The patient capital conundrum

Investors and entrepreneurs often grapple with identifying the optimal holding period (time from investment to exit) for an investment in a growth company. In this feature, we speak to two entrepreneurs and two investors to gather their thoughts on the need for longer investment-to-exit cycles in India

S. PREM KUMAR

Over the last few years, thanks to data gathered from the numerous deals we’ve worked on, we have understood that one of the most critical aspects of any investment deal is exit timing. There are several factors that come into play – the macroeconomic condition, fund timelines, personal situation of the entrepreneur and, most importantly, the ability of the business to create further value.

Fund managers often balance two very different goals – the need to show exits versus staying patiently invested if the portfolio company continues to grow handsomely and build further value. For entrepreneurs, the situation depends on the progress they are making and how much value creation they can showcase, given more time. Typically, fund managers prefer a 4 to 6 year investment-to-exit cycle; however, reality is, it is much longer. Essentially, the goal of this feature is to gather a perspective from investors and entrepreneurs on the need for patient capital and the pros and cons of longer investment-to-exit cycles, say 8 to 10 years.

Subramanian of Mcap Fund Managers says, “Promoters often ask us – ‘how long will you stay invested?’ Our usual response is that patience has to be earned by performance”

For this feature, we spoke to Murugavel Janakiraman, founder and CEO, Matrimony.com, Alok Mittal, Managing Director, Canaan Advisors India, N. Subbu Subramanian of Mcap Fund Managers and Chandu Nair, founder of Scope eKnowledge Works, a company he sold to Quatrro BPO Solutions.

The key factors

The key variables that determine exit timing are both internal and external. Macroeconomic conditions, the state of public and M&A markets and the business scenario of a particular sector are crucial. Internally, the ability of the business to create further value, growth displayed since the time of investment and the personal situation of the entrepreneur play an important role in timing the exit.

Subramanian of Mcap Fund Managers says, “Promoters often ask us – ‘how long will you stay invested?’ Our usual response is that patience has to be earned by performance. Of course, timing the exit is hugely dependent on the nature of the business. If, for example, a promoter is trying to take a regional consumer brand national or build a FMCG company from scratch, it will take him more time and he/she needs patient capital. It will probably take 10 to 15 years to build up such a business and it is important to raise patient capital in such cases.”

Mittal of Canaan India echoes this view and adds, “Patient capital is more a behavioral terminology rather than a technical one. It cannot be defined by a particular time period; rather it is defined by how much patience an investor is willing to show on a particular investment. In our view, almost every company we invest in goes through two or three time periods when the business is facing a serious problem. If we try to exit at the first problem stage, there are significant returns we miss out on. Often, we bring in our experience and try to see how we can fix the problem at hand.”

On the other side of the table, entrepreneurs too understand that patience has to be earned. Janakiraman of Matrimony.com (the company that runs Bharatmatrimony.com and several other matrimonial portals) says, “I’d go to the extent of saying, once you raise money, the primary responsibility of the entrepreneur is to give the investor a good exit. However, once your investors see progress in the right direction and notice that the entrepreneur is putting in a genuine effort, they often work with you as partners to help you achieve the exit goals.”

Janakiraman raised money from Canaan Partners in 2006, Mayfield Fund in 2008 and Bessemer Venture Partners in 2011. Matrimony.com is working towards an exit through the IPO route but the timeframes are still not clear. Janakiraman says, “We’re certainly demonstrating growth, creating further value and that is what is crucial.”

Chandu Nair, another entrepreneur who built a content KPO, Scope eKnowledge Works, says, “In addition to the macroeconomic situation and company’s progress, one factor that pushed our exit was the personal needs of the founders.” Nair raised his angel round in 1999 and gave his angel investors an exit in 2.5 years with a 6x return. Angel investors sold their stake to the Series-A investor, e-India Ventures (which later folded into Infinity Ventures). In late 2007, the company was sold to Quatrro BPO Solutions, to give the Series-A investor an 8x exit. The entrepreneurs held on to a portion of their stake and finally completely exited the company in 2011. Nair says, “We were proactive to get this exit, not only for our investors but for us as well. I often say, there are three categories of entrepreneurs – reactive, active and proactive. To time the exit of your venture, it is paramount to be proactive.”

Exit tales

For this feature, Mittal spoke about a company called e4e, a global business services company. Canaan made its investment in e4e in 2000 and since then has exited most parts of the business. One investment of e4e, Aztecsoft was exited through an IPO and the company was eventually bought over by Mindtree Limited.  Another business of e4e, a technical support services company, was progressing reasonably well and the investors exited it through an acquisition. However, e4e continues to hold on to its healthcare outsourcing venture. Mittal says, “The business is still creating value and we’re holding on to a portion of an investment we made in 2000.”

