Post-Satyam, VCs adopt stricter scrutiny

Following the Satyam scam, venture capital (VC) firms are looking beyond financial numbers before funding a family-owned business.

While the first level of caution is on family-run companies, VCs are increasingly doing a closer scrutiny of legal aspects and businesses of prospective investee firms.

“Post-Satyam, we have become more vigilant while investing in a family business. We prefer two-three partners who come together with a business plan over one that is owned by a family or by extended family members. We carry out extensive due diligence before investing in a family-owned business,” said Nexus India Capital Partner Suvir Sujan. “We have become more careful and cautious before investing in any family-owned business. Now we look beyond just numbers,” added Milestone Managing Partner Rajesh Singhal.

Generally, VCs look at business models or plans that entrepreneurs have along with legal and financial documents before deciding on their investment since it takes at least five years for a business to turn profitable. Also, since the companies VCs invest in are not in the public sector, information regarding their businesses is confidential.

VCs carry out due diligence mainly on business and legal aspects to verify the accuracy and authenticity of statements made by an entrepreneur.

Legal due diligence involves verification of documents such as memorandum and articles of association, important contracts, patents and copyrights by VCs. Business due diligence involves quality of people, quality of business and quality of investment. VCs emphasise on quality of people and find it as one of the most important criteria.

Following the due diligence, VCs either issue a term sheet, which is an indication that they are seriously looking at the proposal, or reject the idea.