Gin and the art of banker maintenance

I caught up with an investment banker (who I know fairly well) to get his thoughts and perspectives on the relationships he has with various stakeholders - entrepreneurs, lawyers and of course, PE funds. As the evening progressed, it became more clear to me that this eco-system seems fragile and delicately balanced. While most PE funds are of the view that investment bankers hamper deal making efforts, bid up prices creating a swirl in this entire system. But a more realistic world view would give them credit for the subtle/subliminal influence they exercise over market and decision makers.

The are responsible more often than not for market creation (seeding and germinating the thought of raising further capital to grow and manage"commercial expectations" - it is a pity they do not get paid for it; Quite ironic really since management consultants get paid tons for the same type of "intangible" advice; Imagine if McKinsey told GE that they needed capital to grow and tap emerging markets - do you think they would give it for free ?); Bankers also help improve market intelligence, help compare notes/offers, provide easy reference checks for everyone in the system( promoters to do a ref check on funds and vice versa), notes on competing offers, honesty around expectations and suggestions on deal structuring.

However, I gather that there is a lot of bitterness that flows back and forth in this banker-PE relationship which I think is a sign of immaturity and inability on both sides (with PE taking a larger share of the blame) for their inability to carry the other constituent along - sort of like what happens in a democracy. A parochial, short-term urge would tell you things would be so much smoother and faster for you if the other party did not exist but an objective, long-term, libertarian view would suggest otherwise.



So, what is the morale ? Be nice to bankers and pray they would realize your value as well. You never know which phone call of theirs can uproot all of your hard work and when. All the stuff I had talked about a professional relationship holds, more than ever for a banker.

Of course, it remains to be seen what bankers as a tribe hold about their PE brethren. That is a story for another day by another soul ! That is best left unsaid by me.

~Varadha (varadha.r1@gmail.com)

Spoilsports of a professional relationship

Happy to note that there has been an improvement in reception to this blog and the ideas of yours truly. You may have noticed an E-mail feed on this page - you can subscribe to this feed should you wish to make life easier for yourself. Was also able to get quite a few ideas during the vccircle conference in Chennai.

Cutting to the chase, I guess anyone and everyone these days has had experience of people who do not pick up phone calls (nor return them) and are always blowing hot/blowing cold about key decisions. Had a recent experience last week that got me thinking on some of the things that kill the trust and respect in a relationship.

Btb, I do not mean to be hypo-critical - I know I may have done a few of this myself :(- . This is as much a lesson to me.


Communication: How many times have we come across people who do not pick up calls or return phone calls ? One phone call not returned might be a case of poor memory or a tight schedule but consistently skirting calls does not send the right message to the counter party. Is this a company/entrepreneur you want to work with at all ? If he/she behaves like this now, how would you deal with him post money exchanging hands ? A honourable exception to this breed seems to be i-bankers who have made this incommunicado posturing into an art !

Clarity of thought: I have personally met a lot of promoters who are happy to say that "a lot of investors/confidantes/advisors/bankers feel that my business model needs to be tweaked because it can unlock better value for me " (read that as higher valuation). I, for one is from an old school of thought and believe that an entrepreneur has to believe in himself more than everyone else and should eliminate all noise (investors are noise too !!) unless there is a fundamentally strong rationale underlying the change. If you do not believe in the idea, who else will ?

Lack of humility: My favourite put-offs are those who humiliate their sub-ordinates in front of everyone, treat office boys with contempt and their guests guests with indifference (how about throwing the visiting card on the table for you to pick up, dearie ?!) ,. Other pet peeves include people who ascribe all success to themselves, speaking ill of all of their competitors ("that guy is a crook and knows the minister", "he does not know how to run a viable business"). Subtle as these might seem, these are signs hard not to miss. An investor of course has to remember that these are guys who have to keep thousands of analysts happy at a later date.

Managing expectations: Right from the time of meeting to the order pipeline (that perpetually seems to be on the way!) to revenue to profit numbers, the smart guys are those who think long term. They tend to avoid evasive/overoptimistic replies that often damage their credibility in the long term. A deal takes 3-6 months to consummate, so why overstate numbers today if the truth will be out soon ?