Mcap’s Subramanian says, “In the late 90s, when this industry was still nascent, we had assumed that we’ll have a robust public market to exit investments. However, this thesis turned out to be incorrect. Having said that, the industry has matured with alternate options like a good secondary market where late-stage funds take over the investment of the earlier investor.” This is exactly what happened to The Carlyle Group’s investment in Newgen Knowledge Works. Carlyle invested in the company in 2004 and exited to a clutch of funds in 2011, giving it a 3x-plus return. Subramanian adds, “There are several other such examples. Look at Dr. Lal Path Labs. Sequoia Capital invested a few rounds in the company before TA Associates gave it an exit.”

While value creation by a portfolio company is crucial, another factor that dictates the exit timing is fund timelines. Subramanian says, typically, the first-half (first 5-years in a 10-year fund) is for investment and the second-half for disinvestment. So, the investment-to-exit cycle shortens even further if the investment into a portfolio company is made in the latter half of the fund lifecycle. Mittal says, “One reaction we’re seeing from investors since it is taking longer to exit companies is that investors are saying we’ll come in later-stage.”

Comparison with Western markets

When requested to compare the salient differences between Private Equity in India with funds in Western Europe and North America, Mittal responded, “The underlying nature of capital is the same. Both here and in the West, we tend to have 10-year funds. Even in terms of investment to exit, I believe the average exit timeframes between 2000 and 2010 in the West was 9 years. This number is not very different from the 8 years we’re hearing in India.”

Subramanian says, “The primary difference between funds in the West and here is dictated by the nature of the economy. In the West, we see a lot of the growth coming from the technology players, and may be from a few other sectors. But, mostly, it is a lot of financial engineering, leveraged buyouts and the like. The moment interest rates go up, this goes for a toss. In India, there are several sectors still growing. While, the economy as a whole might be growing in single digits, there are market leaders, say a Hero Motors, in several sectors growing handsomely. Now, this prompts a supplier to Hero Motors to grow well. In that sense, there is still ‘growth capital’ in the true sense that is needed in India.”

Janakiraman has another angle. He believes that the biggest difference, at least in the Internet space, is because of very little mergers and acquisitions that happen in India. “Look at companies like Google and Amazon and the number of companies they buy every year. In India, we don’t have enough large companies to buy smaller companies. It’ll happen over time,” he says.

The point Janakiraman is making is directly relevant to this feature on patient capital. If there are more mergers and acquisitions, chances of shorter investment-to-exit cycles increase. Now that exit options are limited, the need for patient capital is more, but the belief is it’ll get shorter over time.

Nair makes a very interesting point on the similarity with the Western markets. He calls it the flavour-of-the-day syndrome. “If you managed a KPO company in 2006-2007, the chances of getting an exit – be it through IPO or acquisition – would have been a lot more than it is today. Today, people ask, if you are a KPO company can you IPO?” he says with a grin.  Fundamentally, be it in the West or in India, exit timing is dictated as much by the environment as it is by the nature of the business.

Subramanian says, “At the end of the day, things happen because of an opportunity or the lack of it. An entrepreneur might be building tremendous value; the time would have come for the investor to exit the business, but it all boils down to what exit opportunities are present at that time.”

On the other hand, another common scenario (especially in the current conditions) is that the entrepreneurs and the business have enough steam left in them to create further value, but are forced to sell the company because investors cannot stay invested. Dealing with this becomes tricky, especially in cases where the entrepreneur is emotionally attached to the business.

In short, the need for patient capital is dictated by the time it takes to build businesses. As our interviewees mention, it is rather difficult to define patient capital quantitatively in terms of number of years. It is a function of how much time the investor is willing to bet on the entrepreneur and his or her business. The factors that dictate this are varied – from fund timelines and when the fund manager has to raise his next fund to the personal energy levels of the entrepreneur and the macroeconomic conditions in the country.


Veda is a leading investment bank providing focused advisory services to companies and entrepreneurs. It offers independent advice and customized solutions on private equity fund raising and M&A. With a dedicated and experienced team spread across offices in Chennai, Bangalore and Hyderabad, Veda brings together rich experience in handling a variety of transactions.

The Smart CEO Media Labs is the content marketing and content creation agency owned by the magazine. We created this article for the Veda Corp Newsletter and it was first published there.

Alok Mittal Canaan Advisors India External Funding Fund Raising Matrimony.com Mcap Fund Managers Murugavel Janakiraman Patient Capital Quatrro BPO Solutions. Scope eKnowledge Works