The Essential Handbook For Raising Capital Part II:
How to Approach an Investor
July, 2013
© 2013 Intellecap. All rights r...
Agenda
Introduction
Session I: Knowing your Business
Session II: Approaching an Investor
Session III: Due Diligence and Ne...
Investor & Investee

• Marriage and equity investing have many things in common – Courting/due diligence
before and adjust...
Some Basic Background Work Should be Done Before You
Actually Approach an Investor

1. Identify relevant Investors
2. Eval...
Identifying relevant investors
• Identify the first list of investors on the basis of various parameters like:
– Size of i...
The different kinds of investors
Type of Investors

Stage

Investment
amounts

What do they
look for?

What do they bring ...
How is an Impact Investor Different?
Focus on Impact
Focus on economically
weaker sections and/ or
backward Geographies

K...
Some basic background work should be done before you
actually approach an investor

1. Identify relevant Investors
2. Eval...
The list identified so far should be brought down to make your
approach more targeted
Evaluate & Shortlist by further eval...
Some basic background work should be done before you
actually approach an investor

1. Identify relevant Investors
2. Eval...
What does an investor look for, even before he considers you for
due diligence?
Of Course, Money
RETURN on INVESTMENT

Pea...
Evaluating a Deal

Promoter Evaluation

Business Model
Evaluation

Organizational
Evaluation

Impact Evaluation*

*In case...
The Super Promoter!

Favourable
entrepreneurial
experience in the
past

Quick
adaptability to
changing
business
environmen...
Better Still - A Super Promoter Team!

Who is at the Driving Seat?
•

What is the team?
 Experience, background, competen...
Business Model Evaluation

Financial
Attractiveness

Scalability

Possible
Exit Routes

•
•

Market and Industry Study
Ana...
Business Model Evaluation: Market Study
Conducting a market study is critical in understanding the financial attractivenes...
Business Model Evaluation - Financial Attractiveness
Balance Sheet
• Is there any excessive
dependence on short term
capit...
Business Model Evaluation - Financial Ratios
Balance Sheet
• Current Assets/Current
Liabilities

Profit and Loss
Sales/Ass...
Business Model Evaluation - Scalability

•

Is the model easily replicable across geographies and customer segments?

•

D...
Business Model Evaluation: Possible Exit Routes

Exit is the primary way in which an investor makes money.
Primary modes o...
Organisational Evaluation

• Is a well defined fund utilisation plan in place?

• Does the organisation have a well define...
Impact Evaluation
Social Impact

Environmental Impact

• Impact of organization’s activities on its
stakeholders – communi...
Investor shall try to assess key risks attached to your business
and how do you address them
Key risk areas

Risk manageme...
Some basic background work should be done before you
actually approach an investor
Approaching an Investor

1. Identify re...
So what’s your story?
• Though the basic components of a pitch book , which are,

Approaching an Investor

– Industry Scen...
You are ready now to approach the investor

1. Identify relevant Investors
2. Evaluate & Short list
3. Understand general ...
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The Essential Handbook For Raising Capital Part II: How To Approach An Investor

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Now that you are armed with the all the salient details about your business that investors look for, you are ready to meet investors. This presentation presents as 4-step process on how to do so, explains impact investment for socially relevant businesses, and assessment in the pre due-diligence stage. It delves into how investors analyze your business model, market research, financial attractiveness and scalability.
Presented by leading social advisory firm Intellecap, this slide deck was prepared for Sankalp Forum. The Forum is an enabler of socially oriented early-stage businesses, and catalyzes investments, mentors and international networks to do so.
Read more about Sankalp at www.sankalpforum.com

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  • Voice over from Kamalika – Potential Strategies for an Impact Investor:Invest in few enterprises and commit a significant amount (USD 5-10 mn) in each enterprise. Early to growth stage companies.Invest in many enterprises and commit a small amount (USD 1-5 mn) in each enterprise. Investment is generally in seed and early stage companies.
  • Transcript of "The Essential Handbook For Raising Capital Part II: How To Approach An Investor"

