Entrepreneurial Finance

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Talks of financial management for Entrepreneurs. Venture Capital, Debt Finance, Cash Management

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Entrepreneurial Finance

  1. 1. ENTREPRENEURIAL FINANCE Rajeev Roy
  2. 2. Venture capital <ul><li>Long term equity finance </li></ul><ul><li>Investing as opposed to banks who lend </li></ul><ul><li>Looking for high gains </li></ul><ul><li>Accepting high risks </li></ul><ul><li>Can be involved in management of the invested firm </li></ul><ul><li>Venture capital investment is illiquid </li></ul>
  3. 3. Structure of VCs <ul><li>Mostly funds </li></ul><ul><ul><li>Charge about 2% + success fee </li></ul></ul><ul><li>Also companies </li></ul><ul><li>Limited partnerships expected soon </li></ul><ul><li>Prevalence of banks </li></ul><ul><ul><li>Revenue implications </li></ul></ul>
  4. 4. VC : Advantages <ul><li>No fixed expense of debt servicing </li></ul><ul><li>Financial flexibility </li></ul><ul><li>Sharing of risk </li></ul><ul><li>Value added investing </li></ul><ul><ul><li>Attracting talent </li></ul></ul><ul><ul><li>Networking with service providers/suppliers </li></ul></ul><ul><ul><li>Accessing markets </li></ul></ul><ul><li>Enhanced credibility with lenders </li></ul>
  5. 5. VC : Disadvantages <ul><li>Dilution of shareholding </li></ul><ul><li>Increased 3 rd party governance </li></ul><ul><li>Increased controls </li></ul><ul><li>Increased commitment to stated strategy </li></ul>
  6. 6. Types of VC <ul><li>Early stage financing </li></ul><ul><li>Seed capital or pre-start up or R&D </li></ul><ul><li>Start up financing </li></ul><ul><li>Second round financing </li></ul><ul><li>Later stage financing </li></ul><ul><li>Expansion </li></ul><ul><li>Replacement </li></ul><ul><li>Turnaround </li></ul>
  7. 7. Valuation excersise <ul><li>Get rid of scamsters </li></ul><ul><li>Hygiene factors – beware of things that can shut down a business </li></ul><ul><li>Growth & industry considerations </li></ul><ul><li>Due diligence </li></ul><ul><ul><li>Physical evaluation </li></ul></ul><ul><ul><li>Calling in the experts </li></ul></ul><ul><li>Monetise value </li></ul>
  8. 8. Agreement particulars <ul><li>Amount and terms of investment. </li></ul><ul><li>Dividend policy. </li></ul><ul><li>Composition of the board of directors. </li></ul><ul><li>Reporting - management reports, monthly accounts, annual budgets. </li></ul><ul><li>Liquidity (exit) plans. </li></ul><ul><li>Rights of sale </li></ul><ul><li>Warranties. </li></ul><ul><li>Matters requiring venture capitalist approval </li></ul>
  9. 9. Problems <ul><li>Locating players </li></ul><ul><li>Concerns regarding exchange of info </li></ul><ul><li>Larger companies look equally attractive with lesser risk </li></ul><ul><li>Even listed securities are giving great returns </li></ul>
  10. 10. India centric problems <ul><li>Indian VC not yet a popular asset class among institutional investors </li></ul><ul><li>Exit challenges </li></ul><ul><ul><li>Shallow markets </li></ul></ul><ul><ul><li>Little M & A activity </li></ul></ul><ul><li>Brand India, not strong beyond services </li></ul>
  11. 11. The road ahead <ul><li>Placement agents (Venture Partners) </li></ul><ul><li>Trade meets </li></ul><ul><li>Syndication </li></ul><ul><ul><li>Getting a larger team / new perspective </li></ul></ul><ul><ul><li>Spreading risk </li></ul></ul><ul><ul><li>Eg July systems (wireless content) got $10m from 6 VCs </li></ul></ul>
  12. 12. Some VCs in India <ul><li>Jumpstartup – investing </li></ul><ul><li>Draper Fisher – sector specific </li></ul><ul><li>Charles River Ventures </li></ul><ul><li>Sequoia Capital </li></ul><ul><li>Westbridge – too big? </li></ul><ul><li>ChrysCapital – certainly too big </li></ul>
