WHAT DOES A PERSON DO WITH A 950 CRORE? If he is Girish Patel, he starts all over again. Till recently part owner of Paras Pharmaceuticals, an over-the-counter drug maker, Patel sold his stake in December 2010 to Reckitt Benckiser. The entire company went for Rs 3,260 crore; Patel’s share came to Rs 950 crore, and he plans to use some of it—$25 million (Rs 112.4 crore) for now—to fund family-owned startups.

“I am interested in transforming a family-run business into a professional outfit for future growth, one that creates wealth and value for the promoters,” says Patel. Think of him as a PE player who’ll invest in and advise small, family-run businesses. If the startup needs more money than he’s prepared to invest, he’s open to being one of the investors. However, unlike private equity or venture capital funds, he plans on being invested for a longer term.

He refuses to divulge names of companies he’s eyeing, but indicates that they won’t all be pharma. “I’ll never repeat the same business, because you become overconfident,” he says. “I may invest in a consumer goods company after my non-compete agreement with Reckitt Benckiser ends, but I won’t incubate another such company.”

Unlike PE funds, which have a five- to six-year horizon because they’re playing with investor money, Patel will be investing his own funds and is, hence, answerable to nobody.

He’s looking at businesses seeking investments of around Rs 60 crore, where if a PE firm invests Rs 50 crore, he would put in Rs 10 crore. He argues that a stable investor will allow promoters to continue creating wealth and value for themselves and the next generation. “Successful private investors make tonnes of money,” he says. “I’m looking at doubling my investment every two to three years. I’m a businessman, not a social worker.”

His past life should come in handy. In 23 years, he turned Paras from a family-owned venture making Rs 57 lakh a year to a professionally-run outfit making Rs 400 crore a year. Patel believes the biggest challenge for family-run businesses today is inducting professional management. He should know: That was Paras’s challenge a decade ago.

PATEL JOINED PARAS, his father’s firm, in 1984 when he was put in charge of the southern markets. In 1986, he moved to the headquarters in Ahmedabad. When Patel started out, he joined several of his uncles and cousins, all of whom were heading various divisions. Over the next three years, his two brothers, Darshan and Devendra, also joined the business. By then Patel was heading operations at Paras.

Around 1998, Patel began feeling that the senior management team, (read mainly family members), had reached its limit to handle and implement the strategy carved out for future growth. So, in mid-2000, he hired Rajnish Karki, an IIM Ahmedabad fellow with a doctorate in strategy management, to transform what he calls an “entrepreneurial setup into an institution with a uniform framework”.

The family did not favour inducting professional managers; but when pushed, they agreed to learn how to operate as professionals. Karki began training sessions for seven family members, determining roles for each of them and making them accountable with performance evaluation systems and rewards.

Girish Patel with his family. Patel says he will be a long-term investor.
Girish Patel with his family. Patel says he will be a long-term investor.

Even before the family was trying to learn professionalism, there were schisms. Patel’s management style and philosophy clashed with that of Darshan Patel, who finally stopped coming to office towards the beginning of 2000. But he was back within 10 months. “People started asking questions, so I asked Darshan to return. I resigned as MD and gave him charge,” says Girish Patel.

Karki’s training programme was the first victim of the change. The next was growth. In five years (2001-2006) under the younger brother, Paras’s topline grew from Rs 200 crore to Rs 250 crore. By 2006, Patel realised he had to intervene and asked his brother to give way. Darshan Patel chose to exit and Patel approached the U.K.-based PE firm Actis to buy Darshan Patel’s 26% stake. Actis bought the stake for $43 million. Paras was then valued at roughly a fifth of what Reckitt would ultimately pay.

“When there is a conflict in the styles of running a business, the best way is separation,” Patel says, now wiser. (This is exactly the kind of advice he hopes to impart as a PE investor.) Many believe that had Patel continued, Paras wouldn’t have lost five years of growth. (Between 2001 and 2006, Paras’s Ebitda grew by just Rs 12 crore to Rs 50 crore, while for FY11 that is expected to touch Rs 150 crore.) “To take the company to the next level, systems and processes needed to be put in. Girish was the CEO and he needed to make that change,” says Karki.

Other hard-nosed calls were also required to effect the transformation. “When we made the first investment in 2006, Girish and Devendra were managing the business. But by 2008 Girish had come to a conclusion that to take the business to the next level, Paras needed a professional CEO. He sought our help to find a quality CEO,” says J.M. Trivedi, partner and head of South Asia, Actis. Meanwhile, Devendra also indicated that he wanted to sell his shares in the company. In 2008, Actis bought out the youngest brother’s stake as well.

They also got in S. Raghunandan, then head of Dabur’s international business, as the CEO the same year. Raghunandan in turn recruited second-line managers in marketing, sales, and supply chain management. He also implemented SAP and an IT-enabled secondary sales tracking tool which helped Paras track sales right up to the retail level. This led to distribution reach almost doubling over two years, resulting in better sales and improved profitability. Shows why Reckitt Benckiser valued the company at 8.5 times its revenue and over 30 times its Ebitda.

WITH THIS KIND OF HISTORY, Patel says that he can warn other family-run businesses of potential pitfalls, as well as suggest ways to overcome them. Along with an understanding of how the mind of a promoter works, Patel also brings his entrepreneurial expertise to the table. “He knows how to grow a Rs 20 crore company into a Rs 200 crore one. He can tell you a lot about how to get there and how to get there very quickly,” says Karki.

More relevant for startups is the fact that Patel knows the importance of having a sounding board. When Actis took a majority stake in Paras, former Hindustan Lever (now Hindustan Unilever) chairman Keki Dadiseth also invested in the company as a private investor. “His presence was a comfort to both Actis and me. Initially, there were times when I didn’t agree with certain decisions that were being taken and I often communicated my thoughts to Dadiseth who then spoke to the PE guys. Such a relationship is a huge advantage,” says Patel.

Patel’s new venture is a work in progress; he knows what he’s going to bring to the table. Together with Karki, he’s ironing out the details, and will soon start looking for prospects. Karki says the investing entity could also be a collaboration with other investors or PEs.

“My main idea is to back the family. I will tell the family that along with bringing professional PE funds to invest in your business, I am also investing in your business. I will guide you on how to deal with issues, how to do business, and how to manage a board. In families, board meetings are never held. After one year, you just write some minutes. I have seen this happening with my company. There is no concept of a shareholders’ notice, there is just a signature,” says Patel.

Actis’s Trivedi believes such advice can be most useful. “Girish can inspire many Indian entrepreneurs in striking a balance between owner management and professional management.

Apart from funding other startups, does Patel want to start a venture with his family? For the record, he plans on investing $20 million in son Arpit’s startup. He laughs off the question, but says that if he does anything of the sort, “there’d be one ground rule—the person who wants to do that business should own 51%. The remainder can be held by the rest of the family or working partners.” He explains why this becomes critical as the company grows: “If all family members have an equal stake and are divided on major issues, it’s difficult for a professional CEO to take decisions.”

While Patel says the hardest time for him was when his brothers left him, he is convinced that it was the only way ahead. He adds he never wanted to sell out, but Paras had ceased to be a family business once his youngest brother left. Perhaps that’s why he is keen that other family-run businesses stay within the family.

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