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Why not a Black Money Venture Fund, Mr. Prime Minister?

black-money-venture-fund-therodinhoods-alokkejriwal

The inspiration for this are the events of last night as catalysed by NAMO (Indian Prime Minister – Narendra Modi). Never in my lifetime have I seen such a major transformative move happen in a few minutes.

Now that the legacy Rs. 500 and Rs. 1000 notes have all but got destroyed, I am aggressively proposing an alternate for the hoarders of this money who have NO CLUE what to do with their fortunes of Black Money that has all but gone unusable. Its called the Black Money Venture Fund.

Namo – I know that that the Voluntary Disclosure Income Scheme you announced is over. But give this scheme a dekko. Its a WIN WIN for you, the black marketers and the country.

Yes, I am proposing a Black Money Venture Fund (BMVF) for Indian Startups and Entrepreneurs.

Why?

Look around – Google, Uber, Amazon, Ola, Facebook  – all are (were) startups and they have changed our lives. Therefore, to fund startups is a no-brainer.

“No one, not all the armies in the world can stop an idea whose time has come.” Victor Hugo said this immortal line (my favorite quote) and I believe The ‘Startup’ is the idea of the moment.

Amount

India’s “Black Money” ranges from US $2 trillion to US $50 Billion as stated by Wikipedia and CBI. Thus, we have plenty of supply. In the past 2 years, Indian Startups have raised about US $5 Billion. So we have at least 10X of that amount in Black Money circulation

Trivia: In 1997, the Indian Government announced a one time “Voluntary Disclosure of Income Scheme” (VDIS) for people to disclose their undisclosed wealth and pay prevailing rates of taxes and thus “make it official”. A whopping Rs. 26,000 crores were disclosed by Indians and Rs. 7,800 crores of tax collected by the government during this scheme! Then Finance Minister P. Chidambaram said, “It is my faith that, given a chance, the people of India come clean.”

As I understand, the VDIS scheme of Namo’s government that concluded in 2016 collected 65,000 crores. Good but not great.

The BMVF can be a game changer:

Financiers

VC money comes from fancy suits and highly temperamental investment managers. Before NaMo came to power in May 2014, there were hardly any VC deals being made. Historically, VC money is unpredictable in the global market. Those who have lived through 2001 & 2008 know what I mean. But that does not mean that entrepreneurs need to be stalled. When VC money vanishes, entrepreneurs get punished. And I want to change that.

Black Money in the country only grows every passing year. Show me one report that proves that Black Money has decreased in circulation. Empirically, it’s reported that 1/3rd of the Indian Economy is “Black”. And come rain or shine, our GDP continues to grow.

Returns 

Ask any VC and they will tell you that they look for 10-100x returns on every deal they make. That is why they invest in outliers and extremely calculated (risky and sometimes surprising) bets!  It’s a “winner takes all” business. No VC I know wants a 10-20% return on his deal.

Black Money on the other hand, has a nice problem.

To begin with, it is ‘pre-tax’ money which means that if you own Rs. 100 in Black Money, technically, you should have paid the government Rs. 30 long ago in taxes. Every passing year of not paying makes you liable for fines and interest – the sum of which could well exceed the original Rs. 100 you owned in the first place. So you may pay more than you own if you get caught!

In the market, Black Money always fetches sub optimal returns. This is because it’s not ‘court worthy’! Explanation – if you lend me Rs. 100 and I refuse to pay you back, you can’t do anything because you have no legal recourse to the money. Black Money can’t really be used efficiently. Even while buying a flat from a really shady builder, you have to pay 60-70% in “White” (official money). So “Black” is essentially 2nd class money generating 3rd class returns.

Now my proposal for Namo!

Dear Namo,

As you know, Venture Capital Funds are typically structured in a 2-25% format. The managers of the Fund charge 2% every year of the Fund Size to operate it, and ‘carry’ (take home) 25% of all profits from sales of investments after the Fund Size is recouped.

Very elite institutions like Calpers and Harvard University fund the biggest of the world’s VCs – clearly you and me have not been invited to participate in the next Sequoia or Kleiner Perkins Fund raise.

