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Smarting VCs go for milestone funding

Bipin Chandran

Hit by technology slowdown and investment write-offs, venture capital firms are preferring to go for milestone-based funding now.

They have decided to proffer finance in multiple tranches depending on the growth of the company instead of a single-level large fund commitment and expect that this will keep the company focused on meeting concrete objectives in a timely fashion.

"Venture capital funds are looking at milestone-based funding and performance-based funding. This will help the VCs keep a close watch on the performance of the companies," Ajay Relan, India head, Citibank Private Equity, said.

Relan said this will also give the venture capital fund easy manageability of funds. "If you commit a large fund and issue it to a company, you are not in the liberty to manage you portfolio effectively. But investments based on performance will provide you the ease to manage the fund effectively and manage your portfolio effectively as you will invest only in companies that meet their targets," Relan said.

Many investors are opting to spread out their investment commitments into 3-to-6 tranches.

"In the case of performance based funding, if the company you have invested does not perform well you have to option of not investing in them. This is not possible if you commit large investments. In such a case, if your investment is not reaping the desired benefits, your return on investment is affected," said an executive with a Delhi-based multinational venture capital fund.

Pointing out that committing larger funds could hamper the overall performance of the funds in case of an investment going burst, Sachin Mohindra, fund manager, Chescor, said: "Funds which have lost money during technology slowdown and dot-com crash have adopted this model. With this kind of funding, the venture capital funds can also have a constant control over the running and performance of the company."

According to industry observers, the venture capital funds are also ready to push up the valuations if the company meets its business commitments.

"Besides, we are also ready to push up the valuation if a business is progressing according to plan," said a fund manager with Sidbi Venture Capital Fund.

Mohindra also pointed out that the companies are also happy with this strategy by the venture capital funds.

"The companies are happy as they get higher valuations if they meet the targets. Besides, they get the timely intervention from the part of the VCs to help them change the business strategy when they go wrong," he said.

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