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Conventional Vs Modern Instruments Of Business Funding
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Conventional Vs Modern Instruments Of Business Funding

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By Rajesh Sharma, Times Private Treaties @ Franchise India Private Equity Conclave 2010

By Rajesh Sharma, Times Private Treaties @ Franchise India Private Equity Conclave 2010

Published in: Investor Relations
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  • 1. Conventional v/s Modern Instruments of Business Funding 1
  • 2. Business growth today is all about collaboration …….. Collaborate in Capital Markets to grow exponentially ! 2
  • 3. Private Equity / Venture Capital = Funding against equity 3
  • 4. ‘Past performance’ v/s ‘Future promise’ Debt v/s Equity 4
  • 5. Future promise v/s Past performance - Equity v/s Debt Equity – sharing Debt – a loan from a financial interest in the bank / financing business institution / individual 5
  • 6. Equity – the most expensive form of funding? 6
  • 7. 7 businesses in the modern Economy Building Access to Access to Capital Markets Capital Markets Real Business Real Business 3/16/2010
  • 8. Business stages & sources of funding 8
  • 9. Business stages & Sources of funding Seed Stage Early Stage Growth Stage Expansion Stage Consolidation Growth challenges Market Validation Operational challenges Capex Customer Acquisition Expansion / Scale-up R&D on business idea No / Low Revenues Cash burn IPO Stage of Mezzanine Capital Business Bank Loans Debt markets Venture Capital Private Equity Family & Friends Angels Incubators Time / Revenue 9
  • 10. Angel Investors • Typically HNIs / Entrepreneurs • Invest in very early stage – R&D on business ideas, prototype development, market research, pre-revenue • “Angel Funds” – coming together of angel investors e.g Mumbai Angels. Band of Angels • Typically look at : • Domain knowledge • Entrepreneurship qualities 10
  • 11. Venture Financing • Invest in start- up stage companies – to support a business plan, pre- break-even stage • Started as a concept at Silicon Valley • Active VCs in India – IDG, Cannan Partners, Nexus Capital • Typically look at : • Management team • IPR / Business idea • Scalable market for product / services • Consumer traction / revenues 11
  • 12. Private Equity • Typically later-stage investments • Internationally – majorly represented by Buyouts • In India – typically growth stage investments and PIPEs ( Private Investments in Public Equity ) • Some active PE funds in India – ICICI Ventures, Warburg Pincus, Barings, Carlyle, IDFC etc. • Typically look at : • Operating leverage – opportunity to further scale-up business • Financial leverage – improving capital structure 12
  • 13. “Venture Debt “ – an oxymoron? • Typically coupon-bearing debentures / preference shares convertible into equity, FCCBs • Might be secured – similar to bank debt • Advantage – limits dilution • Interest payments – periodic / bullet • Some structures may cause cash flow issues if not converted into equity as seen recently ( e.g Wockhardt) 13
  • 14. IPOs • Raising capital from public equity markets – broad-basing the investor base • SEBI (ICDR) Regulations specify eligibility criteria for IPOs ( such as track record of dividends, tangible assets, net-worth) – non- complying entities have to follow Book-Building route • Specified allotment under Book-building IPOs: – QIBs – 50% – Non-institutional investors - 15% – Retail investors – 35% • Long –drawn & expensive process • Listing involves significant regulatory compliance, pre & post 14
  • 15. What to consider when selecting source of funding? 15
  • 16. Selecting the Source of Funding: Parameters • Growth Prospects and Profit Margins of the Business • Evaluation: How much money does my business plan require? • Capital Structure of the Company • Evaluation: Can I avoid Distress Costs, especially in bad economic scenario? • Cost of the Type of Finance being considered • Evaluation: Today, is Debt significantly cheaper than Equity? • Visualized Dilution of Stake • Evaluation: How much Stake am I comfortable to part with? • Need for the Deal/ Funding / Expertise • Evaluation: How much will the Deal / Funding/ Expertise help me? • Sometimes, Expertise can take you leaps ahead (Eg. Private Treaty) • The Power of NOW • Evaluation: What are the reasons that necessitate taking (a type of) funding Today? 16
  • 17. Co-creation of value Late Stage Value Handholding through value Unlocking unlocking – IPO / Strategic M&A Growth Stage Strategic inputs Value Creation Corporate Governance Early Stage MIS Contribution Team of a PE / VC partner Relationships / Network 17
  • 18. The Financing Decision • Pecking Order Theory Equity • Companies should choose to raise fund in the order: Debt Internal Funds • Trade-Off Theory • There is an advantage to financing with debt (namely, the tax benefit of debts) and that there is a cost of financing with debt (the bankruptcy costs of debt) • Market Timing Hypothesis • First order determinant of a corporation's capital structure, that is, the fractions of debt and equity in their liabilities, is the relative mis-pricing of these instruments at the time the firm needs to finance investment These form the theoretical basis. In reality, the practice is mixed, but is impacted by arguments of the theories. 18
  • 19. Why Dilute? 19
  • 20. Why dilute – the Golden Rules Limitations on internal accruals / FFFs Debt funding expensive / not possible Equity participation offers strategic value beyond cash 20
  • 21. A perspective on M&A • Organic v/s Inorganic growth • Exit & Liquidity 21
  • 22. 22 Access to Access to businesses in the modern Economy Branding Markets Branding Markets Building Access to Access to Capital Markets Capital Markets Real Business Real Business 3/16/2010
  • 23. “Funding Brand Building / Visibility” Over 5 years of existence Over 250 investments Largest PE fund in terms of deal numbers 3/16/2010 23
  • 24. 3/16/2010 24
  • 25. “Physical” business v/s “Mind” business & “Value creation” 25
  • 26. Times Private Treaties A portfolio of over 250 investee companies 26
  • 27. Thank You Rajesh Sharma AVP – Times Private Treaties Bennett Coleman & Co.Ltd. E-mail : rajesh.sharma3@timesgroup.com 27

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