October 15, 2007

VC Interview: Bob Kondamoori of Sandalwood Partners

N. Sriram interviewed Bob Kondamoori, Founding Managing Director of Sandalwood Partners for the US-IVCA/Venture Intelligence quarterly report. Some extracts:

What differentiates Sandalwood Partners from other VCs?
We are focusing on early stage investments. Most of the VCs we see here are doing later stage investments where valuations are very rich and competition fierce. We are looking at investing in companies at product development stage so that we can help them tune the product to the world market. Secondly, we are also more product-centric than service-centric. We are not going after IT Services companies or BPOs.

Are you looking at India and China together as one block for investments?
We are really India-centric. But since we are product-centric company and one of our partners is in China, we look at China for support in manufacturing, until Indian manufacturing takes off.

What are the revenue requirements for a company to seek support from you?
Out first investment was based on just a PowerPoint presentation. We committed $10 million and in two years, the company had $40 million in revenues. If you look at the track record of our partners, we have invested in concept-stage companies and taken them through the growth curve till acquisition or IPO stage.

Are you open to investing in any sector?
We invest in areas where we can add value. So we are very specific about our sectors. Our partners and advisors should have deep domain knowledge of the sectors in which we are investing. Right now we are focusing on two sectors: technology and alternative energy.

You have chosen to invest in semiconductors segment, which doesn’t seem to be a hot among too many VCs. What drives you to invest there?
If you look at the track record of our partners, we have invested in more than 40 semiconductor design companies and returned more than $20 billion. So we are very comfortable in that space.

When you go into semiconductors, the key thing is you have to be very technology savvy. You cannot be only an investment banker to identify companies in that segment. Our backgrounds lend us the advantage of being comfortable in this niche market. And we know India’s strengths in this area. For example, the microchip that runs Apple iPod was made in India.

There is very little tolerance for flops in this segment. At the board meeting level, we go into excruciating details about the product. You should have been a designer to be an investor here. The company is looking for your inputs on selection of tools, design, etc.

You also seem to have got involved in policy making in semiconductors segment. Does that give you an advantage?
We are early market players and understand the market. It helps to understand the government’s views about the business segment, to work with the government and build relationships there. It also gives a certain advantage to our portfolio companies.

Have you made any investments in alternative energy yet?
We have not made any investments yet. But we are definitely evaluating companies in that space.

What is your outlook on the Indian VC market for the next 3-5 years?
The market is incredibly hot. The people are very entrepreneurial, very talented and sharp. I wouldn’t be surprised if in the next ten years, the next Google or Microsoft is born out of India.

How did you get into the VC business?
I was born in India, went to the US to study, stayed and then joined the workforce. From 1995 onwards, my luck changed. I acquired a sort of Midas touch. Every company I was associated with, did extremely well. The first company went public notching up $300 million in market cap.

Then I invested in two companies, each was acquired by Intel for cash. So one after the other, the luck continued to be good, people were taking notice. Since the VC world is a ‘by invitation only’ business, I got invited to join a fund which was a seed investor in Ramp Networks, a company promoted by me. After several interviews, I decided that it was something that I wanted to try out and hence joined them in 2000. I was a partner with Charter Venture Capital, a $ 400 million fund, for nearly five years. I was involved in more than 150 investments across four funds, and about 60 of them have been gone for IPOs.

Do you have any role model in business?
Not really. I am from the school of Hard Knocks. I had founded a handful of companies which were all successful. So entrepreneurship runs in the blood. But I wish I had a role model. It would have perhaps made my life much easier.

Having said that, I have tremendous respect for anyone who is an entrepreneur. I admire Narayana Murthy, a tremendous person.

What according to you is a perfect investment?
You don’t invest in business plans and companies. You invest in people and their ability to execute and deliver. Perfect investment is nothing but a perfect team, the right gene pool. At the early stage, we have a board meeting every 30 days. If the team commits itself to doing something in the meeting, they have to get it done. It is all about saying and doing it.

Typically, when we invest in a company, it is a company that does not need investment. The entrepreneurs involved have it all in them to build the company. All they are looking for is a catalyst and a little mentorship.

If someone comes to us only for money, we usually don’t invest. The team should have deep experience and knowledge. If a first time entrepreneur insists on being the CEO, we back out, unless we are convinced that he has the experience.

We are also keen that the entrepreneur acquire our expertise and our networks to grow the business because we are confident that he will not embarrass us. That is the true value that we bring in. The entrepreneur also sees the point that our dollar is equal to five of someone else’s dollar.

What are the key lessons you have learnt in the time you have spent in this business?
When I was in Charter Capital, I used to see about 5,000-7,000 business plans a year. I would filter them by 10X based on the sectors that we wanted to invest in. So after the first filtering, the number would stand at 500 or so. It would be reduced by another 10X based on the gene pool, the team, etc. That would bring the number to about 40 of which we will invest in about 8 companies.

What is the lesson that I learnt in that kind of universe? Entrepreneurs have incredible passion. The first reaction when they see a model that is working, be it a search engine or a chip design, is that ‘I can do it better’. They dissect an existing model in thousand ways and we get a hundred business plans on how they will be able to beat Google. They are also fantastic salesmen. It is easy to get carried away. But I have to remain pragmatic and very, very objective when it is very difficult not to get swayed.

If I invest in a concept that is unlikely to succeed, then the entrepreneur is going to chase a dream for five years of his life and he could completely fail. What we lose is some money, but he loses something vastly precious – years of his life. Saying ‘no’ to a passionate entrepreneur is very, very difficult but we have to do it, if we think it is in their own good. Not to get sold to passion is the biggest lesson I have learnt as a VC.

October 06, 2007

Why VCs DO NOT need to own 20%+ in your company

Fred Wilson has an obviously popular post arguing why it is it’s "rubbish" for VCs to put forth the usual argument that "in order to compensate a venture firm for all the time and energy they are going to put into a particular investment, they need to own at least 20% of the company and ideally 30%".
I have made vastly more money on companies where our firm owned 15% than on companies where our firm owned 20% or more.

To some extent the desire to own large chunks of companies is related to the size of the funds that many venture firms manage. A $120 million position in a recently IPO'd company might not be that interesting to a fund that is managing billions of dollars of investor's capital. But it sure is interesting to me.

One of the things we are doing in the venture capital business by raising ever larger fund sizes and amassing larger pools of capital under management is creating problems and then making them the entrepreneur's problem.

And so we tell the entrepreneur that we need 20% of his or her company to solve our problem. I don't think that's right. I've said this before and I am going to say it again. The scarce resource in the venture capital business is great entrepreneurs with cutting edge ideas willing to work 100 hour weeks turning the ideas into businesses. The scarce resource is not capital and yet we are optimizing our businesses to be able to manage ever larger sums of capital.

Arun Natarajan is the Founder & CEO of Venture Intelligence, the leading provider of information and networking services to the Private Equity and Venture Capital ecosystem in India. View sample issues of Venture Intelligence India newsletters and reports.