  13. 13. Others <ul><li>Banks </li></ul><ul><ul><li>ICICI </li></ul></ul><ul><ul><li>UTI </li></ul></ul><ul><ul><li>SIDBI </li></ul></ul><ul><ul><li>Canara bank </li></ul></ul><ul><li>Corporates </li></ul><ul><ul><li>Intel </li></ul></ul><ul><ul><li>Motorola </li></ul></ul><ul><ul><li>Nokia </li></ul></ul><ul><ul><li>cisco </li></ul></ul>
  14. 14. <ul><li>Average fund size $50 mil </li></ul><ul><li>Total deals per annum – 100+ </li></ul><ul><li>Mostly expansion – few seed or early stage </li></ul>
  15. 15. Lending strategy of banks <ul><li>Business plan </li></ul><ul><li>Financial statement </li></ul><ul><li>Profile of promoter </li></ul><ul><li>Asset base </li></ul><ul><ul><li>Gross </li></ul></ul><ul><ul><li>Net </li></ul></ul><ul><li>Credit scoring </li></ul>
  16. 16. How Banks cover risks <ul><li>Collateral </li></ul><ul><ul><li>Internal incl. a/c receivable </li></ul></ul><ul><ul><li>External </li></ul></ul><ul><li>Personal guarantees </li></ul><ul><li>Debt covenants </li></ul><ul><li>Short maturity debt </li></ul>
  17. 17. Managing banks <ul><li>Complete paperwork in time </li></ul><ul><li>Submit financial statements as scheduled </li></ul><ul><li>Route all transactions through bank </li></ul><ul><li>Ask for extras – free drafts, alerts, etc </li></ul><ul><li>Exude confidence and well being </li></ul><ul><li>Transmit good news </li></ul><ul><li>Be proactive about inspections </li></ul>
  18. 18. SMERA <ul><li>Specifically for SMEs </li></ul><ul><li>Joint initiative of: </li></ul><ul><ul><li>SIDBI </li></ul></ul><ul><ul><li>D & B </li></ul></ul><ul><ul><li>CIBIL </li></ul></ul><ul><ul><li>Other banks </li></ul></ul><ul><li>Office currently only in Mumbai </li></ul>
  19. 19. Rating process <ul><li>SME contacts SMERA </li></ul><ul><li>Questionnaire is filled </li></ul><ul><li>Documents are submitted </li></ul><ul><li>Site visit by SMERA representative </li></ul><ul><li>Rating is announced 15 days after all documents are received </li></ul>
  20. 21. Fee Structure <ul><li>Below 1Cr 7500 </li></ul><ul><li>Upto 5 Cr 25000 </li></ul><ul><li>Upto 20 Cr 37000 </li></ul><ul><li>Above 20 Cr 50000 </li></ul>
  21. 22. Cash is king <ul><li>Can result form unplanned success </li></ul><ul><li>Is usually due to lack of planning or tardiness in collections </li></ul><ul><li>Dissatisfaction among suppliers </li></ul><ul><ul><li>Higher costs </li></ul></ul><ul><ul><li>Lower quality </li></ul></ul><ul><li>Dissatisfied (worried) employees </li></ul><ul><li>High bad debts – migration of customers </li></ul>
  22. 23. Collection strategies <ul><li>Investigate new customers </li></ul><ul><li>Supply against written orders </li></ul><ul><li>Sign on a legal contract </li></ul><ul><li>Maintain close contact with customers </li></ul><ul><li>Get and repeat positive feedback </li></ul><ul><li>Send invoice ASAP </li></ul><ul><li>Contact before sending invoice ( to check particulars) </li></ul>
  23. 24. Collection strategies <ul><li>Keep a close watch on customer’s fortunes </li></ul><ul><li>Immediately contact on any delayed payment </li></ul><ul><li>Be firm – its your own money </li></ul><ul><li>Allow a customer to graduate in his credit ratings with you </li></ul>
  24. 25. Break-even analysis <ul><li>Identify fixed and variable costs </li></ul><ul><li>Explore possibilities of changing fixed into variable costs </li></ul><ul><li>And vice-versa </li></ul><ul><li>Can be expressed in terms of </li></ul><ul><ul><li>Capacity utilisation </li></ul></ul><ul><ul><li>Sales revenue </li></ul></ul>
  25. 26. Application of BEA <ul><li>Helps in taking investment decisions </li></ul><ul><li>Profit optimisation planning </li></ul><ul><li>Helps in pricing decision </li></ul><ul><li>Can be modified to calculate profitability at various levels of capacity utilisation / sales </li></ul>

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