It is a curious but logical second innings. Ratan Tata’s second coming as a venture capitalist after retiring from the high table at India Inc has been an unusually public transition for the industrialist. The pace of his investments has also been hectic. Six investments were announced in the first six weeks of 2016 alone; this is besides the raft of announcements the previous year. And now comes the declaration from the investments office of the University of California system to jointly fund start ups and enterprises with Tata over the next 10 years. Pottering around the Willingdon in retirement, is apparently not for this former chairman of the House of Tatas. This is a man in a hurry, working at a pace that says retirement is for wimps.
There was hardly a precedent for this sort of transition. Until some years back, Tatas had neither a retirement policy nor a succession policy worth the name. Tata satraps, including the boss - and that includes Ratan Tata’s two predecessors in the role - continued till they felt like. So JRD Tata had retired at 87 in 1991, and passed on two years later. JRD sort of continued till he faded out; consequently there was neither need nor time for a second innings. JRDs predecessor, Sir Nowroji Saklatwala had died suddenly in office in 1938. Again, no precedent for what Sir Nowroji would have done in retirement.
Ratan Tata’s second innings has been occasioned by his own policy that everyone — including himself — would call it a day at 75. A policy that was scrupulously followed to the day; his last day as chairman fell on his 75th birthday. At that time, there was no hint of the second innings in his conversations with the media on his post retirement plans. There were just the predictable comments people make about retirement. He mentioned pursuing hobbies or interests; presumably a busy life lived continuously at its peak had not left the time for any of that.
Tata has not stepped aside totally from the house; in fact, quite far from it. He remains the chairman of the Tata trusts; so little question of a fade out here. Being chairman of the trusts that itself own most of Tata Sons the holding company, should allow for a say in corporate policy and strategy. But there has been no hint of wielding power from that position. Allowing the incumbent chairman of Tata Sons, Cyrus Mistry, to run the show while Tata retains control of the trusts, and presumably their voting power, is an unusual arrangement; Ratan Tata as chairman of Tata Sons had also controlled the trusts that own two thirds of Tata Sons. It means Mistry does not enjoy the same leeway Tata himself did when he was chairman, the blending of both management and control. Perhaps that will change going forward.
Tata: A name with weight
This brings us to Ratan Tata, VC. Being a venture capitalist is not that much of a change from his main role when he headed Tata Sons. Allocating capital must have been a big part of his responsibilities at Tata Sons, and that is what venture capitalists do anyways. So a good fit there. A delicate question is whether the funds are his personal capital, or from other sources. News reports indicate that it is the former which makes sense; at this stage in his life there is less need for the hassles of dealing with a limited partner, or some other source of funds. Recall however that almost all the money that the venture capital/private equity industry in India plays around with, comes from abroad. Indians it appears, have a sense of realism when it comes to funding their own venture capital industry. So if the money is Tata’s, it represents a welcome change. Local risk capital - and a famous source at that - is stepping up to the plate to fund the “India growth story”.
The real advantage is to the company the weighty Tata name gets attached to. Eager young entrepreneurs are more than happy to have the gloss of the Tata name rub off onto them. Some of them can’t seem to believe their own luck. Signaling effects appear to be profound. Everybody’s suitably respectful and reverential. There’s less pressure in dealing with “exits” of any sort, or with going public. Besides his personal experience and mentoring, there is the possibility of an extensive network of management talent Tata can recommend to the companies he invests in.
The rest of the venture capital business is also happy to play along; the hope is that Old Moneybags has got it right this time. Earlier round investors benefit the most from the bandwagoning effect of his name; naturally many early round investors must be looking to recommend their companies/investments to him, which in turn leaves Tata with a steady pipeline of deals to look at. These will be deals on which others – the earlier round investors – have already done the basic homework and due diligence, so less grunt work for him. Nice.
One would expect that Tata would extract his pound of flesh for the benefits of using his name, by asking budding entrepreneurs to hand over their precious equity to him at cheaper valuations. But that is not the case. Apparently his investments are at the price the previous round of venture capitalists paid when they bought into the firm. This eliminates the need for Tata to haggle over price, always the biggest road block to doing the deal, and accounts for the hectic pace of his deal making. However, that also means he always pays top dollar and is always late to the party. But the advantage of the halo effects associating with the Tata name for all concerned, far outweigh the disadvantage to Ratan Tata of being a later stage investor. His association moves the valuation of the equity to a new equilibrium. Also if things go wrong, then the valuation was done by the previous venture capitalist, not Tata. Nice again.
Recall also that the venture capital industry works on the shot gun model, which is a scatter shot approach. In its highly stylized form, 19 out of 20 investments will be dabbas, but that doesn’t matter as the 20th investment is in a still private Google, or its equivalent. At least that’s the fond hope. Except that in India finding the next Google or Microsoft in the “eco-system” is something of an issue. Hence the Tata role. Having someone like him on your side helps improve the odds.
Or does it? For cues to that, one needs to take a look at Tata’s portfolio. The portfolio is a mixed bag. It includes the usual red hot areas in the industry heat matrix – e-commerce and cab aggregators. There’s also the occasional punt on stuff that gels with his personal interests – Dogspot.in, an online portal for pets, is one recent investment. All close, but no cigar. Nevertheless, so far it’s working. Publicly reported information shows an upswing in valuations after he took a stake in the companies. But as always, causality is difficult to pinpoint. Did the companies head higher because he bought into them, or did he buy into them because they were headed higher ?
A more intriguing question - with little attempt at an answer so far - is whether there are “synergies” between what the Tata trusts do, and Ratan Tata’s attempt at finding the next big thing to invest in. The trusts have a feel for grass roots level development; they’ve been doing it for close to a hundred years. And there’s a hugh amount of management jargon about the “fortune at the bottom of the pyramid”, a reference to low value but high volume transactions that transform the lives of people at the bottom of the financial pyramid ; “fighting poverty with profitability” as Bill Gates has put it. So are there “synergies” – that much abused term in the lexicon? Only time - and Tata - can tell.
Adil Rustomjee is an investment adviser in Mumbai.
Updated Date: Feb 14, 2016 10:53 AM