FUNDS FOR INNOVATION A.S.Rao, asrao@nic.in

Angel investors angels provide capital and frequently valuable guidance and strategic assistance. The ideal angel is someone who is a generation ahead of the entrepreneur in creating value in the industry. Angels are sometimes said to invest 'emotional money ,' while venture capitalists are said to invest 'logical money' .

angels provide capital and frequently valuable guidance and strategic assistance.

The ideal angel is someone who is a generation ahead of the entrepreneur in creating value in the industry.

Angels are sometimes said to invest 'emotional money ,' while venture capitalists are said to invest 'logical money' .

To capture angels attention : An in-depth understanding of the market in which they're competing. A product or service that can be differentiated from the crowd. A concept that is very "scalable" (one that can be rapidly expanded).

An in-depth understanding of the market in which they're competing.

A product or service that can be differentiated from the crowd.

A concept that is very "scalable" (one that can be rapidly expanded).

VENTURE CAPITAL FUND (VCF) Venture capitalist or a venture capital company can be defined as a financial institution, which joins the entrepreneurs as a co-promoter, in a project and shares the risks and rewards of an enterprise. startup financing sequence starts with the entrepreneurs (inventors) putting their own available funding into a shoestring operation. Next, an angel investor may be convinced to contribute funding. Thereafter comes venture capital.

Venture capitalist or a venture capital company can be defined as a financial institution, which joins the entrepreneurs as a co-promoter, in a project and shares the risks and rewards of an enterprise.

startup financing sequence starts with the entrepreneurs (inventors) putting their own available funding into a shoestring operation. Next, an angel investor may be convinced to contribute funding. Thereafter comes venture capital.

VC expects the enterprise to have a very high growth rate provides management and business skills to the enterprise expects medium to long-term gains and does not expect any collateral to cover the capital provided

expects the enterprise to have a very high growth rate

provides management and business skills to the enterprise

expects medium to long-term gains and

does not expect any collateral to cover the capital provided

Advantages of venture capital Finance Business Partner Mentoring Alliances Facilitation of Exit

Finance

Business Partner

Mentoring

Alliances

Facilitation of Exit

STAGES IN VENTURE FUNDING Seed Stage Early Stage -not yet sold their product commercially Expansion/Development Stage - a period of rapid growth and the company will usually require several rounds of capital injection as it achieves the milestones set in the business plan.

Seed Stage

Early Stage -not yet sold their product commercially

Expansion/Development Stage - a period of rapid growth and the company will usually require several rounds of capital injection as it achieves the milestones set in the business plan.

VC APPRAISAL PROCESS Preparation of Info-Memo- business plan, market estimate ,resumes Letter of Intent – after Due Diligence , Broad subscription terms Investment Valuation -Details like board seats, veto powers, requirements for additional investment, vesting schedules, salaries. Also financial structure

Preparation of Info-Memo- business plan, market estimate ,resumes

Letter of Intent – after Due Diligence , Broad subscription terms

Investment Valuation -Details like board seats, veto powers, requirements for additional investment, vesting schedules, salaries. Also financial structure

VALUATION OF A START-UP Step-up ratio- credit for the initiative and non-monetary investment (15=2*5+5)(7) burn rate -the rate at which a company goes through its cash (43 =7X4+15)(22) 2 nd round(91 =22X3+25)(47) IPO (194=47X2+100)(147)

Step-up ratio- credit for the initiative and non-monetary investment (15=2*5+5)(7)

burn rate -the rate at which a company goes through its cash (43 =7X4+15)(22)

2 nd round(91 =22X3+25)(47)

IPO (194=47X2+100)(147)

RISKS IN VC A change in industry growth vis. assumptions A change in competitive pricing vis. assumptions Difficulties in achieving product development schedule Difficulties in obtaining parts and raw materials A change in market structure (e.g. a new entrant or a new technology) A change in the availability of appropriately priced and trained labour

A change in industry growth vis. assumptions

A change in competitive pricing vis. assumptions

Difficulties in achieving product development schedule

Difficulties in obtaining parts and raw materials

A change in market structure (e.g. a new entrant or a new technology)

