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Venture capital is a high-risk game. Out of multiple startups, a venture capital firm invests in, only a handful manage to grow. What happens to those who fail to succeed and how long does an investor wait before writing them off? We asked a bunch of experts and here is what they said:
Deepak Gupta, managing partner, WEH Ventures
A write-off means taking the entire carrying value of an investment in the books to zero. It's somewhat different from a partial diminution or accretion of the carrying value, which may have to be ascertained based on the frequency at which a fund values its holdings and subject to the accounting standard interpretation in place. So the write-off is an extreme event, more of a one-way street.
The decision to make a write-off on investment would typically be driven by fairly tangible circumstances. Some of them could be litigation or claims threatening the survival of the company. This could be a third party claim or among the company’s material stakeholders—founders, investors. It could also be done following a material change in circumstances that may make the company unable to carry out its business as intended. Events could be a pandemic, war, regulatory change, loss of key personnel and more.
Anirudh Damani, managing partner, Artha Ventures
Whenever we write cheques into a startup, my main concern is that the founder creates their category and becomes a category leader. I can live with my founder not doing the former but they must lead their category within the first three years of my initial investment. Hence, if the founders miss out on both, it becomes a primary motivator to write off an investment , conceptually.
As India’s first revenue stage micro-VC firm, we seek a minimum 100x return on our first cheque (we write two larger follow-on cheques). As demanding as it may seem, that is the necessary return for the risk we take not just on our monetary investment but also the return we seek for the time committed to each startup. Therefore, it is hard to convince us to invest if the founder does not envision disrupting their category with their innovation and resilience.
Therefore, for every startup to prosper, the first two years, aka the sprint phase, is the most critical in formulating and executing a sustainable business model. Hence, we offer the maximum support during this phase and identify if the business is making a dent in its respective space. If this criterion is not met and the founders do not have any pivots left, we write off our time investment and formulate ways of cutting our losses. This is done broadly by exiting the company or by writing off the investment mentally and start focusing our time and effort on other categories.Anil Joshi, managing partner, Unicorn India Ventures
A fund has a life and needs to be liquidated at the end of the fund cycle, some investments need to be written-off. While there is no set rule or mantra, however, the fund manager takes these decisions when the company can't raise more money and survival is a question mark. Or, when the company faces huge competition and survival is a question mark in comparison to established players. Investors also write off when founders give up to run the company and survival is difficult in absence of a team
Sanjay Mehta, Angel Investor, Founder and Partner, 100X.VC
Mostly when founders pursue an alternative business or take up a job, which means that they no longer believe in the idea. On paper investors might hold the shares but there is no real business happening in the company. Or, when a company runs out of cash, has downsized teams and visibly moving to a shutdown. Investors try to acquihire to salvage capital or they are left with no option but to write off the capital.Discover the latest Business News, Sensex, and Nifty updates. Obtain Personal Finance insights, tax queries, and expert opinions on Moneycontrol or download the Moneycontrol App to stay updated!
