New Economy: Playing God

The open season on dot.coms has transformed venture capitalists from passive investors who're willing to bankroll start-ups to active stakeholders who insist on having their say in everything-from the company's new logo to its choice of an alliance partner. Meet the new veecees: they're called dot.com(patrollers).

Two in the p.m. of an early summer day in Delhi, found this writer in the passenger seat of a brand new Honda City crawling through the characteristically heavy traffic in the capital's Connaught Place area. At the wheel was an old acquaintance who had set up his own (what else) dot.com. ''My veecee is cool,'' he gloated, swerving to avoid a wannabe kamikaze. ''I give him a status report once a month.'' Once there were angels.

HEAVEN'S ANGELS

Willingness to invest: if you've got the idea, we've got the money
Participation in management: you run things, we won't bother you
Manpower selection: you know what you want; just go out and hire
Promotional expenditure: do what it takes to create a splash
Individual wheels: go on, get yourself a new Ikon; we don't mind
Alliances and partnerships: it's your call, strike them on your own
Office space: of course you need a good-looking office, you're a dot.com
Business models: as long as you get enough eyeballs, it's all right
Revenue streams: of course it's too early to talk revenues and profits

Now, there are only new-age Shylocks-clinically cold investors who are obsessed with hitherto unheard of terms in the dot.com firmament. Terms like revenue-streams, p2p (path to profitability), and business models. Why, their pound of flesh sometimes even takes the form of changing the management team of dot.coms; or getting two such with similar business strategies to merge. Goodbye angel. Hello God!

Thus, in mid-July, venture capital firm Chrysalis Capital catalysed the merger of Productorium.com, a consumer interest and comparison shopping site in which it had invested Rs 7.5 crore with another similarly focused dot.com, Planetcustomer.com. Just a month earlier, two other veecees Edelweiss Capital and Citibank Private Equity had been the moving spirits behind the merger of Icleo.com, a women's portal funded by them, with Smartbahu.com, another for-women dot.com. Says Shujaat Khan, Director, Chrysalis, who spotted the merger-opportunity during a presentation by Productorium.com CEO, Raj Nair, which listed Planetcustomer.com as a potential partner: ''Bringing the two together was the natural thing to do.'' Adds Raj Kondur, 29, Director, Chrysalis: ''We helped structure and negotiate the merger.'' Veecees do take their role as merger-maker seriously. Avers Latika Ahuja, 36, Regional Head, Citibank Private Equity: ''We are in a good position because of (our) access to market information to figure out if there is a fit between one of the companies in our portfolio and any other-whether there is a possibility of a merger or an alliance.'' And they have the locus standi to do so. They possess the networking skills to find partners; the strategic skills to identify a dot.com's partnership needs; and the funding leverage to exert influence over it.

Control is the zeitgeist (most veecees prefer 'partnering' to control). And the attitudes of Khan and Ahuja are representative of a larger change in the way veecees view their investments. If a business plan needs to be modified, the veecee will change it. If the venture needs a marketing head, the venture capitalist will identify possible candidates. If the founder-CEO isn't exactly leader-material, the veecee is bound to tell her to make way for a professional. And if things aren't going well, better believe it, the veecee will facilitate a merger or acquisition. Says Neeraj Bhargava, 33, Managing Partner, eVentures India: ''The message is simple-people want to see hope converted to reality soon.'' Adds Dhruv Sharma, 40, CEO, 123india.com: ''Veecees (today) are much more demanding. Entrepreneurs must be prepared to have the venture capitalist telling them what to do.'' And, for good measure, what not to.

Things weren't always this way. Just a few months ago, most veecees were content to bless the venture monetarily and step back and watch from a respectful distance as the entrepreneur either made it or made a mess of it. There were whispers of how the strategy of India's best-known dot.com wasn't really its own, but drafted by a transnational venture capital firm that had a small but significant stake in it. And there was the ubiquitous undertow of paranoia: veecees were waiting for promoters to burn the first round of funding they received; then, they would then step in, take charge, perhaps, bring in their own people. Still, the newspapers then were replete with happy endings (or beginnings).

