It was a dilemma of sorts for M.P. Ramachandran, a first-generation entrepreneur, who ran a small, though successful, fast-moving consumer goods (FMCG) company called Jyothy Laboratories in the southern state of Kerala, which he had set up in 1984. His company was doing well and he had the ability to scale it up and expand it geographically, but with little experience of business culture outside his region, he wasn’t too sure of his success.
During 1993-94, he did shift his manufacturing base to Puducherry, but that was in lure of some fiscal incentives announced by the government. Though he remained there largely confined to the Southern market till the mid-1990s, his flagship brand, Ujala, a fabric whitener, was being advertised across the country. That was because buying air-time on individual local TV channels was more expensive than buying bulk media time on the national TV network, Doordarshan. By 1997, his small business had acquired a size of Rs150 crore, yet in terms of operations, it remained largely local.
Today, Jyothy’s products, which include a washing powder, mosquito repellents, household insecticides, air care and ayurvedic personal care products, besides Ujala, are available at 2.5 million retail outlets across India, with Ujala enjoying a 71% market share in its product category. The company has more than Rs100 crore in cash reserves, its profit in 2005-06 was Rs70 crore and turnover, Rs400 crore. Jyothy’s team attributes this stupendous success to its partnerships with a series of private-equity (PE) and venture-capital (VC) investors it has had on board over the past eight years.
These include Baring Private Equity Partners (BPEP), CDC Capital (now Actis), CLSA, ICICI UK and ICICI Canada. Recalls Rahul Bhasin, managing partner, BPEP, “Ujala, because of its national advertising campaigns, had built a brand equity across the country. The management of the company was oblivious to this fact. So, we encouraged them to cash in on this opportunity by pushing their products nationally and the rest is history.”
To be sure, just one small insight transformed the fortunes of the company. Says Ullas Kamath, deputy managing director, Jyothy Labs: “They also guided us in choosing the right markets, pricing our products right and managing our growth the right way.” Jyothy is not the sole example of Indian enterprises benefiting from the astuteness of VC and PE firms.
According to Venture Intelligence, a leading information provider on PE and VC investments in India, in 2006, PE firms invested $7.4 billion (about Rs31,560 crore) in some 299 deals across sectors such as information technology, business process outsourcing, pharma and FMCG. The amount invested was three times the investments made during 2005. At a time when it is raining money in equity markets and banks are more than keen on financing creditable business ideas, Indian companies choosing to partner with PE and VC investors does underscore the fact that they bring in something more than mere capital. Says Rajeev Gupta, managing director, Carlyle India, “Private equity is not only about providing finance. It is about partnering with promoters and management to push business on an above average, solid-growth path. We provide a global and strategic perspective for faster and sustainable growth.”
Some promoters feel that the financial assistance provided by these investors is by no means a lesser boon. Says Raman Roy, founder of Quatrro and a serial entrepreneur who had also set up Spectramind which was later sold to Wipro, “Raising debt or equity is not an easy option for every aspiring entrepreneur. Banks ask for collaterals and, most of the time, all that start-ups have is an idea; raising capital from markets entails big expenses and avoidable problems, like exposing one’s business to quarterly public scrutiny.” According to Roy, the biggest virtue of PE and VC investors is that they believe in promoters’ dreams. These investors help a company realize its aspirations with a sense of positive ownership, which is missing in the case of portfolio or other investors.
A study by Venture Intelligence on the performance of PE-backed companies between 2000 and 2005, found that on average, companies with PE investors on board grew 23% over the period, whereas their peers with no PE backing grew only 10% and Nifty companies grew 16%. BPEP’s Bhasin says PE investors provide companies operational and tactical guidance, which is not available to those raising money from other sources. “PE investors introduce strict financial discipline in a company’s management. Our audit procedures are stringent. Our governance models are world-class. We identify new, and right, avenues for growth, be it organic or inorganic. To gain these insights and expertise, companies have to engage consultancies, whereas PE investors bring these along on board.”
It is not surprising then that 96% of the promoters surveyed by Venture Intelligence said that but for PE investors, their company would have either not existed or not grown at the desirable pace. One such entrepreneur, Sanjeev Bikhchandani, CEO, Infoedge India, says: “We only had an idea (on how) to launch our business. We could scale it to the present heights only thanks to the guidance provided by our investors.” Infoedge, which runs jobs, property and matrimonial portals, has been supported by VC funds such as ICICI Ventures, Kleiner Perkins Caufield & Byers and Sherpalo. Another entrepreneur, whose company is due for listing soon, told Mint that he could not have got his company listed were it not for the support of his PE partners.
According to Donald Peck, managing partner, Actis India, the three most important contributions made by PE investors are: finance; strategy and operations; and, profile and perspective. “Besides providing the much-needed financial assistance, we provide companies, specially the smaller ones, a credibility that they in their individual capacity might find hard to spawn.”
Credibility, for sure, is one virtue that could open new vistas for right partnerships and right growth. A good example here is that of Chennai-based online matrimonial company, Bharatmatrimony.com, which, after getting Canaan Partners on board, managed to rope in Yahoo as a partner. The duo invested $8.65 million in the company last year. Says J. Murugavel, founder and CEO of Bharatmatrimony.com, “We could have never imagined approaching Yahoo on our own. It was made possible because of our association with Canaan Partners.” Murugavel runs five other portals besides Bharatmatrimony. Says Alok Mittal, executive director, Canaan Partners, “Since most private equity and venture capital funds have a strong global network, they can easily identify right partnerships for the companies with which they work .”
Another positive contribution made by these investors is attracting talent. According to Peck, that again is a result of the credibility that their backing brings. Agrees Bhasin, “Family-run businesses lack a professional image and attitude and hence, talented professionals are quite sceptical about joining them. PE-VC investors not only attract talent, but also nurture it, thereby contributing to the long-term stability and growth of companies.”
In fact, more than 60% of the executives surveyed by Venture Intelligence said their number of employees had increased manifold after PE investments. Also, remunerations in mid-cap companies backed by PE investors grew three times that in mid-cap index companies.
A section of promoters, however, warns that PE-VC investors can also cause a number of grief. “Some ambitious managers tend to be dominant and intrusive and, thus, cause a lot of problems,” says a Chennai-based promoter, adding, “Choosing the right people is crucial to the success of such partnerships. Personality clashes, could cause more harm to companies, specially the smaller ones, than benefit.”