    1. 1. The Essential Handbook For Raising Capital Part II: How to Approach an Investor July, 2013 © 2013 Intellecap. All rights reserved www.intellecap.com
    2. 2. Agenda Introduction Session I: Knowing your Business Session II: Approaching an Investor Session III: Due Diligence and Negotiation Session IV: Post Investment Challenges © 2013 Intellecap. All rights reserved 2
    3. 3. Investor & Investee • Marriage and equity investing have many things in common – Courting/due diligence before and adjustment afterwards • The first step in ensuring that you have a happy relationship with the investor is choosing the “right” one • It is possible that you already know a few investors and are comfortable dealing with them but it is always useful to be systematic © 2013 Intellecap. All rights reserved 3
    4. 4. Some Basic Background Work Should be Done Before You Actually Approach an Investor 1. Identify relevant Investors 2. Evaluate & Short list 3. Understand general requirements of the investors 4. Prepare Pitch Book Now, approach the investor © 2013 Intellecap. All rights reserved 4
    5. 5. Identifying relevant investors • Identify the first list of investors on the basis of various parameters like: – Size of investment – Sector Focus – Stage of business – Country Focus • Data sources which can help you: – VC Circle – GUST – NENonline – See links in additional reading – … © 2013 Intellecap. All rights reserved 5
    6. 6. The different kinds of investors Type of Investors Stage Investment amounts What do they look for? What do they bring to the table? Where do they get their money from? High Net Worth Individuals (HNWI) Early stage Rs. 0.5-5 cr • Financial returns • Quick decision making • High risk taking ability • Personal wealth Venture Capital (VC funds) Typically early stage Rs. 5-100 cr • Financial returns • Scalability and exit • Networks and contacts • Technical Assistance • HNWI • Institutional funds Mainstream PE Growth Stage, Pre-IPO Rs.30-500 cr • Financial returns • Scalability and exit • Commercial rigour • Ability to take you to the market • Pension Funds, • HNWI • University endowments © 2013 Intellecap. All rights reserved 6
    7. 7. How is an Impact Investor Different? Focus on Impact Focus on economically weaker sections and/ or backward Geographies Kinds of models High risk early stage, usually nascent unproven business models Rate of return Slightly lower hurdle rate of return Focus on impact has definite implications to the investment strategy Due to the stage and nature of the business, Impact investors usually play an active role in the operations of the investee company Return expectation is typically lower than that of a commercial fund The average fund size of an Indian Impact Investor is small; and is usually between USD 20-100 mn © 2013 Intellecap. All rights reserved 7
    8. 8. Some basic background work should be done before you actually approach an investor 1. Identify relevant Investors 2. Evaluate & Short list 3. Understand general requirements of the investors 4. Prepare Pitch Book Now, approach the investor © 2013 Intellecap. All rights reserved 8
    9. 9. The list identified so far should be brought down to make your approach more targeted Evaluate & Shortlist by further evaluation and consideration of: • Portfolio companies – Past investments - For eg. If already invested in competition, better to avoid – Is your business also part of the same value chain? Right target to approach • Recent exits – What mode did they choose to exit? – Tells you a lot about their approach to investment • Background or experience of the investor team – Ex-Investment Bankers or Entrepreneurs? – Does his past experience have synergies with your business? – Do you want DUMB money or VALUE money? • Stage of fund – No. of years and amount left • Funds’ sources of money – LPs or HNIs © 2013 Intellecap. All rights reserved 9
    10. 10. Some basic background work should be done before you actually approach an investor 1. Identify relevant Investors 2. Evaluate & Short list 3. Understand general requirements of the investors 4. Prepare Pitch Book Now, approach the investor © 2013 Intellecap. All rights reserved 10
    11. 11. What does an investor look for, even before he considers you for due diligence? Of Course, Money RETURN on INVESTMENT Peace of Mind LESS OPERATIONAL HANDHOLDING Less Risk SMOOTH EXIT To get all of this, they look at many other factors… © 2013 Intellecap. All rights reserved 11
    12. 12. Evaluating a Deal Promoter Evaluation Business Model Evaluation Organizational Evaluation Impact Evaluation* *In case of an Impact focussed Investor © 2013 Intellecap. All rights reserved
    13. 13. The Super Promoter! Favourable entrepreneurial experience in the past Quick adaptability to changing business environment Relevant educational background Good and relevant network Complete focus on business Long term mind set– whether the promoter is in the business for the long haul Previous operational experience and understanding of sector What Investors look for in an entrepreneur Strong second level team Ultimately, what matters most is the chemistry between the Investor and the promoter! © 2013 Intellecap. All rights reserved Photo Credit: Flickr User dmeemai 13
    14. 14. Better Still - A Super Promoter Team! Who is at the Driving Seat? • What is the team?  Experience, background, competence • What is their attitude?  Enthusiasm, vision,… • What is the team bandwidth?  Team size, advisory roles • Ownership Structure • Distribution of responsibilities © 2013 Intellecap. All rights reserved Photo Credit: Flickr User CourtneyTamez 14
    15. 15. Business Model Evaluation Financial Attractiveness Scalability Possible Exit Routes • • Market and Industry Study Analysis of Financial Ratios Scalability in terms of ease in replicability , infrastructural requirements, distribution network and supply chain etc. Available possibilities for an investor to make a remunerative exit at the end of their investment horizon © 2013 Intellecap. All rights reserved
