery app but ended up as a social network, all the way to an IPO…there are innumerable examples of such outliers which were not foreseen. Behind all the bravado and visionary talk, even the founders can’t know how big the bet could be. Uber is one of the most valuable startups in the world at about $69 billion. Its first pitch deck says that its realistic success scenario is that it gets 5% traffic of the 5 top US cities. It is currently in 72 countries and 10,500 cities worldwide. All this points to the fact that there’s definitely a fair bit of unpredictability involved. But to what degree? Is this completely a game of chance? Is it totally random? Is it Russian roulette at worst and a game of probability at best? Talking of probability theory, it reminds me of Infinite Monkey theorem, a concept that suggests that given an infinite amount of time, a monkey hitting keys at random on a typewriter keyboard will almost surely type a given text, such as the complete works of William Shakespeare. When applied to startup investment, it’s like saying if you have an infinite number of startups and an infinite number of investors, eventually one of those startups will achieve the success of a company like Google or Facebook. That is a sobering thought given how accurately the power law plays out in our part of the world. We do know the way Venture Capital works – Get a number of VCs to invest in a lot of start-ups, Few of them will eventually turn out to be big winners. Does it sound pretty much like the Monkey typing their keys to being a Shakespeare? Are we just a little more evolved species of the same monkeys as far as selecting & investing in startups is concerned? Clearly in the startup realm, success is so unpredictable that even the most seasoned investors struggle to foresee outcomes. Identifying winners upfront is uncertain. Bessemer’s anti-portfolio, where they passed on major successes, illustrates this. Even investors like Sanjeev Bikhchandani, despite notable wins in Zomato & Policy Bazar, have missed opportunities with companies like Flipkart, Snapdeal, Ola, and Big Basket. Despite this randomness, there is a breed of VCs who consistently outperform the others by a big order of magnitude. They understand that while wild success is attributed to variance, wild success itself is built on mild success. And mild success can only be explained by skill & labour. What a good VC must do is to at least ensure the investee bet is a strong one and they must be prepared to work hard for that. They use a combination of thorough research, strategic decision-making, data-driven investment practices, due diligence, diversification..pretty much everything to build a smart portfolio. Prepared Mind approach by Accel, Keiretsu approach by Kleiner Perkins, Hands on by Benchmark, Active Roadmapping by Bessemer, Aircraft Carrier by Sequoia, Early-stage bets by YC…all points to the fact that it may very well be a game of chance but equally important is the fact that chance only favors the prepared mind. Hard work will put you in places where good luck can find you. As they say, anyone can be a fisherman in May. But in the long run, seizing opportunities requires preparation, foresight, and the ability to adapt to evolving situations. It encourages us to remain vigilant for right opportunities & moments of alignment, to capitalize on them with intention and preparedness, and to recognise that success often lies at the intersection of readiness and opportunity. And that to me is wherein lies the difference between an exceptional VC and an average one, between being a Shakespeare and a monkey. To paraphrase Stephen Hawking – “We are just an advanced breed of monkeys on a minor planet of a very average star. But we can understand the (Startup) Universe. That makes us something very special.”
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BY: admin
While the frost of the funding winter hasn’t completely disappeared yet, the Indian defence startup ecosystem is experiencing unprecedented growth. Attributed to the government’s pro-policy reforms and increased demand for defence technologies, a large number of startups entering the unicorn club are making strides in the Indian defence sector. The latest EY report reveals that the sector witnessed over $1.5 billion in private equity and venture capital investments in the past three years. Hence, India’s deep tech innovation in defence continues to hold a crucial power. It perfectly aligns with the aspirations of ‘Atmanirbhar Bharat’ where emerging startups can be incentivized to build progressive solutions for battlefield challenges. Automated logistics drones, AI-powered projection and warfare planning, autonomous drones and other next-gen technologies make startups a strategic priority from an investment point of view along with portraying India’s capacity-building initiatives in the defence sector. Startups outshining traditional capabilities Recognised as the home to the world’s third-largest armed forces, India boasts a substantial defence budget of around USD 34.35 billion. The notable contributions from startups in the field of AI and robotics further aggravate their impact on enhancing the capabilities of the Indian armed forces. Startups exhibiting risk-taking capabilities and growing prowess in defence technology bring agility in air and water surveillance, particularly with the development of Aerial Systems, Counter Drone Systems, Robotics and Space. Subsequently, Robotics and Unmanned vehicles are seen as disruptive forces to alter the course of defence strategies. As per media reports, investments particularly in defence startups were estimated nearly $50 Mn in 2023, double from 2022. Leveraging the potential of Machine Learning, Artificial Intelligence and Deep Learning, these startups are unlike established and large enterprise firms, can accommodate the dynamic demands of the industry. Government Initiatives Fueling Growth Demonstrating an upward growth trajectory, the government of India in 2018 launched the Innovations For Defence Excellence (iDEX). The initiative strives to build an ecosystem that further nurtures innovation and technology advancements in the sector. Having received over 2000 proposals, iDEX provided significant financial assistance to around 300 startups and small-medium companies to scale their operations, invest in R&D capabilities and strengthen the competencies of India’s defence sector. Apart from this, Defence Minister Rajnath Singh’s newly unveiled initiative to finance the R&D efforts of startups cohesively with the government offering funding of Rs. 25 Cr. to meet the demands of armed forces on the battlefield. In a series of government initiatives, another scheme Acing Development of Innovative Technologies with iDEX (ADITI) addresses various security challenges beyond land, air and underwater threats, identifying cyber thefts. This, in turn, facilitates a collaborative spirit between startups, government agencies and investors creating a synergy crucial for realizing India’s Self-Reliance vision. Apart from this, the government has entered into strategic alliances with leading nations like the USA and Israel. By leveraging domestic capabilities, India is strategically positioned at the global stage with enhanced Indo-US Defence Cooperation and Indo-Israel Defence Strategy. Further, the ban on foreign drones and freeing up import of drone components is allowing India to accelerate its Make in India efforts as other international regions – Southeast Asia, the Middle East and Africa are also turning to India for its tech-backed defence solutions. Surge in Strategic Angel Investments As the country solidifies its global positioning, angel investment becomes pivotal in cultivating a growth culture for early-stage startups. Apart from bolstering domestic capabilities, it is significantly influencing the economic landscape on a global level. In 2024, angel investors have increasingly shown their interest in niche technologies and are directing their funds to areas of revolutionary applications, enabling start-ups to entirely focus on creating breakthroughs with radical innovations. A substantial rise in syndicate investments is also capturing the angel investing landscape where a group of investors pool funds to spread risk and provide startups with initial-stage funding to accelerate R&D efforts and scale their operations. Furthermore, many defence focused incubators are actively supporting both private and government funding. In a notable deal, Finvolve – a leading Micro VC & deep B2B foundation recently invested $750k in Zulu Defence that provides advanced air defence aerial systems for rapid deployment, resilient ISR, precision strikes, and countermeasure capabilities in contested environments. The strategic influx of angel investment proves to be instrumental for India’s Self-Reliance capabilities. The investments are anticipated to reduce the country’s dependency on other nations by owning and inducing advanced technologies. The virtuous cycle of innovation and investment is projected to stimulate India’s positioning as a global leader in defence technology.
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