HELL'S ANGELS

Willingness to invest: so, you've got an idea; pitch it to us strong
Participation in management: you run things, we'll just keep an eye you
Manpower selection: we know just what you want; call these people
Promotional expenditure: we don't think you should spend money you don't have
Individual wheels: what's wrong with your Maruti 800, any way?
Alliances and partnerships: we insist you merge with this dot.com we know
Office space: we thought you were going to operate in virtual space
Business models: we just want to know one thing; what's your P2P?
Revenue streams: it's been two whole months; time to start talking revenues

Memories of Satyam Infoway's $115-million buyout of Indiaworld was still fresh in people's minds. Everyone-ageing FMCG marketers, techies just out of college, MBAs from the best campuses, and a rash of professionals returning post-haste from the US to benefit from India's dot.com boom-wanted to be another Rajesh Jain. And the best hotels in Mumbai, Delhi, and Bangalore were chock-a-block with veecees, living out of suitcases, and doling out largesse . It wasn't charity: they could see dollars at the end of the rainbow (or so they thought). Even the language was different then: hits, page-views, and eyeballs were the buzzwords. It was hosannas all around.

Things were too good to last. In April, 2000, the NASDAQ faltered, then fell. Several first world dot.coms-notably boo.com and reel.com-went belly up. Suddenly, veecees turned coy. Not that they didn't have money. According to Fortune magazine they raised $12.4 billion in the first quarter of 2000-01 from investors anxious for a slice of the new-e-pie. But circumspection governed every move. They were still willing to invest in good ventures . The rest ended up with advice on how they could better their pitch. Clearly, the reek of dying dot.coms has awakened veecees: they were no longer (ad)venture capitalists; they were accountant-investors. Agrees James Abraham, 34, Director, The Boston Consulting Group: ''The NASDAQ tumble intensified the feeling among veecees that they needed to be involved in the resolution of some of the fundamental strategic issues facing the companies in their portfolio.'' Exit the cheque book; enter the spread-sheet.

That this desire to crunch some numbers has come at a bad time for dot.coms is irrelevant. They have nobody to blame but themselves and their business models, which, as Arun Pai, 34, a partner in an angel investing firm Passionfund.com, points out, ''are predicated on getting more money from investors, not the business itself''. An entrepreneur would raise enough money to keep the office fires burning for between six and eight months and use the time to build the company and the brand. This, everyone thought, would up valuations before the second round of funding. All good, clean, logic. Only, the companies that raised a million (dollars) or two between November, 1999, and March, 2000-the Indian dot.com's glorious summer-will try and raise the second round of funding, starting early August, 2000, from veecees who seem to have suddenly turned hard. Says Ranu Vohra, 28, CEO, Coolstartups.com, a venture catalyst (it helps dot.coms attract capital): ''Companies approaching a venture capitalist better be prepared with a revenue model.'' A grilling is inevitable.

Costs, expectedly, are the first target of veecees. It may be late, but the realisation that dot.coms spend too much on wages, perquisites, and promotions has finally dawned. Says Neeraj Roy, 35, CEO, Hungama.com, a promotions site, (it hasn't promoted itself yet; nor approached veecees): ''The same venture capitalist who'd once pat a promoter on his back for spending Rs 5 crore on advertising is now extremely uncomfortable if more than Rs 5 lakh is spent on it.'' The growing list of things veecees are now allergic to includes content-only free-play sites, advertising-only revenue streams, and anything to do with eyeballs. Revenue models, especially, multi-channel ones spanning both the virtual and the real worlds, are in. Agrees Vishal Gondal, 23, CEO, Indiagames.com: ''All dot.coms need to have alternate or parallel revenue models that are strong in the real world.''

Gondal should know. To bolster the revenue streams of Indiagames, an India-specific games portal, venture capital firm Infinity Ventures recommended that the dot.com forge an alliance with FunnGame.com, a China-specific games site. The benefits? FunnGame pays Indiagames for developing (exclusive) games for its use, and for the use of the latter's games on its site.

Infinity's intervention took the form of adding to a business-model. Other veecees haven't hesitated to change them radically. And revenues are increasingly occupying centrestage. Recalls Alok Kejriwal, 30, CEO, contest2win, which introduced a revenue model in April, 2000: ''Our venture capitalist (eVentures) suggested we charge for our services as we were providing a value to any brand". Still, Kejriwal held off till he reached a critical mass of 1.5 lakh consumers in December to ensure that the company would make money even if 10 per cent of them participated in every contest. There's a lesson there for dot.com chief executives: altering course midway at the insistence of the veecee doesn't mean not having a mind of their own.

