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November 30, 1999


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Adventures of Mr Money Bag: APIDC-VC's Sarath Naru on how India's pioneering VC is now making it good.Adventures of Mr Money Bag: APIDC-VC's Sarath Naru on how India's pioneering VC is now making it good.

When government and entrepreneurial initiative appear in the same line, they never fail to raise eyebrows.

Email this story to a friend. Yet, what is interesting about the Andhra Pradesh Industrial Development Corporation's venture capital project is that it was started in 1990!

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That was a time when few businesses had even heard of the concept of venture capital.

Those were the days of liberalisation in government and among the good things that happened then was the setting up of Andhra Pradesh Industrial Development Corporation-Venture Capital.

Perhaps APIDC-VC was much ahead of its times. That is why it has had a turbulent life until just two years ago when it actually burst into a lot of activity.

The fund had not taken off as expected and was eventually forced into privatisation in 1994.

Today Dynam Venture East holds 51 per cent share of APIDC-VC.

Sarath Naru is the managing director of APIDC-Venture Capital Limited. He was one of the key speakers at the VC for IT '99 seminar that was recently held in Bombay.

In an interview, Naru told Kanchana Suggu, how the pioneering institution has finally found itself. Excerpts:

When and how did Andhra Pradesh Industrial Development Corporation-Venture Capital come into existence?

The APIDC-VC came into existence in 1990; 1989 to be precise. That was when the trust was registered. The fund was set up as a 100 per cent subsidiary of the Andhra Pradesh Industrial Development Corporation and had a very illustrious board.

M Narasimham, who has been a Reserve Bank governor, was the chairman of the board.

The fund was privatised in '94. Why?

The World Bank had a condition built into their investment proposal that they would not release the money right away. They would first look at five proposals one after the other and based on the quality of the analysis they would release the money.

APIDC made 10 proposals then and none of them were accepted.

The APIDC was in a quandary. It was worried about how it could raise money. So it was in '94 that the Andhra Pradesh government decided that it should privatise the management of the fund.

It wanted to have a more professional management. It sought the approval of investors who agreed to the proposal.

ICICI and A Ferguson were appointed consultants. There were advertisements in local and vernacular papers, inviting people for bids. The bids were based on credentials of bidders and the experience they had in the industry.

Five candidates were then shortlist and each was asked to make a presentation for half a day. It was after this procedure that Dynam was selected.

The Andhra Pradesh government holds 49 per cent of the share in APIDC-VC and the remaining 51 per cent is held by Dynam.

How active has the APIDC-VC been?

Although its inception was in '94, it took two years for the fund to actually get started. So I can say that we have been active only in the last two years. We have made at least 15 investments in these 2 years.

Which has been your most memorable venture till date?

Actually I'm going to give you a very stark answer: All our ventures have been memorable.

I say this because each one brings a different challenge with it. It's a very exciting feeling. I have been an entrepreneur, I'm still an entrepreneur and I have been able to carry that off in a surrogate manner with all these companies. That's what I enjoy. Each has a special reason as to why we picked it.

At the end of the day I know that each one of them will emerge a winner.

What has been your largest investment?

We typically do not invest beyond a crore and a half per round of investment. (One crore equals 10 million). Our largest investment right now is around (rupees) 1-2 crores: One is in the pharmaceutical sector. The other company is an import services management company and the third is a dairy products company.

Tell us about your other ventures?

Right now we have two IT investments. We are very selective about what the competitive advantage of a company should be. We do not want to get into an IT company that is service oriented or an IT company that does not have a strong exposure to the overseas market. That is the reason we have not considered several proposals.

Currently we have our investments in two companies. One is in chip design. They are into very specific applications. They have a set-up in India as well as in the Silicon Valley.

Another company that we have invested in is an Internet business solutions company. This again is a services company but with a difference. The difference being that this company consists of some of the best expertise in the business intelligence area that is, data mining, data warehousing, which is a very special aspect related to the Internet and the e-commerce. Again, this company is based in the US as well as India.

Do you follow any particular pattern of funding? What are your focus areas?

We do not have any priorities as such. But what we do consider is whether or not the business has the ability to build a long-term sustainable market. For us that is the ultimate criterion.

How long and how closely do you monitor the company that you have invested in?

