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What are the kinds of investors who are funding ventures? VCs, Angels, Angel Funds, HNIs, Impact Funds, Accelerators, Incubators? Whom should one approach? What is the homework one needs to do?

What are the kinds of investors who are funding ventures? VCs, Angels, Angel Funds, HNIs, Impact Funds, Accelerators, Incubators? Whom should one approach? What is the homework one needs to do?

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Funding strategies Funding strategies Presentation Transcript

  • Emerging Business Trends: Part I - Funding Strategies The Institute of Chartered Accountants of India, Bangalore Branch 13th February 2014 Anjana Vivek anjana@venturebean.com
  • Agenda At the start Kinds of Investors Project Requirement Investment Process Valuation and Term Sheet Post Investment In Summary VentureBean Consulting Private Limited 2 2
  • At the Start Do take time out to think/reflect… • What are the kinds of Funding options available today for business? • What are the alternate equity investment options? VC/ PE/ Incubation? This session focusses on equity linked funding options and strategies VentureBean Consulting Private Limited 3
  • Agenda At the start Kinds of Investors Project Requirement Investment Process Valuation and Term Sheet Post Investment In Summary VentureBean Consulting Private Limited 4 4
  • Kinds of Investors: Equity (Linked) • • • • • • • • • • Venture Capital Private Equity Strategic Investors Corporate Funds Impact Investors Social Ventures Angel Funds Seed Funds 3 Fs HNIs • Incubators • Accelerators VentureBean Consulting Private Limited 5
  • Contributors • • • • • • Corporates Banks and FIs FIIs Family Business Groups HNIs Combination / others • Crowd sourcing platforms ? • Some contributors want money back in a finite time period, some are not particular VentureBean Consulting Private Limited 6
  • Caselet: You are an investee • Zyco Fund has a life Cycle of 10 years, this is a fund with overseas investors • In year 7 of the fund, Zyco has offered 1 million USD for a 15% stake in Amaze Co., in Bangalore • The promoters of Amaze also have another offer from Indo, a Rupee Fund; they are offering Rs.6 crores for 20 % stake in the company. • What are the key deal aspects the Amaze founders should consider VentureBean Consulting Private Limited 7
  • Caselet – Debrief - Illustrative • Promoters should make an effort to understand the mandates of potential investors and their reasons for investing • Some contributors want money back in a finite time period, some are not particular • The value add and brand accretion or depletion due to an potential investor need to be factored, it is not only about money and equity stake percentage • The clauses in the contract need to be checked with care VentureBean Consulting Private Limited 8
  • Caselet – Debrief - Illustrative • Founders of an investee company should think through possible scenarios over the next 3-5 years, assuming the company does as well as projected and also assuming a scenario where projections are not met • Valuation today and valuation expected tomorrow, both have a role to play in decision making • Valuations expected in 3-5 years, depend on assumptions for projections. These need to be thought through carefully from multiple angles, operations, finance, team, competitive landscape and more VentureBean Consulting Private Limited 9
  • Caselet: You are an investor • GR Fund is a fund of alumni of GR Institution • The Fund invests directly and sometimes the alumni may also invest in individual capacity • Blyitz, a for profit company, which is working on a BOP (Bottom of the Pyramid) model has got a commitment from an Angel Fund (AF) • AF tells Blyitz that they will put in money along with another co-investor, so Blyitz approaches AF • Another HNI Fund managed by a CA who is a friend of a relative of a promoter of Blyitz also hears of this deal and asks for information • How will you evaluate the investment proposal from Blyitz if you are a Fund Manager for GR Fund? What if you are the HNI Fund Manager, will your approach be different? VentureBean Consulting Private Limited 10
  • Caselet – Debrief - Illustrative • Each Investor and Fund Manager will approach it from his or her fund mandate and how the investment and disinvestment from this company will fit into this • Internal aspects, such as stage in the Fund Life Cycle, current portfolio on hand, etc. will also play a key role in evaluation • If multiple fund managers are involved, the differences and similarities in the mandates of the funds will need to be assessed • There needs to be collective discussion as to who will lead the deal, do the due diligence and play an active role post the funding. One or more of the Funds may be involved in these aspects and more VentureBean Consulting Private Limited 11
  • Stages of investment • • • • • • • Idea / Seed R&D / Pilot / Proof of Concept Commercialization / Scale up Early Stage Growth / Later Stage / Expansion Turnaround … etc. VentureBean Consulting Private Limited
  • Trends • • • • VCs Foreign VCs FIIs directly investing in India Banks and other institutions also looking at innovative ways to fund SMEs • Corporate Investors • Government supported funds VentureBean Consulting Private Limited
  • Trends • Successful entrepreneurs in US turned financiers, TiE - initial wave • Successful Indians turning angel Investors; individually and in groups – later wave • Overseas Angel Investors • NRI entrepreneurs tapping Indian funds • Successful individuals setting up incubation centers and accelerators • Incubation centres at academic institutions VentureBean Consulting Private Limited
  • Agenda At the start Kinds of Investors Project Requirement Investment Process Valuation and Term Sheet Post Investment In Summary VentureBean Consulting Private Limited 15 15
  • What a project must have • High upside potential • Potential for extraordinary returns to investor • Exit route plan • This implies – Rapid Growth, i.e. – – – – Total addressable market is high Company has potential to address this market Company has ambition to address this market Company has the capability to Execute to achieve growth – Risks are articulated VentureBean Consulting Private Limited
  • Investors look for • Team – leadership, multidisciplinary, integrity, competence, capability to execute, domain knowledge • Idea/Service/Product potential to attract large numbers of paying customers • Market, opportunity, growth expected, barriers to competition • Exit avenue VentureBean Consulting Private Limited
