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Asia: Investing in India

Families in Business talks with Gopal Patwardhan, managing partner at Duke Equity Partners, about helping Indian family business grow, and what the future holds for this fast growing economy

FIB What is your background?

GP I have been in the early stage/venture capital field for the last nine years, but my exposure and interest in entrepreneurs and entrepreneurship goes back much further.

The Patwardhan family ruled over much of what is today Southern Maharashtra and northern Karnataka (the states in India which house Bombay and Bangalore respectively). As rulers of the state, many of my ancestors had 'incubated' or supported the growth of many entrepreneurial ventures in their principalities – during the days of the British Raj. India's first printing press was founded in the state of Miraj with financial and material support from my great-grandfather (four times removed) in the early 1800s, and my great-great-great grandfather established one of India's first precision machining facilities in India in the mid-1800s. In the early 1900s we established one of India's first modern banks and invested in a number of textile manufacturing, engineering, sugar and chemicals companies that were amongst the earliest companies to list on the Bombay Stock Exchange.

So I understand how valuable this sort of entrepreneurial investing is to both the provider and recipient of the funding. I became interested in venture capital and private equity when I observed how innovative ideas were funded in the US (particularly in Silicon Valley).

While completing my engineering degree and MBA in the US, I worked with a couple of small internet start-up companies in Silicon Valley – primarily in business development or marketing.

Keen to sink my teeth into the venture capital business, I started working with The Enterprise Network (TEN), a business incubator in Silicon Valley that helped establish companies such as eBay, iPrint.com and Xros (acquired by Nortel in early 2000, for $3.5 billion). From early 1999 to 2002, I served as director of TEN, and helped the organisation through the early days of the dot.com bust.

In late 1999, my brother and I founded a proprietary investment firm, Indiaco Ventures, to make minority investments in small businesses in India.

In 2002-03 I co-founded the Girvan Group, which under contract with NASA (the space agency) worked to develop, foster and incubate cutting edge technologies from the commercial and non-aerospace industry for use inside NASA's enterprises (spin in) and technologies developed inside NASA's research labs for non-space applications (spin-out).

Though my family has had a long history and association with entrepreneurs and entrepreneurship in India, as members of a princely house, no members of the family were involved in the operations of the businesses we supported – to the extent that we did not even take board positions in the companies we invested in.

Through my experience in the valley, and my brother's experience on the ground in India, we were determined to adapt the US venture capital model to the trust- and relationship-based process that had been followed by my family (as well as many other feudal families in India) over the last several generations.

FIB How did you become involved in Duke Equity Partners?

GP I met Stanton Dodson, who had founded Duke Equity through an acquisition we made while I was at Girvan. Stanton had just founded Duke Equity, after exiting from his last venture (a financial software firm, which he had taken public in the US) and was keen to use his expertise in raising capital and financial structuring to build a venture capital/private equity business.

We both had complementary skills – his knowledge of public markets and experience with mergers and acquisitions; and my experience in early stage and growth stage enterprises.

I was keen to bring in external investors/partners into our Indian investment firm, and Stanton and Duke Equity were a great fit. Stanton recognised the opportunity in India, and made a firm commitment by shifting his base from the US to Dubai!

FIB What services do you provide?

GP Duke Indiaco primarily focuses on investing growth capital into companies in India. In addition to financing, we also help our companies raise follow-on funds, develop joint ventures for acquisition of new technologies or developing new markets, and scale up operations through recruiting senior advisors or executives. For our investors, we strive to provide a superior absolute return – last year our internal rate of return on invested capital was over 100%.

FIB How has Duke been involved with Indian family businesses?

GP Duke has made over 20 investments in India. A number of our investments are in companies that have been established by families and are now in the process of professionalising into the second or third generation.

We have helped a number of these companies expand quite significantly. Being an 'institutional' investor, Duke is able to provide a level of professional credibility to the market that these companies need. Being well-entrenched in India, and having strong links to a number of older families in the country, we are able to provide a greater degree of comfort to the family of the companies we invest in than other private equity funds can.

FIB What are some of the unique features of Indian family businesses that you are able to address?

GP Indian business families are similar to those anywhere in the world in most respects – most family businesses have been built by a strong patriarch, and have evolved through the generations and changing socio-political and economic conditions in India to where they are today.

India, though, is changing very rapidly, as a country: economically and socially. We are seeing a period of unprecedented growth in the country that cuts across industrial sectors and business size. Capital for this growth is now much more readily available through a number of private equity, hedge funds and retail investors (on the Bombay Stock Exchange). While this has created a lot of opportunity for entrepreneurs and established businesses, it has also levelled the playing field in favour of efficient businesses that are more professional – rather than those that merely have been around longer.

As a result, most families in business in India have started to 'professionalise' their operations – bringing in senior executives, moving away from buying from vendors only because they were owned by friends or relatives, etc. It's a balancing act, though, as they they are also keen to retain some of the old ethos – change in India is evolutionary, never sudden.

FIB Are there certain sectors of Indian businesses that seem more keen to use private equity than others?

GP Today, I would say most manufacturing-based, technology-based and service businesses have considered private equity for growth.

FIB What are the obstacles you encounter with family businesses?

GP One of the first challenges is dealing with the loss of ownership issue. Then there are issues that relate primarily to expanding the organisation, delegating authority to non-family members, and ensuring business decisions are not clouded by family relationships.

FIB How do you convince Indian family businesses that private equity is the way to grow?

GP The biggest supporter of this is the growth in the country. Families need to be convinced that if they do not grow now, they will be irrelevant tomorrow, and to grow they need external capital (in most cases) and external expertise (in almost all cases).

We have to give them the comfort that we are not here to 'run' their business, or 'run away' with their business.

Most families we work with are comfortable with us, because they know where we come from, and that we understand them better than larger multinational private equity firms that are much more impersonal and bureaucratic. With Duke Indiaco, they know the decisions are taken in India, and that we understand their needs much better, because we come from business families ourselves.

FIB What does the future hold for Indian business?

GP The future for India is bright. The country is clearly on a growth track and things are changing extremely quickly. The underlying economic and social fabric of the country is much stronger than China, because of the more advanced state of its banking system and the stock markets in the country. While infrastructure remains a bottleneck for growth, I believe that if market forces (ie, the private sector) are allowed to drive the development of our infrastructure (power, roads, airports etc), then this should be a concern of the past.

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