Money Mantra

For any business, irrespective of its size and scale of operations, one thing
that is a must is money. Money in terms of 'capital investment' is required by
every organization/business to meet its various needs-be it short-term, mid-term
or long term.

Short-term needs usually include the daily expenses, while those relating to
mid and long term are aimed at scaling up business growth and increasing the
value of the company. According to an article in the entrepreneurship
magazine-DARE, while looking for capital investments companies choose to borrow
from banks and when making big investments they either go for pure equity, pure
debt or a mixed financing.

It also observed that most companies prefer to first rely on internal sources
like savings, family and friends and if that falls short of the requirement,
they go in for loans.

Equity is seen as the last option. The equity option for small and medium
business is in the form of angel funding or venture capitalists (VC), while for
large business, it raises money from financial markets, by launching an IPO.

Like all other entrepreneurs, solution providers have to meet their need for
capital by making a choice out of the funding options, which include debts,
venture capital funding and IPOs, each of which is available for profitable
growth for companies in the solution provider space of the IT industry.

VC funding

Given that the hardware industry is not a sweet spot for most venture
capitalists, the invest­ment from a good VC would require a reliable, focused,
professional entrepreneur who practices diligent management. A clarity on the
roadmap to success with milestones defined for achievement and details of data
with an acceptable business plan are a definite plus.

Alongside, the VC would look for a value proposition and exit plan for
liquidity of investment. This does not necessarily mean that the VC will exit.

The advantage VC funding will provide the solution provider is that it brings
quick recognition in the field. Normally a VC has a pool of investment, which
helps the entrepreneur get access to the VC's network for sales and technology
tie-ups.

Since VCs are matured investors, they have the pulse of the market and know
the trends to be able to provide liquidity to investments through IPOs, mergers
or acquisitions. VCs also help provide additional funding if the management is
performing as projected or shows more potential irrespective of the financial
conditions. This in turn helps provide international growth with capital and
provides options of tie-ups for accelerated entry in foreign markets.

But there are some risks in opting for VC funding. One of them is that the VC
takes large control of equity with invest­ments; sets high targets for
achievements; takes strong position and views for sales, valuations and mergers
and limits freedom. This can act as a restraining strategy for entre­preneurs
often giving rise to friction.

What a VC looks for

Ideally a VC would be interested in establishments that have succeeded in
managing debts or borrowings from the bank. It definitely helps in proving the
entrepreneur's ability to manage money as more often than not banks have
tight-lending norms, which have to be complied with.

Said Sanjay Mody, Chairman and Joint Director, Realtime Systems, who is also
an angel investor, “The success rate of a VC is significantly low as the
business plans presented by entrepreneurs are under near ideal conditions. The
most important part for him to consider funding is the strengths and depths of
the management, previous track record, academic qualifications and market
saviness of the company in the field of operations. As an individual, I do not
invest in unproven technologies and fresh start-ups except when the concepts are
very clear and lead-time to market is short.”

The clarity of the proposed business plan, time to market and a strong
management team are the fundamental require­ments for successful execution,
which are the key requirements for any VC's investments. They look at a
company's growth plan and scalability before they provide any kind of funding.
They would invest in companies, which have a clearly defined growth path and
show some kind of consistency in their profitability.

Alok Gupta MD, Samtech Infonet

According to Mody, com­panies seeking funds can approach VCs who seek to
invest in the IT sector. VCs have a wide mandate for investment and are open to
review a good business plan with a management that has a track record for decent
execution in the past. There are several VCs, who also fund fresh start-ups
where they bargain for a larger share, as the risk involved is significantly
high. Since the criteria of investment are specific to funds based on size and
field of interest, it is difficult to provide this list of VCs eager to fund in
IT sector in India.

Speaking about his own experience with Realtime, Mody said, “Realtime has a
long history of R&D and a rich library of IP and products which had to be
steered towards the new generation product require­ments. The previous CEO
failed due to poor management abilities and lack of vision. I don't know of any
other company in the industry that has the depth of technology as Realtime
Systems. This is the company's fourth year under the new ownership and
management and I see the exciting results with new marketing initiatives and a
diversified large product profile.”

However, all may not be lucky as far as VCs are concerned. Sharing his
experience of working with VCs, Alok Gupta, MD, Samtech Infonet said that given
the option of choosing between an IPO and a VC, his company chose to go the VC
way since it did not have the required cash to invest in an IPO.

“However, at a time when the economy was down, we opted to invest and opened
many offices across the globe. This according to me did not work in our favor.
In our case, the VC turned out to be a bane rather than a boon,” Gupta added.

Sanjay Mody Chairman and Joint Director, Realtime Systems and an angel investor

IPOs: How and why

The next option available for solution providers is initial public offering
(IPO). According to experts, IPOs in India are not suited for most people as the
compliance requirements are stringent. To be successful in raising funds via IPO
is a costly and time consuming affair and its needs an acceptable business plan
for the underwriter to take this on best effort basis.

IPO for small enterprises is time consuming, costly, difficult and also
uncertain due to changing capital market condi­tions loaded with several factors
such as sentiments, political situations and geo-political effects in current
global market environments.

Looking at the recent ups and downs of the stock market, it comes as no
surprise that many solution providers would think twice before considering an
IPO. It appears that not many players are too keen on an IPO because they are
not convinced about taking this route.

While the viability of an IPO would ultimately depend on the growth stage of
the organization, it is important that solution providers avoid financial
advisors and boutique investment bankers and instead chose to go along with a
category-one investment banker. It is only these bankers who can give the right
advice as regards undertaking the IPO process.

Bimal Raj, CEO, Allied Digital Services, a company that has brought out its
own IPO said, “Most solution providers have a revenue generation methodology
that is not in sync with the rest of the world. So they need to do a bit of
restructuring and establishing a different revenue generation methodology. This
would be possible with the help of a category-one investment banker, because
they would help in correct evaluation of the process.”

