Inside the deal engine room: VCs and PEs make the case for ERP as a governance variable

“For over 50 years, SAP has been the most trusted enterprise application, when adopted by enterprise it ensures transparency and brings lot of confidence into the investor” Managing Director and Member of Board, India, NTT Data Business Solutions India Krunal Patel told a room full of venture capitalists (VCs) and private equity (PE) investors in Mumbai. The maturity of a company’s enterprise resource planning (ERP) systems is already shaping how confident buyers feel about its numbers, Patel clarified, and, by extension, what they are willing to pay.

A decade ago, environmental, social and governance (ESG) factors were still at the margins and not central to how investors assessed term sheets; today, they are more central to deal valuations. Miloni Bhatt of The Economic Times asked what the next such variable would be: what would investors start formally pricing into deals and even walk away from, despite impressive top-line numbers? “For me, I think it is readiness,” Bhatt said. “How ready is a business underneath? How good is the data? How real is the growth? What about the numbers? Are they in order? And what is the intent of the founder?”

At the centre of the roundtable was ERP maturity, the quality of a company’s SAP or other enterprise systems, the integrity of its data, and the robustness of its processes, as seen by investors and by NTT Data, which enters companies after the cheque has been written.

Readiness seen from inside the deal

Bhatt began with Patel because his teams see the “underneath” of businesses after the cheque has been written. “Many times, we do the due diligence on the tech side from a tech perspective. But we leave out the process, the context under root engineering checkup,” he said. “And because of which, after we invest, we realise that, you know, probably there could have been much more due diligence done on the application, on the ERP, which could have given us a fair value of the deal,” Patel added.

Over the past year, NTT Data Business Solutions India has implemented SAP transformations for capital-infused auto-components manufacturers, pharma businesses acquiring active pharmaceutical ingredient (API) units, and bank-backed enterprises, each showing systems and processes that were not ready for the scale implied in the investment thesis. “When these deals are happening, right from the due diligence to exit, there are various phases of maturity that portfolio companies as well as the target companies have to be going through,” Patel explained. “And what we realise is that when we start with this together as a partner from due diligence to exit, that’s the life cycle of a deal,” he added. That life-cycle view, Patel argued, is what turns technology from a one-off diligence checklist into a continuing governance variable.

Sometimes, missing readiness is already altering deal structures. Patel recalled a family-owned automobile components company that “went through multiple rounds of raising funds” but received conditional funding because it could show profitability at the enterprise and plant level, “but not at the stock-keeping unit (SKU) level. It has to be at SKU level. And because of which the investor then ultimately did a conditional funding.” In other words, ERP maturity, and the granularity of data it can support, is beginning to be priced in explicitly.

Family businesses operational transparency

From the inside view of systems, the conversation moved to family businesses and institutional ownership.

Ritesh Chandra, Managing Partner, Avendus Future Leaders Fund, works with older, family-run companies seeking institutional investment for the first time, as well as newer, fast-growing businesses. He sees two broad buckets. “Folks who do not have systems in the first place. And the other folks who have a system and are operating on that,” he said. “The first discussion is always around, hey, why do I need to change? My business has been working, you know, just fine, without you guys, why do I need to change?”

Even when systems exist, almost everything depends on their integrity. “We’ve seen systems which have patches in them. As they say, in India, there used to be two books of accounts. There are two sets of systems which come in,” Chandra said. “That’s a big red flag for us, for example, if the guy is not able to discuss getting a third party vendor to kind of upgrade his system, etc., you know that there is some issue.” In his own portfolio, he has seen ERPs that masked regional sales manipulation and quietly dropped bills from the consolidated profit and loss statement, with accountants “down the chain” unaware that the system was not capturing every bill.

The argument Chandra makes to promoters, therefore, is not about software features, but credibility and value creation. “It’s a carrot and stick policy, right? I mean, the stick is that you’ll never get the money, you’ll never get to see the money,” he said. “But the carrot has to be the fact that… a 3 to 5 crore investment in the overall scheme of things is pittance, right? If you’re looking at value creation for yourself and the credibility that it brings along with it, right, in terms of the fact that, listen, if somebody organisation tells me, listen, I have ERP, SAP running on the background, here is a login, you can do your checks. That gives me confidence that the guy has nothing to hide, right?”

Intent before infrastructure

Anjali Bansal, Founding Partner, Avaana Capital, took the conversation one step further, from systems to the intent that drives them. “Governance starts not with ERP or systems, it actually starts with intent,” she said. “So, governance is not about having a highfalutin board. It’s really about the intent of the founder, promoter, family, whichever way you think about the dominant shareholder.”