For the Black Money Venture Fund (BMVF) this is my term sheet and an explanation for every term:

Black Money Venture Fund

Fund Size: Minimum Corpus – Rs. 1000 crores – Maximum – None

Explanation: We need Rs. 1000 crores (150 million US$ to get started) a minimum size – there is no need to cap the fund.

Subscription: Lots of Rs 1 lac each, to be subscribed by anyone. This can be in the form of old Rs. 500 and Rs. 1000 notes. No questions asked. The subscribers will be kept anonymous/guaranteed non-persecution.

Explanation:  Creates a ‘bite sized’ opportunity for everyone! The promise is “Hey – you could be investing in the next Naukri.com via this fund!”

Operated by: A Professional Board. Let’s get Mr. KV Kamat to help us set it up just like he set up ICICI.

Explanation: We don’t want this to become another corrupt Govt. Organization

Investment thesis:

Generating Fees :

30% of the Fund goes into G-Sec (Safe Government securities) earning 6-7%. This delivers 2% return on the Corpus

Explanation: This ‘100% safe’ investment ensures that there is always the 2% to pay for Fund expenses. On say a Rs. 1000 crores fund, that’s Rs. 20 crores per year.

Generating Minimum Returns:

30% is invested in late stage deals/PE type transactions/Long term Mutual Funds (if required) earning 15-20% long term. That returns about 4-5% on the Corpus

Explanation: This is a calculated carve out to make sure that a bulk of the Corpus is invested in funds that are almost guaranteed to return money. This allows the Fund to stay liquid and deliver a minimum base return!

High Risk High Reward:          

40% is invested in Startups – angel, pre-seed, seed and first round. Let’s assume that if Rs. 2 crores is given to each startup (average) then the Rs. 400 crores in cash can fund almost 200 new Companies!

Explanation: This is the soul of the BMVF. Rs. 400 crores invested in say 200 Companies chosen from the best out there. Why can’t we expect at least 1-2 companies (1% of 200 Companies) to become the next Ola or Naukri?

Summary of a Rs. 1000 crores in the BMVF:

– 2% or Rs. 20 crores is earned via Govt. Debt and is used to pay to manage the fund

– 5-6% or Rs. 50-60 crores are earned via the late stage/PE type deals or even via Mutual Funds for minimum returns and keeping the fund liquid.

– The rest of the returns can range from anything starting from -40% (losing the entire Rs. 400 crores corpus) to +250% (earning Rs. 1000 crores). In the case of Naukri and many others, VCs have made 10-100-1000 times their investments.

The No-Brainer:     

A 5 year lock-in into the fund and then let the bonds be tradable at Net Asset Values.

Even assuming that the Fund does very badly and destroys 40% of its Capital Value, a “Black Money” hoarder may still be happy to launder his money at 40% cost vs. the penalties of back taxes, legal cases and even imprisonment!

This is how the returns will eventually stack up:

black-market-venture-fund-outcome

Why is this a Win – Win – Win?  

The Government starts mopping up Black Money and uses it to create monstrous opportunities of jobs and enterprise in the country. This at no cost to them.

The owners of Black Money get to park their money in something that could work for them vs. having to burn their stash!

Indian Startups get a chance to get funded by a Fund that’s local, not subject to ad hoc gyrations in the global financial market and which will only blow up in the years to come!

Call for action:

Namo: Please give me a chance to meet you and present this plan in person!!

Readers – if you have comments and ideas, please comment and I will add that to the main article if required!

 

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17 Comments

  1. super brilliant idea! this is what happens when an entrepreneur thinks of a solution! 🙂

  2. Good idea Alok. There could be one more use of black money – why not fund infrastructure – by mopping up money through long term bonds at a much cheaper interest rate – say 3% and a set lock-in period – 10 years. This way the penalty for black money will also be paid and infrastructure crucial to country can be built.

    This will clear up a lot of bottlenecks in the entire supply chain. Electricity will be cheaper, transport and shipping charges will reduce, doing business will get easier.  Not only businesses – everyone will benefit.