    16. 16. Business Model Evaluation: Market Study Conducting a market study is critical in understanding the financial attractiveness of the product Need for the product Demand vs Supply Competition Regulatory Overhang Is there a definite need and ready customer base for the product or does the demand need to be created? What is the estimated demand and what is the current supply? Who are the competitors in the market? How strong are these players? How well funded are they? Do they have any clear advantages (networks, patented technology etc.) What is the regulatory overhang in the sector? (For Example: all models in the primary education sector are mandated to function as “not for profit” structures) © 2013 Intellecap. All rights reserved
    17. 17. Business Model Evaluation - Financial Attractiveness Balance Sheet • Is there any excessive dependence on short term capital? • Does the capital structure of the company suit the nature of the business? Profit and Loss What is the amount of sales per rupee of investment? How far can the company go with the current investment? • What is the profit that the business makes per rupee of sales? • Will the costs of the business increase in proportion to the increase in sales? Cash Flow What is the ability of the company to service debt through operating cash flow? • Can cash from operations support capital expenditure? • How much time does it take to translate sales into cash? • What is the credit period that the business gets from suppliers? • What is the capital expenditure required to grow sales? Note: Khan Academy has some excellent video tutorials to understand financial management better. Follow links from additional resources to view. © 2013 Intellecap. All rights reserved
    18. 18. Business Model Evaluation - Financial Ratios Balance Sheet • Current Assets/Current Liabilities Profit and Loss Sales/Assets • Net Profit/Sales • Total Contribution/(Total contribution- Fixed Costs) • Debt/Equity Cash Flow • Operating Cash flow/ Total Debt • Free Cash Flow/Operating Cash flow • Receivables/Sales • Payables/Costs Or Operating Cash Flow/Sales • Capital Efficiency and Cash Flow are critical in Early Stage Companies © 2013 Intellecap. All rights reserved
    19. 19. Business Model Evaluation - Scalability • Is the model easily replicable across geographies and customer segments? • Does expanding the business require large amounts of investment in terms of time, money and infrastructure?  K-12 school model vs online tutorial model • Is the supply chain for raw materials and the distribution channel for the product/ service established/ • Does the model depend on a long series of regulatory approvals for expansion? © 2013 Intellecap. All rights reserved
    20. 20. Business Model Evaluation: Possible Exit Routes Exit is the primary way in which an investor makes money. Primary modes of exit for early stage investments, specially in social enterprises: • Secondary sale (most common) • Strategic sale/ Acquisition by other companies • Promoter buy back IPO is rare for social enterprises, and you should be careful in mentioning IPO as an exit strategy during your conversations with investors. © 2013 Intellecap. All rights reserved
    21. 21. Organisational Evaluation • Is a well defined fund utilisation plan in place? • Does the organisation have a well defined plan of implementation?  Sourcing  Distribution  Manufacturing  Marketing • Are the internal processes robust or is there a clear plan for implementation of these processes? • Does the organisation have the implementation team in place or does it have a clear recruitment strategy? © 2013 Intellecap. All rights reserved
    22. 22. Impact Evaluation Social Impact Environmental Impact • Impact of organization’s activities on its stakeholders – community, customers, employees, suppliers • Impact of organization’s activities on environment, natural resources, biodiversity Example: Example: • Number of hectares cultivated per farmer • Energy saved by replacing to new energy solutions • Incremental increase in farmers income • Reduction in charcoal, wood, kerosene, LPG etc. • Number of patients visited/ treated • New caregivers employed • Number of new schools created/ improved • Increase in student enrollment • Number of households with new/ improved access to electricity • Water returned to water table • Reduction in emission of green house gases • Amount of clean water production • Reduction in land and air based pollution Focus of Impact varies by organization, stakeholder, context, geography © 2013 Intellecap. All rights reserved
    23. 23. Investor shall try to assess key risks attached to your business and how do you address them Key risk areas Risk management Financial risks Financial risks • Credit risk • Funding strategy • Liquidity risk • Cash management • Market risk • Asset-Liability Management Operational risks Operational risks • Transaction risk • Systems and processes • Fraud risk • Internal audits and controls Strategic risks Strategic risks • Reputational risk • Responsible policies • External environment • Stakeholder management © 2013 Intellecap. All rights reserved 23
    24. 24. Some basic background work should be done before you actually approach an investor Approaching an Investor 1. Identify relevant Investors 2. Evaluate & Short list 3. Understand general requirements of the investors 4. Prepare Pitch Book Now, approach the investor © 2013 Intellecap. All rights reserved 24
    25. 25. So what’s your story? • Though the basic components of a pitch book , which are, Approaching an Investor – Industry Scenario which your business operates in – Company overview – Management, Product, Operations, Marketing, Customers, market share etc. – Current Financials & Future Projections are necessary, it really depends on how you wish to sell it. How do you WEAVE these components to tell your STORY? • Story of similar businesses could be different. It depends on what you want to highlight and what is your key strength: – Is it your efficient and experienced management team? – Is it the growth of the industry/ sector you operate in? – Do you have an innovative product/ a first mover advantage? – Do you have very high demand already established? – … © 2013 Intellecap. All rights reserved 25
    26. 26. You are ready now to approach the investor 1. Identify relevant Investors 2. Evaluate & Short list 3. Understand general requirements of the investors 4. Understand specific requirements 5. Prepare Pitch Book Now, approach the investor © 2013 Intellecap. All rights reserved 26

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