She offered a reading of the culture and mindset of an organisation that seemed to resonate around the room: “Governance is not about Niti (policy), it is about Niyat (intent). If the intentionality is not there, no amount of board, ERP can help.” Drawing on her experience of serving on the boards of fast growing businesses, she noted that ambitious founders who want to build large companies instinctively invest in governance and systems, even if the implementation is patchy in the early stages.

For Bansal, this leads to a sequencing: “Intention comes first, governance comes next, enterprise maturity first, ERP maturity next.” Very early-stage companies, she argued, cannot yet be valued on ERP maturity; they must first reach some scale, show good data and sound processes, and prove they are not “cooking their own books” before systems can be treated as a deal variable.

Founder DNA, capital constraints and readiness

Vikram Gupta, Founder & Managing Partner, IvyCap Ventures Advisors Private Limited, agreed that everything “boils down to the team and their intention and their basic ethics and their attitude towards life,” but added a pragmatic view of capital constraints and human behaviour. “We invest from C to Series B,” he said. “When the founders are very early and let us say seed even up to Series A, I think even if they have the intention, I think they are all struggling and juggling with multiple things and the challenge there is the capital is extremely limited… at that stage it is a survival issue.”

Gupta looks for intent expressed not only in conversations but in the financial plan. “When you assess their five-year plan, if they have a line item which is actually showing expenses in building a tech system which is going to transparently show their governance and their other things and if they have specific cost items assigned to it, you can see that there is a mindset of being transparent of systems and processes even though they may not be doing it at that stage, but at least the mindset of doing it,” he said.

Over time, he has seen how behaviour shifts with cheque sizes. People go from raising ₹10 crore to ₹100 or ₹1000 crore, and “sometimes they are sitting on so much cash that they do not know what to do with it and then comes a real human behavior at that stage.” As cheque sizes grow, Gupta has seen founder behaviour change, making readiness a moving target that must be repriced at each stage.

Valuation, structuring and hidden risks

Rajesh Sehgal, Managing Partner, Equanimity Investments, brought a public-market lens to the impact of ERP maturity on valuation. “Obviously, it will impact, you know, the valuation multiple etcetera, but it is not as easy as that,” he said. “Whether a company uses technology, or any ERP system, etcetera appropriately or not, it is not a very simple translation into giving them a premium for because they are using the best or a discount because they are not using it. It is not as straightforward as that.”

Instead, he breaks ERP maturity down into underwriting variables. “If systems are fragmented and that is a very common thing across large public market companies as well, systems are fragmented. You know this system is not talking of that system and therefore, somebody somewhere has to do something manually, big red flag,” Sehgal said. “Second is if… your system is not able to give you a straight answer and… the founder has to sometimes step in and reconcile it for you… that is also a big red flag.”

Discounting the valuation upfront on the back of such findings is “not an argument you can win easily,” so he focuses on structuring instead. “In some cases what we have done is use the escrow mechanism. So, if you are not confident of some numbers you say okay you know this period this is going to be an escrow. So, we can monitor,” he said. “In some cases… We have used some earn outs as well… milestones in terms of not just business milestones, but these are milestones of setting in place, system and processes and… audited by a third party which says that okay this system now systems are talking to each other nobody else needs to intervene.” In public markets, thousands of eyes interrogate the numbers every quarter; in private deals, two to four investors may rely on the founder-supplied MIS, making such structuring a way to price readiness without blowing up the transaction.

If governance, systems and valuation are one layer of readiness, there is also an older lineage of how Indian businesses have tracked performance. Brijesh Damodaran, Managing Partner, Auxano Capital, evoked an older regime. “Before SAP came into play there is something called Parta [a traditional daily cost-management and accounting system] and that was like unique when Babuji was more feared than the auditors and you had be it a cement company or the steel company you know you actually knew factory unit wise what was the profit or the loss for the day,” he said. “I am talking about 34 years or even 50 years back.”

For Damodaran, today’s ERP and AI tools should restore that kind of unit-wise visibility. “When we look at… the reports you just came out today, let us say by doing your diligence can I get unique revenue numbers… three years in the last three years where was this revenue head or there is a vendor or there or not. Those unique things can come out,” he argued, suggesting that such diagnostics matter in valuation rounds. He urged investors to move from fear of missing out (FOMO) to joy of missing out (JOMO) when pushing for escrow-linked milestones and compliance: “Can we get… from the founder saying that I have complied with ABCDEF and that it is possible.”