Even intermediaries realise the need for robust revenue models. In early June, 2000, a group of young techies met Ranu Vohra, CEO, Coolstartups.com with a proposal. The idea was interesting and Vohra knew he could have had his pick of veecees before things turned sour. So, he suggested that the founders WAP-enable their sites (rendering it in a format that can be accessed by mobile phones), and also offer e-biz solutions to other companies. In mid-August Vora hopes to be able to present a revenue-intensive business model to veecees.

The sudden obsession with revenues may sound ridiculous to old economy types. Hasn't business always been about cash-flows, pay-back periods, and internal rates of return? It is, but no venture capital firm worth its millions thought revenue models were needed a few months back: everyone just assumed that they would have enough time to worry later. That assumption is dead. Says one veecee: ''There is a realisation that you do not have an unlimited (time) horizon to go on burning money.'' Agrees Ahuja of Citibank: ''The restructuring of business strategies is a direct fallout of the fact that money isn't available. Almost all deals are targeted at getting money into the venture rapidly.''

Thus, if job-sites have started charging applicants a registration fee, and corporates a screening fee, the motive is, again, the revenue-imperative. Or, if firstandsecond.com, a book e-tailer has entered into a revenue sharing arrangement with egurukool, an e-learning site, the motive is the same.

It's a phenomenon that's just started to happen in India. Venture capital firms are leveraging their portfolio of investments to benefit individual companies in which they have invested. Says P.M. Austin, 39, CEO, Paisapower.com a personal finance vortal in which ICICI Ventures has invested $1 million: ''The major advantage we stand to gain from veecees is the keiretsu or network of companies funded by it.'' Agrees Rashesh Shah, 36, CEO, Edelweiss Capital: ''Alliances are a positive part of a portfolio.'' Edelweiss, for instance, has apnaloan, a finance site and indiacar, a car site, as a part of its 35-strong dot.com portfolio. By facilitating an alliance between the two, it could increase revenue flows to both-someone buying a car from indiacar, can opt for a loan from apnaloan.

Increasingly, veecees are also exerting their influence in the areas of manpower selection, strategic planning, market development, corporate governance, and financial strategy. Says Kondur of Chrysalis: ''We are not just there to (help dot.coms) start the race, but also to (help them) finish it.'' By virtue of dealing with many dot.coms, venture capital firms are very well clued on to the strengths and weaknesses of companies and the individuals in them. And that knowledge serves them well when it comes to facilitating M&As, suggesting strategic alliances, or simply poaching people on behalf of a dot.com in their portfolio.

There's nothing wrong with a company protecting its investment. But forming a shadow management team has its disadvantages. Says R. Ramraj, 49, CEO, Satyam Infoway: ''Dot.coms should ensure that this-the influence of venture capital firms-does not mean red tape. A dot.com is all about speed and creativity.'' However, most veecees claim that they step in only when things aren't really working out. Agrees Pravin Gandhi, 55, Director, Infinity Ventures: ''When we invest in a company, we invest on the basis of the premise that the management team is good.'' That's the kid glove.

And here's the iron hand. Argues Arjun Malhotra, 54, Chairman and CEO, TechSpan, a valley-based infotech services company: ''In the US, when a veecee puts in money (into a company), it controls the board. If the projected numbers are not met over a period of time, then the veecee has the right to step in and usher in a new management team to protect its investment.'' That sounds fair: venture capitalists fund ideas not because they think the ideas are exciting by themselves, but because they have the potential to create value in the future. If something-a bad business model, a lousy marketing chief, or an incompetent management team-comes in the way of that, veecees have every right to call in the chips.

The ideal approach (from the perspective of the veecees) is to let the company know that it is accountable, but to do so unobtrusively. Vinod Khosla, 50, Partner, Kleiner Perkins, Caufield & Byers, a veecee firm that set the trend in demonstrating how a venture capitalist could leverage synergies across companies in its portfolio, believes that this works best. He says: ''I am not a puppeteer; but I believe in asking the company pressing questions that its managers may not feel free to discuss with the board. It's not fun to discuss problems, but it's better than being unprepared.'' This is the same approach that Kanwal Rekhi, the godfather (he even looks a bit like Brando in the motion pic) of many Indian entrepreneurs in the Valley follows.

For veecees, this involvement with the running of dot.coms could mean healthier portfolios. For dot.coms, it could mean an eye on costs and revenues. For the industry at large, it could translate into a rational hysteria-and hype-free approach to New Economy ventures. And for everyone, it does prove that there really is no such thing as a free lunch.

Additional reporting by Aparna Ramalingam, E. Kumar Sharma, Pooja Garg &
Rakhi Mazumdar