FUNDS FOR INNOVATION A.S.Rao, asrao@nic.in
Angel investors <ul><li>angels provide capital and frequently valuable guidance and strategic assistance.  </li></ul><ul><...
To capture angels attention :  <ul><li>An in-depth understanding of the market in which they're competing. </li></ul><ul><...
VENTURE CAPITAL FUND (VCF) <ul><li>Venture capitalist or a venture capital company can be defined as a financial instituti...
VC  <ul><li>expects the enterprise to have a very high growth rate </li></ul><ul><li>provides management and business skil...
Advantages of venture capital <ul><li>Finance   </li></ul><ul><li>Business Partner   </li></ul><ul><li>Mentoring   </li></...
STAGES IN VENTURE FUNDING <ul><li>Seed Stage   </li></ul><ul><li>Early Stage  -not yet sold their product commercially  </...
VC APPRAISAL PROCESS <ul><li>Preparation of Info-Memo- business plan, market estimate ,resumes   </li></ul><ul><li>Letter ...
VALUATION OF A START-UP  <ul><li>Step-up ratio-  credit for the initiative and non-monetary investment (15=2*5+5)(7) </li>...
RISKS IN VC <ul><li>A change in industry growth vis. assumptions </li></ul><ul><li>A change in competitive pricing vis. as...
Promoter Risk  <ul><li>Integrity / honesty of the entrepreneur / promoter </li></ul><ul><li>First generation entrepreneur ...
Product Risk  <ul><li>Development stage of product </li></ul><ul><li>Product life cycle </li></ul><ul><li>Risk of reverse ...
Technological Risk <ul><li>Availability of superior technology </li></ul><ul><li>Unpredictable technology development </li...
Market Risk  <ul><li>New users; uncertainty in market acceptance </li></ul><ul><li>Market growth rate </li></ul><ul><li>Co...
Financial Risk  <ul><li>Capital market situation (e.g. lack of exit opportunities) </li></ul><ul><li>Current leverage rati...
Implementation /  Operational Risk  <ul><li>Manufacturing complexities </li></ul><ul><li>Capability of producer / organisa...
Organisational Risk  <ul><li>Motivation of employees </li></ul><ul><li>Employee turnover </li></ul><ul><li>Dependence on f...
Strategy Risk  <ul><li>Loosing competitiveness </li></ul><ul><li>Unrelated diversification  </li></ul>
Environmental Risk  <ul><li>Changes in Government policy </li></ul><ul><li>Lack of understanding about regulations </li></...
HOW TO IMPRESS A VENTURE CAPITALIST <ul><li>VC Fundamentals- </li></ul><ul><li>The venture capital firm get paid first. Wh...
Other factors <ul><li>Winning Team   </li></ul><ul><li>Financials  - Hockey Stick Appoach </li></ul><ul><li>requires an in...
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Funds For Innovation