A change in the availability of appropriately priced and trained labour

Promoter Risk Integrity / honesty of the entrepreneur / promoter First generation entrepreneur Lack of experience in related field Lack of contacts with resource persons Lack of experience about - market - technology

Integrity / honesty of the entrepreneur / promoter

First generation entrepreneur

Lack of experience in related field

Lack of contacts with resource persons

Lack of experience about

- market

- technology

Product Risk Development stage of product Product life cycle Risk of reverse engineering Manufacturing complexities Number of constituent technologies

Development stage of product

Product life cycle

Risk of reverse engineering

Manufacturing complexities

Number of constituent technologies

Technological Risk Availability of superior technology Unpredictable technology development Technology life cycle Investment requirement for assimilation Lack of organisational capability to assimilate Source of technology / Goodwill of supplier Level of technology (high or low)

Availability of superior technology

Unpredictable technology development

Technology life cycle

Investment requirement for assimilation

Lack of organisational capability to assimilate

Source of technology / Goodwill of supplier

Level of technology (high or low)

Market Risk New users; uncertainty in market acceptance Market growth rate Competitors Substitute products Potential entrants Huge marketing expenditure Unorganised sector No assured market

New users; uncertainty in market acceptance

Market growth rate

Competitors

Substitute products

Potential entrants

Huge marketing expenditure

Unorganised sector

No assured market

Financial Risk Capital market situation (e.g. lack of exit opportunities) Current leverage ratio not in par with industry average Growth prospect of the company Foreign exchange risk Problem with working capital; Liquidity problem Expected rate of return Lack of understanding of standard financial procedures

Capital market situation (e.g. lack of exit opportunities)

Current leverage ratio not in par with industry average

Growth prospect of the company

Foreign exchange risk

Problem with working capital; Liquidity problem

Expected rate of return

Lack of understanding of standard financial procedures

Implementation / Operational Risk Manufacturing complexities Capability of producer / organisation Manufacturing set up Commitment from manufacturing Unavailability of skilled work-force Maintenance problem Lack of contacts with resource persons Problem in arranging additional fund

Manufacturing complexities

Capability of producer / organisation

Manufacturing set up

Commitment from manufacturing

Unavailability of skilled work-force

Maintenance problem

Lack of contacts with resource persons

Problem in arranging additional fund

Organisational Risk Motivation of employees Employee turnover Dependence on few workers

Motivation of employees

Employee turnover

Dependence on few workers

Strategy Risk Loosing competitiveness Unrelated diversification

Loosing competitiveness

Unrelated diversification

Environmental Risk Changes in Government policy Lack of understanding about regulations Pollution / hazard Availability of raw material Legal barriers - piracy / patent etc.

Changes in Government policy

Lack of understanding about regulations

Pollution / hazard

Availability of raw material

Legal barriers - piracy / patent etc.

HOW TO IMPRESS A VENTURE CAPITALIST VC Fundamentals- The venture capital firm get paid first. Whether by means of a liquidity event or the liquidation of the company in the event of failure, the VC firm will get paid first. Participation in the upside of the venture. The VC will benefit from the appreciation in value of the venture over and above the original investment. Control over critical events. VC will want to have decision rights in matters that vitally affect the business, such as the decision to do an IPO. Creation of a path to liquidity. There must be a way for the VC to cash out of the venture.

VC Fundamentals-

The venture capital firm get paid first. Whether by means of a liquidity event or the liquidation of the company in the event of failure, the VC firm will get paid first.

Participation in the upside of the venture. The VC will benefit from the appreciation in value of the venture over and above the original investment.

Control over critical events. VC will want to have decision rights in matters that vitally affect the business, such as the decision to do an IPO.

Creation of a path to liquidity. There must be a way for the VC to cash out of the venture.

Other factors Winning Team Financials - Hockey Stick Appoach requires an investment of 20 L over a 3 year period. VC expects a return of 5 times . PAT-30L.P/E-10 VC share= 20X5/ 30X10= 100/300= 33.3 %

Winning Team

Financials - Hockey Stick Appoach

requires an investment of 20 L over a 3 year period. VC expects a return of 5 times . PAT-30L.P/E-10

VC share= 20X5/ 30X10= 100/300= 33.3 %