The Steps• Personal Decisions• Business Plan• Pitching to the Investors• Negotiation & Closure
Answer this Question, FIRST!
What do you want your pie to look like? Share of your pie 1XYZ Unknown private Limited O You are the boss, owner, can pass R You are the founder, chiefit on to your children objective is the value creation.
Lifestyle Business vs. CorporationLifestyle Business Corporation• Be your own boss • Founder, not boss – Lone wolf – Team• Self funded • VC/Investors• Organic growth • Fund the plan• Slower growth • Rocket ship• Can re-invent • If a miss, typically themselves flame out• No planned exit • Exit strategy
Equity FinancingBusiness Stage Stage 1 Stage 2 Stage 3 Stage 4 Stage 5 Type Risk Seed Venture Private PublicSource of Own / family Family / VCs VCs / Private Public, MFs,funds friends / Equity Institutions AngelsPrime Creating / Creating a Establishing Scaling up the Established,Activity exploring an Prototype the model model scalable, profit idea Generating businessTypical Very low, sub Typically 20 Rs. 2 to 10 Depending on Depending onFunds 500,000 - 50 lacs crores the business the businessRequirement(indicative)
Business Plan• The problem you are solving – target audience• How large is it?• How will you reach out?• Can you do it profitably?• Scale & Exit
Watch the size Must match your capability level V/s• Smaller scope … with killer potential!• Too small for the “big guys” • Need time to acquire capability
What is the modelInnovation Efficiency
How much should you planReady. Aim. Fire. FIRE. FIRE. FIRE OR
Pitching to the VCs• Identify the segment – Financial, strategic, other• Typically behavior similar across financial investors• Fundable deals move fast• If negative response from first 3-4, regroup and evaluate.
Equity Allocation• Service Providers • Business Plan, space, HR, marketing, etc • Cash v/s equity• Management Team • Fixed v/s variable v/s no salary • Share of equity • ESOP plan • Option price
Valuation Approaches• Rules-of-Thumb / Multiples• Discounted cash flow - Weighed Average Cost of Capital (WACC) - Capital Cash Flows (CCF)• Scenario analysis• Decision tree analysis• Others
Rules-Of-Thumb Procedures• Look at similar deals.• Look at ratios of similar public firms: - Valuation / sales. - Valuation / profit (P/E). - Market value of equity/book value. - Use multiples to generate projected value.
Equity Allocation for Founders• Founders • Based on experience / cash / proposed effort • Vesting Schedule • Dealing with unequal distributions / perceptions • Get a formal agreement in Place • Deal with issues like Decision making process, responsibilities (operational / strategic), etc – these become very important as the business grows • Answer the question – “What if it does not work out?” » Vested / unvested shares » Put / Call option
Terms & ConditionsEquity Investments• Extent of Stake• Affirmative Rights• Liquidation preference• Control Issues – – Operational – Board – Shareholders
But more than anything else…
It is the timing – raise money when the market is ready