Tuesday, November 25, 2014

Venture Capitalists: Value addition through synergies

As an investment banker, I have had the opportunity to get the insights of two institutions that were seeking venture funding from investors. Although one of the institution was delivering service while the other was manufacturing product, there seemed to be quite a similarity in terms of their approach towards business, the way they see the market and their organization structure. Both of them were run by enthusiasts rather than professionals. Both of them had invested heavily on infrastructure but seriously lacked organizational structure to run the business profitably.

So, when they came seeking for funds, it was really hard for me at first to understand how to value these firms. What do we present to the potential investors to make them interested?

It seems venture funding has a lot to do with creating a ecosystem and getting value addition from synergies between several businesses within the portfolio of the venture capitalists. The investors are rarely interested in the company solely for the value of the company in isolation. The ventures are more appealing if the investors find a good fit in their portfolio of other investee companies. For example, a venture capitalist having IT college in its portfolio will be more interested in a IT company than someone not having IT college in its portfolio.Investor with investment in spirit manufacturing will be interested in soda manufacturing business. The reasons for these is the synergies between the businesses (in hand and in the offering). Synergies come with creating an ecosystem for a whole product/service and leveraging this ecosystem for wider product/service range. In case of the spirit manufacturing, the same distribution channel could be used for distributing soda, thereby reducing cost while increasing speed of distribution for the new products. In case of IT college case, interest alignment among the college and the company lead to value addition.

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