    PS: the going rate for giving out black money is 2-2.5% per month. Ofcourse the market is managed by loan sharks and there is no principal guarantee especially in these times.

    PS,PS: I have a electronics hardware startup since the last 2 years. Bottlenecks and inadequacies in infrastructure is a significantly bigger pain point for me than funding.

  3. Haha!

    Why don’t we build Hospitals, Schools and other basic stuff first?

    I don’t know how many people actually deserve the funds you’re talking about.

    Grocery ? Last mile delivery? Cab hailing? Selling Unsold inventory? Building an Indian Amazon ? 

    How about paying ISRO, DRDO and other scientists – 5x of what they are getting?

    I feel people spending time under the name of entrepreneurship should no be encouraged unless they are making a real difference to the world.

    P.S – Can anyone give me at stat of how many startups are focussing on cities and how many look beyond tier-2 or tier-3? 

    How many startups expect India to understand English, email, etc?

  4. This itself is a billion dollar idea….. 

    Another point, see, we do struggle to be in black (P/L account ), may be this Black Money will help us to negate the red and help to reach there sooner….. 

  5. Alok Boss

    Great idea to get funds from black money. Right on the spot. 

    1. Also need to start tax benefits to MNCs, if they fund startups.  That way we will get successful products, from us.

    2. Most of the startups are lagging in the process, people, funds.  VCs can fund, but an internal process, strategy are not set. Even selecting a right combination of team is not done. 

  6. Good you thinking solution for black-money. people with black money may not subscribe to fund. As already they invest in venture funds using their Maldives or Mauritius firm. Now the fund invests in India. Do we have insights of how much invested in India comes funneled as foreign investment? . 

  7. this got me thinking..how about a tax-free start-up bond issued by a professionally managed government AMC..

    1000 Cr subscription…for retail investors..issued in multiple tranches..Initial tranch for seed funding..small amount to many businesses..lets say 100 crore..after 6 months..some businesses closed down..Increase the tranch size to 300 Cr to meet the greater cap requirement of growing companies..after 6-9 months remaining 600 crore for large capital investment in companies capable of becoming unicorn..this is a very vague presentation but something which should be done..

    Most Retail investors keep their money in PPF/ savings account..getting sub-optimal return..why shouldn’t they be allowed to invest in startups and reap benefits in long term..

  8. totally agree Kamlesh.

    I become speechless/dumb shocked/cant find more adjectives everytime I hear politicians talking about

    free wifi / Mumbai to be Singapore/digital india/bullet trains bla bla blaaaa

    I mean why do we always think of our top 4 metros, wat about the rest of India ?

    what did they do wrong to be not included in the SMART city initiative ?

    I just dont understand why we have to be always so ambitiousssssss.. why cant the railways work on upgrading all the train routes to reduce the travel time by lest say atleast 4 hours… who will not be happy with that ?

    I bet there are 1000 things before we should think about free internet in railway stations!

    It doesnt matter if we are 1 trillion or 20 trillion economy if there are not enough hospitals.

    its so tragic to hear someone dying of dengue bcos there are not enough beds in the hospital and this is

    our national capital city Delhi.

    It doesnt matter if we are 1 trillion or 20 trillion economy if farmers continue to commit suicide and we cant

    control the prices of chawal, dal and our beloved onion.

    It doesnt matter if we are 1 trillion or 20 trillion economy if we cant stop child labor

    and the list can go on n on n on…

  9. I was thinking that what if the fund money is invested back into fraudulent startups which are owned by these black money operators itself and they can show inflated returns on paper and then exit the fund with more clean money. So in the end, 100 rupees worth of black money is made 1000 rupees worth of clean money. This will attract more people to gather black money today so they can repeat same in future. A great idea with a possible threat which needs to be addressed. 

