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July 29, 2005

Board Behavior Tips for VC-backed Firms

Brad Feld points to an article by Dennis Jaffe (Saybrook Graduate School) and Pascal Levensohn (Levensohn Venture Partners) titled "After The Term Sheet: How Venture Boards Influence The Success Or Failure Of Technology Companies."

"Written in 2003, this is one of the best articles I've ever seen of the issues and dynamics surrounding the board of a venture backed company," Feld says. I agree.

An Extract:
The Board, and the roles and behavior of its members, evolve with the venture in three developmental stages:
• Start-up/Seed: An embryonic Board assembles as soon as capital is invested and VCs join the Board as preferred shareholders. Their first joint task is to recruit talented employees and define their roles. The optimal size of a start-up Board is between three and five people.This breaks down into one management representative and two venture investors, or two management representatives and three venture investors.
• Early Commercialization: A typical commercialization-stage venture Board has three VCs representing the largest investor in each series of preferred stock offerings (the A, B, and C rounds) and two insiders (the CEO and one other member of the management team, possibly the CTO or a co-founder). As a company grows, a successful Board adds new members with management and financial experience. As it enters the early commercialization phase, the company continues to demand active participation from the Board. Often the participation required is of a different and expanded scope than when the company was in pure research and development mode. Committees may form on an as-needed basis, including strategic review, merger and acquisition, and management integration.
• Productivity/Expansion: At this stage, typically three to five years after inception, the company has successfully launched its product and attracted customers. The VC Board Member is now looking ahead to exit options and helping the company become self-sustaining. While the CEO may be occupied with the company’s performance, the VC Board Members are motivated to look for exit options, such as a sale, an IPO, or a merger, and must also be looking for their own replacements on the Board. Independent directors who are likely to remain on the Board after an IPO often become more active at this time. Board Members skilled in structuring exits through mergers and acquisitions also may play an increasingly important role.

Arun Natarajan is the Editor of TSJ Media, which tracks venture capital activity in India and Indian-founded companies worldwide. View sample issues of TSJ Media's Venture Intelligence India newsletters and reports.

July 28, 2005

Why "reverse mergers" are often bad ideas

When their portfolio company is too small to launch a successful IPO, investors consider "reverse mergers" to obtain liquidity. (Reverse mergers or "reverse IPOs" - in which a publicly listed company with little or no business activity merges with a private company - are a pretty common occurance in the Indian market.)

Fred Wilson provides whole bunch of reasons why he dislikes such transactions:
# The people who control the public shells demand a "premium" for their business because they have the public company asset. The premium they demand often gives them a significant percentage of the merged business and it is rarely a fair deal for the privately held company.
# There is no way to determine the valuation at which the merged entity will trade at once the merger is completed. In a traditional public offering shares are sold at the IPO and that sale price is a good indication of where the stock will initially trade. Because there is no way to determine the value at which the merged company will trade, there is no way to determine what the value of the deal is to the privately held business.
# Because there is no stock sold as part of the deal, there is no marketing effort associated with the back door IPO. One of the best things about the IPO process is the road show in which the company has the opportunity to tell its story to a large number of institutional investors, thereby insuring some interest in the stock. In a back door IPO, you could, and often do, end up with a public company that nobody knows or cares about.
# If cash is an issue for the privately held company, the back door IPO often doesn't bring a lot of cash and once the company is public, its much harder to do a financing with private equity investors. The result is that a back door IPO may make it harder to raise money in the future, not easier.
# There is no guarantee of liquidity in the stock. There is no value in having a public company if there is no real market for the stock. The idea that because a company is public you can sell your stock is false, particularly if you have a large position in the public company.

Arun Natarajan is the Editor of TSJ Media, which tracks venture capital activity in India and Indian-founded companies worldwide. View sample issues of TSJ Media's Venture Intelligence India newsletters and reports.

July 24, 2005

Battery arms itself for India foray

US-based Battery Ventures, which recently led the $17 million third round investment in Bangalore-based communication technology firm Tejas Networks, is arming itself for making more direct investments in Indian companies.

The firm, which operates out of both the East Coast (Wellesley, MA) and West Coast (San Mateo, CA) of the US, has recently appointed Manik Arora as a Senior Associate to focus exclusively on identifying investment opportunities in India.