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Funds For Innovation

  1. 1. FUNDS FOR INNOVATION A.S.Rao, asrao@nic.in
  2. 2. Angel investors <ul><li>angels provide capital and frequently valuable guidance and strategic assistance. </li></ul><ul><li>The ideal angel is someone who is a generation ahead of the entrepreneur in creating value in the industry. </li></ul><ul><li>Angels are sometimes said to invest 'emotional money ,' while venture capitalists are said to invest 'logical money' . </li></ul>
  3. 3. To capture angels attention : <ul><li>An in-depth understanding of the market in which they're competing. </li></ul><ul><li>A product or service that can be differentiated from the crowd. </li></ul><ul><li>A concept that is very &quot;scalable&quot; (one that can be rapidly expanded). </li></ul>
  4. 4. VENTURE CAPITAL FUND (VCF) <ul><li>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. </li></ul><ul><li>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. </li></ul>
  5. 5. VC <ul><li>expects the enterprise to have a very high growth rate </li></ul><ul><li>provides management and business skills to the enterprise </li></ul><ul><li>expects medium to long-term gains and </li></ul><ul><li>does not expect any collateral to cover the capital provided </li></ul>
  6. 6. Advantages of venture capital <ul><li>Finance </li></ul><ul><li>Business Partner </li></ul><ul><li>Mentoring </li></ul><ul><li>Alliances </li></ul><ul><li>Facilitation of Exit </li></ul>
  7. 7. STAGES IN VENTURE FUNDING <ul><li>Seed Stage </li></ul><ul><li>Early Stage -not yet sold their product commercially </li></ul><ul><li>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. </li></ul>
  8. 8. VC APPRAISAL PROCESS <ul><li>Preparation of Info-Memo- business plan, market estimate ,resumes </li></ul><ul><li>Letter of Intent – after Due Diligence , Broad subscription terms </li></ul><ul><li>Investment Valuation -Details like board seats, veto powers, requirements for additional investment, vesting schedules, salaries. Also financial structure </li></ul>
  9. 9. VALUATION OF A START-UP <ul><li>Step-up ratio- credit for the initiative and non-monetary investment (15=2*5+5)(7) </li></ul><ul><li>burn rate -the rate at which a company goes through its cash (43 =7X4+15)(22) </li></ul><ul><li>2 nd round(91 =22X3+25)(47) </li></ul><ul><li>IPO (194=47X2+100)(147) </li></ul>
  10. 10. RISKS IN VC <ul><li>A change in industry growth vis. assumptions </li></ul><ul><li>A change in competitive pricing vis. assumptions </li></ul><ul><li>Difficulties in achieving product development schedule </li></ul><ul><li>Difficulties in obtaining parts and raw materials </li></ul><ul><li>A change in market structure (e.g. a new entrant or a new technology) </li></ul><ul><li>A change in the availability of appropriately priced and trained labour </li></ul>
  11. 11. Promoter Risk <ul><li>Integrity / honesty of the entrepreneur / promoter </li></ul><ul><li>First generation entrepreneur </li></ul><ul><li>Lack of experience in related field </li></ul><ul><li>Lack of contacts with resource persons </li></ul><ul><li>Lack of experience about </li></ul><ul><li>- market </li></ul><ul><li>- technology </li></ul>
  12. 12. Product Risk <ul><li>Development stage of product </li></ul><ul><li>Product life cycle </li></ul><ul><li>Risk of reverse engineering </li></ul><ul><li>Manufacturing complexities </li></ul><ul><li>Number of constituent technologies </li></ul>
  13. 13. Technological Risk <ul><li>Availability of superior technology </li></ul><ul><li>Unpredictable technology development </li></ul><ul><li>Technology life cycle </li></ul><ul><li>Investment requirement for assimilation </li></ul><ul><li>Lack of organisational capability to assimilate </li></ul><ul><li>Source of technology / Goodwill of supplier </li></ul><ul><li>Level of technology (high or low) </li></ul>
  14. 14. Market Risk <ul><li>New users; uncertainty in market acceptance </li></ul><ul><li>Market growth rate </li></ul><ul><li>Competitors </li></ul><ul><li>Substitute products </li></ul><ul><li>Potential entrants </li></ul><ul><li>Huge marketing expenditure </li></ul><ul><li>Unorganised sector </li></ul><ul><li>No assured market </li></ul>
  15. 15. Financial Risk <ul><li>Capital market situation (e.g. lack of exit opportunities) </li></ul><ul><li>Current leverage ratio not in par with industry average </li></ul><ul><li>Growth prospect of the company </li></ul><ul><li>Foreign exchange risk </li></ul><ul><li>Problem with working capital; Liquidity problem </li></ul><ul><li>Expected rate of return </li></ul><ul><li>Lack of understanding of standard financial procedures </li></ul>
  16. 16. Implementation / Operational Risk <ul><li>Manufacturing complexities </li></ul><ul><li>Capability of producer / organisation </li></ul><ul><li>Manufacturing set up </li></ul><ul><li>Commitment from manufacturing </li></ul><ul><li>Unavailability of skilled work-force </li></ul><ul><li>Maintenance problem </li></ul><ul><li>Lack of contacts with resource persons </li></ul><ul><li>Problem in arranging additional fund </li></ul>
  17. 17. Organisational Risk <ul><li>Motivation of employees </li></ul><ul><li>Employee turnover </li></ul><ul><li>Dependence on few workers </li></ul>
  18. 18. Strategy Risk <ul><li>Loosing competitiveness </li></ul><ul><li>Unrelated diversification </li></ul>
  19. 19. Environmental Risk <ul><li>Changes in Government policy </li></ul><ul><li>Lack of understanding about regulations </li></ul><ul><li>Pollution / hazard </li></ul><ul><li>Availability of raw material </li></ul><ul><li>Legal barriers - piracy / patent etc. </li></ul>
  20. 20. HOW TO IMPRESS A VENTURE CAPITALIST <ul><li>VC Fundamentals- </li></ul><ul><li>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. </li></ul><ul><li>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. </li></ul><ul><li>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. </li></ul><ul><li>Creation of a path to liquidity. There must be a way for the VC to cash out of the venture. </li></ul>
  21. 21. Other factors <ul><li>Winning Team </li></ul><ul><li>Financials - Hockey Stick Appoach </li></ul><ul><li>requires an investment of 20 L over a 3 year period. VC expects a return of 5 times . PAT-30L.P/E-10 </li></ul><ul><li>VC share= 20X5/ 30X10= 100/300= 33.3 % </li></ul>

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