According to Raj, an IPO is definitely a viable option for most solution
providers who are on a growth path, and is a much easier process today than it
was a few years ago. Reiterating that coming out with an IPO is a time consuming
exercise, Raj believed that the success of the exercise would depend on the
synchronization of the various promoters, bankers and institutional buyers who
would together be able to determine the value of the share in the market. “At
the end of the day, it is required that organizations considering an IPO consult
the right person, and follow the required procedures so that the company gets
required funding for future growth,” he opined.

From the above said, it becomes clear that there is no point-based agenda for
companies seeking to go public. This implies that there is no rulebook to follow
because each company will have a different experience. This is why it is
necessary that every company takes a closer look at where it sees itself
heading, and how soon it wants to achieve its goals. Once it has determined
this, it needs to make a close scrutiny of its finances to see how much more
funds are required for achieving these goals. Only then it should consider an
IPO.

One possible apprehension that service providers would have as regards an IPO
is that their company would be in the public glare all the time and all
sensitive information, which was earlier in the purview only of the management,
will get open for any investor. However, experts believe this reason is not good
enough to wish away an IPO option.

There are several companies in the solution provider space today who are
considering coming out with an IPO. While most of these are the biggies in the
solution providing commu­nity, even the smaller ones are mulling over this
growth path to take their business to the next level.

Debt options

Debt options come in the form of bank loans and bonds. Most companies prefer
to take money from financial institutions and banks to start their business, and
are also open to bank loans. Most big businesses in the country have a debt
component in their balance sheets.

While the option of debt financing may not be available for companies who do
not have assets to offer as collaterals, larger companies find equity more
attractive than debt because it is much easier to get.

Like other debt, financing also has its share of advantages and
disadvantages. The benefits of debt financing include autonomy to run the
company, tax benefits and also inculcation a sense of discipline to ensure
income is generated to pay off the debt.

On the flip side, one must keep enough ready cash to enable regular repayment
of the debt. The rate of interest may vary depending on the source of finance
and the company's credit rating. Also most loans come with riders like
collaterals be it ownership papers or guarantors.

Like an article in DARE states, whether to go for pure debt pure equity or
mixed financing depends on capital requirement of the company, which can be
short-term, mid-term or long-term. In case an organization opts for debt
financing, then its retaining capacity and money raising capacity become very
crucial.

Additionally, what matters is the thought process of the organization's
promoters. If the promoter does not want to part with the ownership of the
company, debt is a better option. Only after studying the company's cash-flow
analysis (amount of money that come from and goes into the business) can a good
decision be taken on the relevant financing option.

An investor or lender would have his set criteria to be met before he invests
in any company. The money giver (a bank in this case) would want to reassure
itself that the borrower would repay the loan on time and without any hassles.
That is why most banks and financial institutions insist on collaterals.

In addition some banks may also want information about the borrower company
that is related to audit balance sheets, income tax returns, list of customers
and number of employees. For companies seeking a debt, banks would also want
details about the shareholders and full time directors.

Mentor as an advisor

At a panel discussion held at the DQ Channels SP Summit at Andaman, the CEOs
of various organizations came forward to give their view about the funding
options available for solution providers. Heading the discus­sion, Pradeep
Gupta, CMD, CyberMedia India stated that for most businesses today, the concern
is not just about taking funds for scaling up business but rather where to take
funds from.

“The confusion is whether one should consider VC or if IPOs a safer way out?”
he questioned. According to Gupta whenever a company thinks of opting for funds,
be it an IPO or private equity or any other, it would be advisable to have some
mentors with them from whose experience they can learn and decide whether to opt
for VC funding or IPO.

Additionally, he felt that one must be very clear of the exit path so that
one would have fewer problems to tackle. While thinking of this option, solution
providers must seek a mentor who not only understands the promoter's business
idea but also is willing to do the required handholding in the early days of the
venture.

No funding from outside

While there are so many funding options there are also ways in which
entrepreneurs can gain from others experiences and begin their start-ups without
either VC or angel funding. Strange as it seems, this is a possibility, if as a
first step the promoters get a realistic picture of what entrepreneurship means.

One of the many players who have opted for this route of self-funding is PC
Solutions. Speaking about the exercise, Devendra Taneja, CEO, PC Solutions, said
that his company had grown over the years through internal approvals and did not
opt for either VC funding or private equity. “We began as a services company and
from the beginning we focused on bottomlines. This focus and analysis helped us
to do the right kind of investment.”

PC Solutions has continued to invest some percentage of its revenue back into
the business and grown over the years. “This has helped us meet all our fund
requirements through internal approvals only, and we are happy that we are a
zero credit company today,” Taneja indicated.

If one looks at this option and against the backdrop of a shortage of seed
funding in India, it seems a very difficult yet possible option. Most solution
providers believe that at some stage of their business growth, they would be
required to borrow or opt for funds from outside.

Yet, because of the lack of enough number of experienced veterans in the
industry, a still immature ecosystem and a varying stock scene, funding is still
a challenging task for many solutions providers. The risks involved in the
various funding processes also seem to add to their skepticism. However, if one
has to grow big in business a calculated risk has to be taken.

In the end, a company seeking funding options must have in place a team that
is convinced that there is a need to consider seeking funding options, either
for sustenance or growth. Additionally a good rating reflects an organization's
credit worthiness and that would help determine its probability of meeting
financial obligations, be it debt servicing or equity allocation. All this would
go a long way in helping solution providers get their required funding without
much worry or hassle. The rest like they say is for them to see.

SUBBALAKSHMI BM

subbalakshmibm@cybermedia.co.in