Manik Arora, Battery's Point Man for India

"Battery is actively looking at making investments of between $5 million and $30 million in Indian companies across all technology and technology-enabled services sectors," Arora said during an exclusive interview at Battery's San Mateo office last week.

Before joining Battery, Arora worked on BPO initiatives at American Express in New York. He has previously worked with General Atlantic Partners (GA) on India-US technology investments. Arora has had start-up experience as well: he was a co-founder of International, a GA-backed software start-up, where he was responsible for strategy and business development. Arora started his career at The Boston Consulting Group serving clients in India and South East Asia primarily in the financial services and e-commerce sectors. He holds a BA in Economics from Swarthmore College and an MBA from MIT’s Sloan School.

During the interview, Arora told me that Battery is especially keen on looking at investments in BPO firms focused on analytics and collections outsourcing, wireless technology companies providing value-added services, chip design firms and Internet companies. Yes, you read the last part right. Internet companies. (I think this is the first time in five years that I have heard an India-focused VC mention this sector as a focus area for the last 5 years or so.) Arora even has a special preference within the sector - e-finance. "Indian companies can leverage Battery's special expertise in areas like telecom, software, Internet, media and semiconductors," Arora said. "I'm going to be in India once every two months and am very keen to meet with entrepreneurial teams in our focus areas," he added. Arora can be reached by email at marora (at)

PS: In case Arora's infectious enthusiasm isn't good enough and you need more evidence of Battery's commitment to the Indian market, check out the article titled "India: The Next Hub of Global Venture Capital Investing" co-authored by General Partner Mark Sherman and Partner Carl Stjernfeldt in the latest issue of the firm's newsletter.

Arun Natarajan is the Editor of TSJ Media, which tracks venture capital activity in India and Indian-founded companies worldwide. View sample issues of TSJ Media's Venture Intelligence India newsletters and reports.

July 03, 2005

BlueRun Ventures pitches to early-stage cos. in India

I was at the Nokia Growth Partners and BlueRun Ventures (BRV) sponsored TiE event in Bangalore last week. Given the almost complete drying up of early-stage VC investments in Indian companies (ie, not including the cross-border companies) over the last 2-3 years, it was a refreshing change to see a VC firm actively pitching itself to Indian tech companies and calling itself - proudly and clearly - an EARLY-STAGE investor.

Here's wishing a warm welcome to BlueRun. May your moves catalyze other Silicon Valley firms who have so far dipped their toes in the Indian market via late-stage investments, move towards early-stage companies as well.

Extracts from a Business Line report on BlueRun's press meet:
"We are looking for one to two investments in India a year," said Mr John Gardner, founding partner of BRV, a venture fund that focuses on early stage companies in the IT, mobile, and consumer electronics markets.

...BRV, which started its India operations last year, has invested in Nevis Networks, a Pune-based start-up that focuses on developing new class of enterprise security solutions. BRV, formerly known as Nokia Venture Partners, has close to $1 billion under management. Mr Sujit Banerjee, head of BRV in India said the firm was pursuing a few more serious opportunities and was expecting to finalise one or two investments.

BRV has added two senior members to its India team. Mr Vasudev Bhandarkar, former CEO of Unimobile, has joined as Venture Partner, while Mr Vineet Buch, co-founder and CTO of systems management software provider Karient, has joined as Principal.

UPDATE: Not only is BlueRun Ventures keen to make early stage investments in India, it is also willing to commit $2 million or less as first round investments. The firm would even be ready to invest in chunks of $500,000 as long as it finds the right start-ups and management teams, BRV Venture Partner Vasudev Bhandarkar told me at a follow-up meeting in the Bay Area. Bhandarkar is very excited by the quality of the business plans that have already been submitted to the firm by start-ups in India.

This approach is again a refreshing change from the "we can't invest less than $5 million" that entrepreneurs in India get to hear so often from other VC firms.

Arun Natarajan is the Editor of TSJ Media, which tracks venture capital activity in India and Indian-founded companies worldwide. View sample issues of TSJ Media's Venture Intelligence India newsletters and reports.