  • Business Plan • An output based on business model and strategy, expected to evolve over time • To be forward looking, based on past knowledge of promoters and their work experience in the existing or new venture • Assumptions to be tested to see if they will be valid for execution, i.e. to demonstrate this is not a business plan on paper alone • Risks to be factored in plan • Multiple scenarios are looked at, revenues expected are discounted, expected costs and expected cash flows factored, sensitivity to key parameters checked VentureBean Consulting Private Limited
  • Due diligence reviews (DDR) Investment decision is based on DDR, some illustrative reviews are below. Some of these or aspects of these may be done in-house by the investor, others may be out-sourced to experts and professionals: • Business • Market • Accounting • Tax and Legal • Technical • HR VentureBean Consulting Private Limited
  • An Illustrative Sales Quality Review.. • Illustrative indicative parameters, for DDR – Sales Quantity – Quality of revenue - in terms of product/service/vertical/location etc. – Average revenue per employee – Number of customers, number of high value customers – New customers added – Customers lost – Pipeline customers – Etc. VentureBean Consulting Private Limited 20
  • Value Creation Review • Investment should have potential for value creation not value depletion; i.e. beyond – Top line (revenues) – Bottom line (profits) and – Cash flow • To understand financial and non-financial aspects of business and investment into business and impact on growth and sustainability VentureBean Consulting Private Limited 21
  • Agenda At the start Kinds of Investors Project Requirement Investment Process Valuation and Term Sheet Post Investment In Summary VentureBean Consulting Private Limited 22 22
  • VC investment & exit Promoters with Project Initial Meetings Prelimnary Project Review by Venture Capitalist Term Sheet Signed by Venture Capitalist & Promoters Due Diligence Review of Project Divestment & Exit from Project Mentoring & Monitoring of Project Investment made by Venture Capitalist in Project Legal Documents /Agreement Signed Venture Capitalist with Funds Promoters Venture Capitalist VentureBean Consulting Private Limited
  • Investment life cycle • • • • Partner (s) identification Due diligence review Forecasts and valuation, Exit Plan Negotiation, acceptable and non-acceptable terms (deal breaker and deal maker issues) • Other deal terms and conditions • Deal closure • Post deal monitoring and mentoring VentureBean Consulting Private Limited 24
  • Agenda At the start Kinds of Investors Project Requirement Investment Process Valuation and Term Sheet Post Investment In Summary VentureBean Consulting Private Limited 25 25
  • Valuation • Based on – Tangibles and intangibles – Data and assumptions – Subjectivity and objectivity • Many methods of computation including but not limited to – Multiples of revenue, earning, user base etc – Cash flow based, discounted – Cost based • Factor statutory, accounting, and tax implications VentureBean Consulting Private Limited 26
  • Valuation • Driven by markets including flavor of season, competitive scenario, team at helm etc. • Driven by percentage of stake offered, negotiation etc. • Deals can sometimes be structured to accommodate valuation perceptions; by linking to future performance etc. • For more on valuation: detailed notes are at http://www.slideshare.net/anjanavivek/valuationbasics (from the popular set of the TOP 4% viewed on SlideShare in 2013) VentureBean Consulting Private Limited 27
  • Term Sheet • Term sheet is a letter of intent and may or may not be legally binding • Term sheet terms give a summary of proposed principal terms of investment • Term sheet is usually subject to satisfactory completion of due diligence reviews • These may need the company to enter into a period of exclusivity • May range from simple (few pages) to a complex term sheet running into hundred plus pages • Review this from the practical angel as well as from a legal angle VentureBean Consulting Private Limited
  • Term Sheet extract Amount of investment Rs. 100 million Type of security Equity Shares Pre-money valuation Rs. 300 million Post-money valuation Rs. 400 million Equity shareholding of the company post investment Existing holders of equity a b c d e f 15% 15% 10% 10% 5% 5% Stock options pool 15% VC Investor Limited 25% 29 VentureBean Consulting Private Limited
  • Agenda At the start Kinds of Investors Project Requirement Investment Process Valuation and Term Sheet Post Investment In Summary VentureBean Consulting Private Limited 30 30
  • Post investment • Can mentor and play advisory role • Can assist in multiple aspects, from sales to getting a good team on board, to assistance in fund raising for future rounds of investment, i.e. helps network, provides contacts, opens doors.. • Can improve governance, systems and process as venture gets monitored • Can add to the brand value, some investors may conversely, deplete the brand value • Some like accelerators, angel investors, may play an even more active role, like a copartner/promoter VentureBean Consulting Private Limited
  • Post investment Flip side • Could be perceived as interfering, this depends on investor/entrepreneur relationship • Multiple investors with different agendas can pull founders in different directions • If the investors feel the company is not moving as anticipated, they may choose to ignore requests and focus on other companies in their portfolio VentureBean Consulting Private Limited
  • Agenda At the start Kinds of Investors Project Requirement Investment Process Valuation and Term Sheet Post Investment In Summary VentureBean Consulting Private Limited 33 33
  • In Summary • Both investor and investee need to take care and plan before going ahead.. • Execution is the key for success, so the plan must be a realistic one, an executable one .. • And if planned, executed and monitored with care… Success will follow VentureBean Consulting Private Limited 34
  • In Summary • Thank you for the patient hearing • Delighted to invite you to view/follow the link below for periodic insights, class notes & more, from thought leaders, academicians and others at the VentureBean Consulting Knowledge Hub: http://www.linkedin.com/company/venturebeanconsulting-private-limited www.slideshare.net/anjanavivek • Contact for more information and inputs: beanie@venturebean.com VentureBean Consulting Private Limited 35