We are involved with the company all in all. We are there all the way till we exit. Our promoters are constantly in touch with us every week. When I say that they are in touch with us, it's not that we are thrusting our unwanted attention on them, but the reason they choose to keep in touch with us is the fact that they trust us.

What are the specialised services that APIDC-VC offers?

Being entrepreneurs ourselves, a part of the advantage that we have is that we are able to empathise with the possible situation the company might get into at the start-up stage.

We are able to react to them and give them the support they need. That's one of the things different about us.

Lot of funds talk about being an incubator. Now this incubator thing is not just about throwing in money. You also have to be able to relate to the issues that the entrepreneurs would possibly be having.

And again, I'll go back to the same thing that only if you have been an entrepreneur yourself, will you be able to understand their problems better.

What are the typical problems that a start-up faces?

Typically we found that they fall into a well of issues that can be broadly classified into three different areas: One is the cash-flow issue. At their start-up stage, we have seen that most companies are fire fighting to make some cheque not bounce and things like that. Now this is one area where we have been able to help them.

Not only have we helped them plan, but we have also been able to come up with the cash when they require it. We give them loans, short-term funding... They do not have to go through many boards and layers. And that is something they really appreciate.

The second area where they have a lot of issues is marketing. It is one atrocious area for these people. They do not realise until late that it is an issue. I come from Procter and Gamble that deals with the consumer goods and we took a lot of marketing challenges there. So my experience has proved to be very useful for our clients.

The third is a broader area involving strategy and people. It's difficult for a small company to attract good people. So this is one sector where the VC plays a very critical role in attracting good people because of their institutional standing.

Thus we are not only able to help every company that we can but at the same time we also give them value addition.

I think many VC companies possess just one of these qualities. None of them have been able to combine both as strongly as Dynam has been able to do.

I guess that's what makes us a little different from the rest. That's one of the reasons we have been able to attract good promoters as opposed to other bigger and better VCs.

How different are you from lending institutions like SIDBI, IDBI, ICICI, IFCI?

The difference between them and us is that there is a big brother here who has the World Bank money and also their own money. We do not deal with the investments per se. However at the end of the day, we do get a share in the profits. We get 49 per cent of the profits.

Another difference is that the management is being done not by the APIDC but us. We are the ones who are involved in the value-addition, the hand-holding, everything.

So this is one unique area where we have access to the government when we require it and again we do not have to ask the government for every small thing.

Thus we can take the strengths of the government and combine it with our strengths. That is the beauty of it.

What have your experiences with your clientele been like?

We've had some very interesting experiences with our clientele. We spend a lot of time with them discussing every detail and trying to minimise as many risks as possible.

Of course we too have made our mistakes. Another thing is that our clients have been very good. They seek our advice regularly and call us with the bouts of problems that they are having. I must say that it has been a very symbiotic relationship.

The fund has seen two governments: the Congress during its inception and later on, the Telugu Desam Party. Has the change of government affected the functioning of the fund? Do you face any political pressures?

It's very interesting that it has not affected the fund at all. In fact we've had two members from the government on the board. The board sure has been very supportive. We have so many people who walk in thinking that it is a government organisation and are surprised when they see that it is run by a team of such professionals.

I've had calls from cabinet ministers saying: 'Mr Sarath Naru, I am sending so and so person to you, please take a close look.' And I say: 'Yes Sir, I shall take a close look at his case and now that you have mentioned it to me, I shall take a closer look.'

But that's about it. We have had no political pressures as such.

We hold 51 per cent stake in the government so we are a majority and we have no government employees at all.

Which other state governments have started their own venture capital funds? Is the Andhra Pradesh government a role model for them? Have they consulted you?

Karnataka, Tamil Nadu and even Punjab, I believe, have their own VCs right now. But none are adopting our model. And yes, they have sought our advice. Kerala has come to us. Karnataka and Punjab have also talked to us.

Do you plan complete privatisation in future?

That could happen.

How would you rate you rate your performance?

We have done very well actually. We have our portfolio valued by Price Waterhouse Cooper. Our last valuation was done in March'99 and our annualised rate of return from all our portfolios was over 30 per cent, which really is a very good number.

Two thirds of the companies that we have invested in have proceeded on track or are getting in line and that again is a very good figure.

So what are you working on currently?

The news today is that UTI is launching a 65 million dollar fund and we already have soft commitments for part of the fund. Myself and my IT experts, who are based in California, are a part of this.

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