  10. I disagree.  

    1. If we’re to give money only to the deserving, who’s to decide who deserves the money, then? 

    2. The beauty of investing in startups or the private sector in general is that in the long-term, the money flows only to the deserving. Only those entrepreneurs and startups who truly add value will sustain. The market will itself ensure those ‘spending time under the name of entrepreneurship’ would not be encouraged unless they are making a real difference to the world. 

    Any why would you assume grocery or last-mile delivery startups aren’t attempting to make a real difference? Each of these startups has one basic premise: they aim to improve the productivity within their specific focus area and therefore cash in.

    Isn’t that a real difference in a country whose productivity measures 1/7th that of the USA (actual stat), and whose citizens continually try to upstage one another in procuring freebies from the government & society at large, rather than figuring out how they can add value? Show me a successful startup or private enterprise, and I’ll show you someone who’s making a real difference. Yes, even the Zivames and the Pepper Frys, I’d argue they’re making a real difference.  

  11. That’s sounds like a great idea. Catch is something psychological. NaMo may agree. Let’s see from money hoarders mindset who is stashing the money initially to save tax and get the business advantage of dealing in cash and killing the competition. It then surrounded by the fear of getting caught by tax authorities and losing business of declared. That turned into the helplessness or compulsion to keep maintaining such situation. Now that fear of getting caught and being penalized is so big that any method taken by government to curb this economic hazard, feels like a bad decision and not letting them do business.

    Coming back to your idea, my comment may sound pessimistic, but the prospective subscribers in your fund may not come forward to invest. As they may think that getting into the fund is easy but what about when they time to exit comes. They will have to declare it at that time, which may bring them under scanner. Overcoming that fear will not be so easy. Even fund will have to disclose the money to whom is being disbursed to. If fund do not that, money will again go back to black hole and that vicious circle.

    I may be sounding like a dumb, but that’s what came into this evil mind.

  12. If I were to decide about the collected sum of all black money then I will first put it towards the growth agricultural industry and the welfare of farmers because remember if they won’t grow the required agri products then we and our children won’t grow either. Secondly i will put the money today’s free education for those who can’t afford or getting education. Thirdly I will reserve the money for safety and security measures of our citizens of india. Now that’s going to take lot of money as you know it. Fourthly I will put that black money to build wind parks and solar parks to meet our energy demands. Fifth and lastly i will invest lot of money on road safety because that’s what killing most people in india.
    For a prime minister to think about puting the black money in venture fund for start up will come very late because that’s not the need of an hour. Country is struggling with greater challenges that can be curbed with this black money.
    I am also an entrepreneur and I am also one of those who will be excited to get funded but I won’t love to see so many start ups funded left right and center cluessly.
    No offense to anyone but it’s my personal thought.

  13. Stupendous idea!! Two things though: 1.) I would like to see this fund being used for funding social entrepreneurship only 2.) Call it ‘Reclaimed Money Venture Fund’ which sounds more apt 🙂

  14. This well-intended & thought-provoking idea is unique and original. Well thought out.

    The problem with this, however, is the number of fake startups and dummy companies that will surface to show fake expense/profits on paper for the investor to claim tax benefit. Even fake exits can be meticulously planned by a shrewd mind.

    As someone pointed out, at the time of exit the investor may have to declare the source/identity of the funds, which can shy him away.

    But it can be a great test lab with unstinting opportunities for risk-taking founders to try out their ideas; its like a giant idea-harvesting machine getting easy rainfall [funds]

  15. Lol looks to me like such a Dumb set of ideas… when the basic motto and the sole purpose of punishing the Black Money Hoarders is being defeated.
    For eg : Someone has 100 crores of black money .. give him time to invest into right things.. he would invest all of them. But with this he wont ever be afraid of making more black money considering the fact that the gov or someone will somehow help me again to make it white.
    It is a lose – lose situation for people who have stood in line for days and hours and gone without food.
    – Also if someone has 10 Crore and he burns it out , does in no ways means that the country is getting poor, if due to such a situation there is a currency crunch in the market RBI has all the rights to print the money and get it again floated through right channels this is just a temporary situation bear with it.
    Think and do what is right and not how to make a wrong thing look right.

    Regards,
    Jignesh Rawal

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