I guess dealing with simpler, easy to understand people makes investors' (or an entrepreneur's ) lives easier than having to double guess the intent on the other side all the time. Doesn't it ?


~Varadha
(varadha.r1@gmail.com)
+91 9940670064

Due diligence in an Indian context - what to watch out for ?

Before I begin, I must say I have been quite happy with the response I have been getting on the blog from the handful of people who have been following it. There has been overwhelming criticism that I am painting a gloomy picture of PE in India and so, here goes some effort towards me cheering this up.


The Due diligence (did I hear someone say "Ouch ! that is so boring - we are already convinced about the business case. That is best left to a big 4 firm to submit a report") is one of the most overlooked aspects of deal making, especially in India where entanglements (into other businesses, either of the promoter or his close members/confidantes) are a big hurdle to deal with apart from the usual E's - Egos, Emotions and Expectations (Courtesy : Venkat of Veda Corporate Advisors, arguably one of the respected names in the mid-market deal making space in India)

For most of us, Due Diligence is a drab process where you are focussed on vetting the internal processes and financials of the company to see if they stand up to the image they have been projecting thus far. However, there are a few softer aspects that go beyond the ambit of what an external DD specialist is capable of (which have been learnt the hard way). So here goes :





Promoter:

• Commitment :Will his/her mind be fully into this business post the transaction ? If not, whose eyes are we going to be looking at ?
• Ambition :Is the promoter ambitious and willing to pull out all stops to make this a success ? This, to go by anecdotal evidence, it seems is the singular reason why some investments go the entire distance and most fall by the wayside.
  
• Professionalism :Are there any familial pulls/strings that one needs to be aware of ? For eg., feuding brothers, an acrimonious marriage with a wife who is also a business partner? Does he realize that he has to forgo a lot of his intertwining to scale this up ?
  
• Openness to ideas:A lot of promoters having been used to a dictatorial (and that is not necessarily bad in a small, growing company)
  
• Hunger for value creation: While one might think ambition should be intertwined with hunger for value creation, a small sect of promoters do not realize that there are other stakeholders - investors, employees, management who also have to reap the rewards of all the hard work that went in. There are a business groups which seem to live by the credo " Upside is all mine, downside is all the investor's".
  
• Focus & Predictability of behaviour: A lot of entrepreneurs who I have personally worked with seem to get distracted after a while (either because they are bored or get turned on by other business opportunities). In their quest for experimenting with the new, they get into risky moves - diversification, punting big, pursuit of self-glory etc.. For investors though, these are strict "no-nos"
  

Organization

• Competence:Is the rest of the organization upto scratch in terms of delivering the results envisaged for the company ? Or has the promoter surrounded himself with sycophants whose field of vision is limited to doing the best that their boss wants them to do.
• Financial checks and balances: How strong is the CFO ? Can he act as a check and balance on strategic issues - can he put the company ahead of the promoter should the situation arise ? Can he veto an unrelated diversification ? A large number of companies in India still have CFOs who are at best rubber stamps resulting in disastrous situations post the investment
• Vision and aspirations of the second line: Are the second line of management also seeing an upside in their own careers ? Or are they looking at this round of funding as one that facilitates a cushier lifestyle?
  

The above I guess is pretty much commonsense for someone who has been in this business for long. But, exactly how does one answer the above ? The simple answer is in "freeing one's mind' - Use your network to tap into market feedback from customers, vendors, peers, friends of promoter, ex-employees. I have personally found a lot of useful insights about the promoter by talking to customers, ex-employees and vendors (who are the only ones who have the benefit of "inside out" and "outside in' knowledge" - a rare but useful combination to asses a person/organization). They are the best ones to answer the following questions:

• Behaviour: How has this promoter been in the past ? Has past success changed him ? Is he committed to his employees ?
• Values:How strong are his value systems ? Does he live by scruples ? Is he keeping his customers happy ?
• Perceptiveness: Is he perceptive to market feedback ? Is he aware of changing market dynamics and actioning on them ahead of times ?
  
• Capability/competence :Do employees/vendors look upto him ? Do they think he is amongst the best there is in the industry ?

As always, happy to take any feedback. Do mail me or post your comment on the blog.

~Varadha
(varadha.r1@gmail.com)
+91-9940670064