The Global Economic Impact of Private Equity Report 2008 - World ...

2003 – 2005: patient, supportive capitalAugust 2003 marked the beginning of a new phase in therelationship between ICICI Venture and Subhiksha. At thispoint, Subhiksha had 137 stores all over Tamil Nadu, thestate surrounding Chennai, but uncertainty was mountingabout whether the company should roll out additional storesbeyond Tamil Nadu and how it could do so successfully andquickly. At the time, there was no other organized retailplayer in the food and grocery discount segment with anational presence, which posed a critical opportunity forSubhiksha to seize the first‐mover advantage. But in therace to win, time and capital were of the essence.Removing funding constraintsDuring an August 2003 board meeting, one of the membersof the ICICI Venture team asked RS what constraints wereimpeding his expansion plans. His response was money andpeople, which prompted ICICI Venture to evaluate a secondround of funding that would enable the company to movemore aggressively to execute the firm’s expansion strategy.Between 2004 and 2006, ICICI Venture invested anadditional $17 million on top of the original $3.4 millioninvested in 2000, which increased the investor’s equity stakein the company to 45%. 11 But far from writing a blankcheque, ICICI Venture invested with a number of conditionsthat were designed to strengthen Subhiksha’s capabilitiesas it embarked on a major expansion, including:Investing in ITTo support Subhiksha’s national expansion and prepare thefirm for its eventual listing, one ICICI Venture condition foradditional financing was that the company strengthen itsIT and management systems. Although RS single‐handedlyinvented the management system and practices that definedSubhiksha, he initially resisted the need for an elaborateIT system. “Here is a brilliant guy who has everything in hishead. RS has no reason to put this on paper or in somesoftware programme,” explained Deshpande. “But wewanted a back‐up. A situation where all of the company’sinformation is in just one head is very risky for us asinvestors.” Finally RS was convinced and in 2006 the coreIT upgrade was completed using state‐of‐the‐art software.Build a management teamBefore 2004, like many entrepreneurs, RS was a hands‐on leaderwho retained personal responsibility for overseeing all functionalareas of Subhiksha management. ICICI Venture recognized that apan‐India growth plan required a deeper management team anda less centralized approach with a greater amount of delegationof responsibilities. Thus another condition for ICICI Venture’sadditional investment was an agreement that RS would recruit anew Chief Financial Officer (CFO), a Chief Technology Officer(CTO), a logistics/back‐end head, and a number of business unitheads for each regional market.Developing a robust board structureEven RS acknowledged that before 2004, Subhiksha’s boardconsisted of “my right hand and my left hand”. ICICI Venturenot only urged him to have an independent board, but alsoone that truly reflected the pan‐Indian goals of the company.Leveraging its wide business network, ICICI Venture helpedattract a truly pan‐India board, with independent directors,industry experts and academics from across India and theUnited States. (See Exhibit 3 for Subhiksha’s boardcomposition and brief biographies of board members.) “Inever knew any of these people before at all. ICICI Venturebrought these connections to us. This greatly enhancedour credibility in the eyes of future investors,” remarked RS.Enabling a pan‐India vision and being patient and supportiveRS’s initial expansion plan was to focus on the south‐westof India, the country’s wealthiest region. ICICI Venture madeit clear, however, that it would support Subhiksha’s growthstrategy only if RS pursued a pan‐India vision that wouldtransform Subhiksha into the country’s dominant food andgrocery discounter. Deshpande argued that a south-westerncompany would be far less attractive to investors when andif Subhiksha underwent an IPO. RS was soon persuadedand in late 2003, ICICI Venture made a second roundinvestment worth $3.5 million, and Subhiksha began toexpand across India.But execution often deviates from original plans. AlthoughRS’s initial pan‐India rollout strategy was to sequentiallyenter each geographic market, he began to reconsider afterwitnessing the phenomenal transformation of Bharti Telecomfrom a northern India mobile company to India’s largestmobile provider. Bharti had adopted a “big bang” approach –the simultaneous rollout of service in numerous geographicmarkets. RS concluded that this more aggressive approachwould be superior to his more gradual strategy because itwould create simultaneous brand recognition across India.RS worried that ICICI Venture might not agree with the shiftof strategy because it would require a time‐consumingreconfiguration of the company’s logistics and delay theexpansion. In addition, more capital would be required tofund an intensified marketing campaign. But to his surprise,ICICI Venture immediately supported the new plan, andfollowed up with a third round of financing of about$6.5 million in late 2004.Reflecting on the experience, RS said: “We wanted aninvestor who would understand what we were trying toachieve and would not second-guess us. It was reassuringthat ICICI Venture understood that we changed strategy notbecause we couldn’t deliver on the original plan, but becausethe new strategy was better. [This level of trust] was why wedidn’t even talk to any other investors.”In summary, the period from 2003 to 2005 marked thesecond stage in the ICICI Venture‐Subhiksha relationship. InRS’s own words, during this period, ICICI Venture providedthe much-needed “patient, supportive capital”, as well asmanagement support, and valuable suggestions for thecompany’s strategic direction.11This was later reduced to 30% due to additional financing.146 Case studies: ICICI Ventures and SubhikshaThe Global Economic Impact of Private Equity Report 2008