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Crisis: An opportunity for companies

February 27, 2009 13:12 IST
Companies funded by venture capital firm Sequoia have a sense of pride. They know that they are in safe hands as the VC firm has groomed many technology majors such as Google and Apple.

Known for its strong technology focus, the VC firm has of late started funding companies in many non-tech areas. In an exclusive interview with Raghuvir Badrinath and Bibhu Ranjan Mishra, Sequoia India MD Mohit Bhatnagar discusses the company's strategy to help its portfolio companies tide over one of the worst financial slowdown that the world is seeing today.

Excerpts:

Is the downturn keeping you busy?

It's as busy as ever. In fact, we are now spending more time with our existing portfolio companies to make sure that extra efforts are put into them - especially in times like this when they need solidarity and a shoulder to lean on. So we are busy with our new and the existing companies.

Is the number of proposals coming down?

The pace is not frenzied as earlier, which gives us more time for better decision-making. Earlier, the companies used to get funding very fast. However, now the chances are such that the companies could still be looking for funds the next day even if we don't react to their mails.

Has better decision-making raised the bar for selection of portfolios?

We might be getting more proposals a day than earlier, but now we are probably thinking 10 times before we take up the proposals. We never want to feel compelled to do something. We have about 55 companies active at this point in time. The sheer workload of managing and helping our existing companies navigate is also a major task. For us, to add value post investment is more important than anything else in the venture side.

But recession has also some advantages?

I would say that at the broader level, the main message within our team and everybody else is that some of the best businesses have emerged from the downturn.

Cisco is a story that we often tell internally in the Sequoia family. Two weeks after one of the worst financial downturn in the US, the husband and wife team walked in with a business plan and now the company is Cisco. This is the best environment when you can get a solid team. This is the best time when you won't see crazy unnecessary competitions. This is a great time if you are a young company and you are building a product, and to take it to the next level.

Sequoia used to be famous for its focus on technology firms; but you are increasingly funding many non-tech sectors such as textile, garments, coffee?

We are basically attracted to high-growth companies. Of-course, technology had always been our preference. It's because those businesses have historically had non-linear scaling ability. But we don't try and stick to technology for the sake of technology without seeing a market for it. It's equally important to know what are Indians buying and what they are willing to spend money on over the next two years.

Companies, irrespective of various sectors, come to us as they are confident that Sequoia knows how to help scale a company. Scaling a company is about unravelling things - it's not about the technology IP that Sequoia brings to the table. It's about attracting the management, it's about being able to attract the next two-three rounds of investment that they need, it's about planning the exits. All these are applied to non-tech as well as tech companies at some or the other levels. We are an early investor in micro-finance space - historically an area a venture firm had never looked at.

How is the economic downturn hitting your portfolio companies?

Having funded about 55 companies in India, we have a very good mix of tech and non-tech companies in our portfolio. I would say some sectors like mico-finance (Sequoia has funded SKS Microfinance) are seeming well-isolated from the slowdown. Till now, the need of financial services in rural India and urban India is huge.

Despite a little bit of blip on the liquidity availability late last year, these companies are still finding a lot of customers. On the flip side, there are companies on the technology / internet side who are more dependant on the advertising revenue. There is a little bit of quiet growth for such companies.

How are you preparing your portfolio firms if the recession lasts for longer period?

No one knows how long this is going to last. If you are a cash-flow break-even company, it does not matter much. Whether you are a start-up or a large company, it's important right now to reduce the cash spend. Being able to have the security of having cash in the bank so that you can manage rainy days better, is an important thing.  

Are VCs calling the shots or the entrepreneurs?

All these years entrepreneurs were on the driving seat. They had a lot more role to play in a valuation discussion say six to nine months ago. A good company had lots of options available. Earlier, there was so much capital available to everybody. That has changed.

What lessons you have learnt in India?

Based on our experience in India, I think we cannot expect that explosive returns here - Suddenly a company will come out from nowhere and snatch you. We don't see those unnatural miraculous multi-billion dollar exits happening here in India. We need to stay focussed on cash flow from day one. I think that is a good learning experience.

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