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The Saraf Foods Investment (A)

Cornell University Johnson Graduate School of Management NBA 593 International Entrepreneurship Auke Cnosssen, MBA ‘04 prepared this case study under the guidance of and with Professor Melvin Goldman as the basis for class discussion rather than to illustrate either effective or ineffective handling of a business situation.1

The Saraf Foods Investment (A)
In August 1999, Vishnu Varshney, head of Gujarat Venture Finance Ltd. (GVFL), a venture capital firm in the state of Gujarat, India, was assessing the investment of GVFL in Saraf Foods Ltd. Saraf Foods was a producer of freeze dried vegetables for export. The latest monitoring report showed the financial projections for Saraf Foods for FY 1999-2000. 1998 had been a particularly bad year as a huge increase in the price of raw materials and restrictions on exports had increased costs and limited the ability to deliver products to customers. Sales volume for 1999 would be significantly below the break even volume. As a result, Saraf was now facing serious liquidity problems and needed additional funding. It had been seven years since GVFL had first put money into the venture and Varshney now had to decide whether to write off the Saraf Foods investment or to keep backing the entrepreneur and his company. Writing off the investment would mean that the return on the investment would be very low, if the assets could be sold. On the other hand, Saraf had turned out to be an honest and hard working businessman that had built up a strong relationship with his buyers. Continuing would mean a heavy time allocation by the staff of GVFL and Varshney in particular. And how would he exit?

Entrepreneurship and Venture Capital in India
The Indian Government as well as state level administrations had provided various incentives and financing schemes to promote and finance small and medium enterprises (SMEs). SMEs proliferated in India, but Gujarat with its tradition of business and entrepreneurship produced many companies and two relatively successful state level financing organizations. However, these financing organizations were conservative and rarely financed companies with new or untried technologies and /or markets. The authors acknowledge the enormous support provided by GVFL and the company and particularly Messrs Varshney and Saraf. Both opened their files and gave enormous time. 1


The Saraf Foods Investment (A)

Venture Capital (VC) was just being experimented with by a development financial organization (DFI) when the World Bank was developing a scheme to promote technology development in the private sector. It identified VC as having enormous potential in India and identified organizations to spearhead the effort including the Gujarat Industrial Investment Corporation. The Government of India announced guidelines for VC funds in India in 1988. With the help of the World Bank the VC industry did eventually gain momentum in the late 1980s and early 90s. The program involved setting up VC firms and recruiting and educating people with proper backgrounds. Internship programs for 18 ‘would-be’ venture capitalists were set up with US firms in order to introduce the required knowledge and develop the man power. In total nine funds were set up with total capital of $180 million for 350 investments. India generally is considered entrepreneurial. However, industry was very much dominated by the public sector and several family-led large industrial conglomerates like Tata and Mahindra. Entrepreneurs tended to start as traders and build their businesses up based on retained earnings. They needed to learn to deal with inadequate financing and infrastructure and a difficult regulatory environment. For new entrepreneurs, it was particularly difficult to obtain bank finance and there was no services industry to support new entrepreneurs with few resources. The problem was far worse for those starting a business based on new technology and new...
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