VCs should in fact see these bad times as an opportunity and collaborate to gain the maximum in terms of valuation, suggests Shankar Rele, CEO of Mumbai-based strategic management advisory services firm ICE Startups.com India Pvt Ltd
What does the current recession and stock market turmoil mean for VCs? Especially when the valuations of their existing investments have come down substantially and a profitable exit is not possible at the moment?
It is time for introspection. It is time to reflect and realign strategies. If companies have to survive and grow, they need to adapt quickly to the changing market scenarios. The trick is to innovate, not necessarily do different things, but do things differently.
This is the right time to put things in order and assist the promoter to visualise and plan for the long-term to enable better valuations through:
Mergers & acquisitions, joint ventures & alliances: This is the time when many opportunities have cropped up, with banks and institutions facing NPAs and restructuring of their debt portfolio. Many small and medium enterprises feeling the cash crunch would not be averse to collaborate with others in their field to expand their operations.
They would be willing to partner to grow jointly. Therefore, instead of reinventing the wheel or starting an independent expansion or growth plan, companies could look at alliances as well as JVs, instead of setting up their own plants, acquiring assets or increasing headcount, etc.
This is a great opportunity to look for mergers with other companies in the similar industry vertical segment to expand together and form major synergies. Such joint operations will bring about a positive change in the profitability of the merged entity and help in the reducing manufacturing and operational costs.
This will also expose the company to a wider customer base, reach and significantly increase their market share.
Joint operations would not only help in the profitability of the company but will also get the managements of both these entities together to a new level of complementary activities which will help them in gaining a stronghold over their competitors.
Looking at it from a macro aspect, the merged entity will have a huge advantage in the domestic arena, which would help it to widen its horizons and carve a global footprint. Not only would there be an advantage relating to synergies, but it would also help the company to fetch higher valuations in this phase of turbulence and turmoil. Consolidation is the key driver.
Strategic Planning: This would involve visualising the bottlenecks and planning the right strategies for tackling them, in anticipation, to enable a smooth flow during the recessionary period and to gear up for the future.
Forward and backward integration: It is an ideal time to look at various avenues for forward and backward integration to reduce costs, as also for assured supplies, increasing profitability, and for gaining a larger market share.
Revise sales & marketing, advertising strategies and market research: Companies need to take a second look at their branding and positioning strategies, on a priority basis. Questions relating to investee companies generating right brand equity, producing effective communication strategies, implementing a proper action plan need to be answered. The most critical question from a company's point of view should be regarding dealer / customer satisfaction (CRM) because, in the end, it is the customer who decides if the company's product or service is worth their money.
In short, from an investor's perspective, the most critical aspects regarding the investee companies that need to be considered are the scope to improve brand value to get better IPO or exit value, and whether their clients are realising or exploiting the market potential to the fullest.
This requires continuous monitoring and improvement in effective marketing and communicastions to ensure financial growth, especially for investee companies, which prima facie, look low performers. Also evaluation of the Front end of the business as well as the back end, including marketing, branding, distribution, logistics, product, packaging, manufacturing etc need to be evaluated and reviewed and corrective measures taken for better results and sustainability.