AI as accelerator and stress test

As the conversation shifted to AI, Ashish Fafadia, Partner, Blume Ventures, argued that technology is accelerating readiness rather than complicating it. Asked whether AI makes the mess worse or forces companies to finally get organised, his answer was “fairly binary”. “It definitely makes life easy in the medium term itself,” he said. “You take any technology and it definitely makes it accessible for companies much earlier… now for the first time you are in that zone where you can start funding companies which are solving for the mid market or even a little earlier that is because of technology that is because of AI.” Technology, he added, is “pushing the curve faster” for ERP adoption and audit-grade diagnostics.

At the same time, intent and discipline remain non-negotiable. Amish Dedhia, Principal, Chiratae Ventures, described the fiduciary duty investors assume when backing companies “just at idea stage”. “At that time there is a fiduciary duty that this group here takes that we will handle that person through ourselves as well as our advisory networks,” he said. Founders are nudged to build systems “where data is getting captured… from day zero,” and to understand that “you have to capture every data [point]… [because] the larger picture is what you know what is happening in all the levers to grow or to focus or to defocus.”

Ritu Verma, Co-Founder and Managing Partner, Ankur Capital Fund, brought the AI discussion back to basics. “It is only as good as the data,” she said. “So, you feed garbage in and you get garbage out. So, that part is pretty critical that it comes back to what Anjali said. If you intend to capture the data appropriately, absolutely, AI will help accelerate, but if you do not then we have to think of mechanisms of how to.” For her, the core question at seed stage is whether founders recognise that “if you do not do this you will not build value” and whether they will start putting systems and processes in place even while they are in an “existential state of survival,” Verma elaborated.

Fafadia linked that behaviour back to founder “DNA”: “A lot of the time, it is about the DNA, it is how a guy makes a decision… is it a data driven culture,” he said. “Can you get into some pattern matching, yeah, you would interact with the guy half a dozen times before you make up your mind and there will be patterns which will be available in the DNA and that is the starting point.”

Systems selection and measuring readiness

If founders and investors are still learning their way around AI and ERP, systems-selection has become a challenge of its own. Ashwin Raguraman, Co-Founder and Partner, Bharat Innovation Fund, recalled a conversation 15 years ago between the Auto Component Manufacturers Association (ACMA) and the National Association of Software and Service Companies (NASSCOM) about choosing ERP vendors. “The key underlying theme in that conversation is how do we even select an ERP vendor right and they were like, hey, we want NASSCOM which is an IT industry body to help identify an ERP vendor,” he said. “I am seeing that happening with AI today. Right people do not know okay there is intent but you do not know how to about it. What do you do? How do you get into the nuts and bolts of selecting the right systems… how do you convert that intent into action and there are a lot of question marks that have existed on ERP and now exist in AI.”

On the technology provider’s side, Keval Shah, Customer Advisory Lead – Cloud ERP – India, SAP, suggested ways to turn this into measurable readiness. “Intent has to be there, data has to be captured, processes have to be mature and governance has to be there,” he said. “So one of the things that we try and do is to do a process intelligence first and a process maturity index first as to what are the processes that they are following today and how are they being followed in the current system… Second is the data intelligence: how mature are they on the data part and what is the data intelligence that is coming out of the system and there is a way to score that as well.” Public-cloud ERP, he added, now lets systems be “implemented based on intent… you just say that this is what I want, this is how I want to run the process and the ERP gets configured on the back end as you say it… we have delivered ERP implementations now in 30 days, in 45 days, which is next level.”

Yet the most overlooked variable in this equation may be finance itself.

Anil Joshi, Managing Partner, Unicorn India Ventures, pointed to a recurring blind spot among first-generation founders. “The biggest issue is the acceptance of one function which is being ignored is, you know, finance and accounts,” he said. “They want to hire one crore techies but are not willing to spend five lakh on a chartered account and or I think this disparity you know needs to be corrected till time that happens I think the acceptance of bringing any system will be ignored.”

Back at NTT Data, Patel has seen both sides: digital natives that invested early in back-office systems, and those that focused entirely on front-end tech. “We have been supporting a lot of digital native startups ,” he said. “Those who have invested in finance primarily on SAP are now very confident about what the numbers are and how they do because we help them manage the systems.” In one transaction that we handled where an arm of company was sold to other company as both companies operated SAP the entire carve out as well as merger on both the sides,was smooth ” showing how ERP maturity can smooth exits.

At the same time, Patel warned, “people have neglected the complete finance part because they build a tech company and they left out the core tech of back office… in their core tech solutions they are very good… they have all these MAU and all the other metrics perfect, but in the back office they are still maybe using” rudimentary tools. Investors, in other words, can be looking at polished apps and impressive user metrics while the underlying accounts remain opaque; a gap that makes readiness the next governance variable to be priced.