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The proverbial camel in the startup tent

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By Venkatachari Jagannathan

Chennai, March 6 (IANS) Are private equity/venture capital investors like the camel in the tent in startups ousting promoters from their company positions?

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The question pops up with BharatPe sacking its Co-founder and Managing Director Ashneer Grover’s wife Madhuri Jain Grover, for alleged financial irregularities with the former putting down his papers later.

Responding to the developments, industry officials told IANS that investors normally will not like to dirty their hands by chucking out the existing management and going for new a one when the going is fine.

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An investment banker, not wishing to be named, told IANS: “The actual fact is that a private equity or venture capital investor is an economic animal and is not here to promote entrepreneurial skills. Their template is simple as they have to return the money raised to their investors in 8-10 years. So, the timeframe will be 3-4 years of investment in a startup, 3-4 years for value accretion and the remaining period for strategising the exit route.”

Their main job is to find a company, invest in it and earn returns for their sponsors.

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But in certain situations, they do dirty their hands if things go beyond limits as in the case of the BharatPe episode.

“Some startup founders are good at early stages but not after the company grows to a certain size. At the time investors would suggest bringing in a professional to run the operations,” a senior official of a venture capital company told IANS on condition of anonymity.

The power equation between the startup founders and investors depends on the conditions.

“Prior to the investment, the venture capital firm has an upper hand and after that the founder gets an upper hand. Further, if the company performs well, the promoter has stronger say,” Sarath Naru, Managing Partner, Ventureast, one of the longstanding venture capital firms in India, told IANS.

Investors told IANS that a startup promoter may be forced to go astray on the pressure from the investors who push the former to take higher risks for higher returns.

In cases where the investors collectively own majority stakes, it is easy for them to join hands and bring in new management.

According to Naru, in cases where the startup founder owns a majority stake and has gone astray, the investors through their nominees on the company board can first sack the promoter from the job.

If the company is on the line for initial public offering (IPO), the investors can buy out the startup founder’s stakes, he added.

“We have the fiduciary responsibility. We have to provide returns to our funders like pension funds where individuals would have invested their lifetime savings. At the same time, venture capitalists should not be seen as condoning wrong doings,” Naru said.

A lot of investors also allow startup founders to be angel investors in other ventures.

The question is where such a founder’s focus would be — on his own company or his investee companies where his own money is at stake, an investment banker not wishing to be named told IANS.

(Venkatachari Jagannathan can be reached at v.jagananthan@ians.in)

–IANS

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