ENTREPRENEURIAL FINANCE Rajeev Roy

Venture capital Long term equity finance Investing as opposed to banks who lend Looking for high gains Accepting high risks Can be involved in management of the invested firm Venture capital investment is illiquid

Long term equity finance

Investing as opposed to banks who lend

Looking for high gains

Accepting high risks

Can be involved in management of the invested firm

Venture capital investment is illiquid

Structure of VCs Mostly funds Charge about 2% + success fee Also companies Limited partnerships expected soon Prevalence of banks Revenue implications

Mostly funds

Charge about 2% + success fee

Also companies

Limited partnerships expected soon

Prevalence of banks

Revenue implications

VC : Advantages No fixed expense of debt servicing Financial flexibility Sharing of risk Value added investing Attracting talent Networking with service providers/suppliers Accessing markets Enhanced credibility with lenders

No fixed expense of debt servicing

Financial flexibility

Sharing of risk

Value added investing

Attracting talent

Networking with service providers/suppliers

Accessing markets

Enhanced credibility with lenders

VC : Disadvantages Dilution of shareholding Increased 3 rd party governance Increased controls Increased commitment to stated strategy

Dilution of shareholding

Increased 3 rd party governance

Increased controls

Increased commitment to stated strategy

Types of VC Early stage financing Seed capital or pre-start up or R&D Start up financing Second round financing Later stage financing Expansion Replacement Turnaround

Early stage financing

Seed capital or pre-start up or R&D

Start up financing

Second round financing

Later stage financing

Expansion

Replacement

Turnaround

Valuation excersise Get rid of scamsters Hygiene factors – beware of things that can shut down a business Growth & industry considerations Due diligence Physical evaluation Calling in the experts Monetise value

Get rid of scamsters

Hygiene factors – beware of things that can shut down a business

Growth & industry considerations

Due diligence

Physical evaluation

Calling in the experts

Monetise value

Agreement particulars Amount and terms of investment. Dividend policy. Composition of the board of directors. Reporting - management reports, monthly accounts, annual budgets. Liquidity (exit) plans. Rights of sale Warranties. Matters requiring venture capitalist approval

Amount and terms of investment.

Dividend policy.

Composition of the board of directors.

Reporting - management reports, monthly accounts, annual budgets.

Liquidity (exit) plans.

Rights of sale

Warranties.

Matters requiring venture capitalist approval

Problems Locating players Concerns regarding exchange of info Larger companies look equally attractive with lesser risk Even listed securities are giving great returns

Locating players

Concerns regarding exchange of info

Larger companies look equally attractive with lesser risk

Even listed securities are giving great returns

India centric problems Indian VC not yet a popular asset class among institutional investors Exit challenges Shallow markets Little M & A activity Brand India, not strong beyond services

Indian VC not yet a popular asset class among institutional investors

Exit challenges

Shallow markets

Little M & A activity

Brand India, not strong beyond services

The road ahead Placement agents (Venture Partners) Trade meets Syndication Getting a larger team / new perspective Spreading risk Eg July systems (wireless content) got $10m from 6 VCs

Placement agents (Venture Partners)

Trade meets

Syndication

Getting a larger team / new perspective

Spreading risk

Eg July systems (wireless content) got $10m from 6 VCs

Some VCs in India Jumpstartup – investing Draper Fisher – sector specific Charles River Ventures Sequoia Capital Westbridge – too big? ChrysCapital – certainly too big

Jumpstartup – investing

Draper Fisher – sector specific

Charles River Ventures

Sequoia Capital

Westbridge – too big?

ChrysCapital – certainly too big

Others Banks ICICI UTI SIDBI Canara bank Corporates Intel Motorola Nokia cisco

Banks

ICICI

UTI

SIDBI

Canara bank

Corporates

Intel

Motorola

Nokia

cisco

Average fund size $50 mil Total deals per annum – 100+ Mostly expansion – few seed or early stage

Average fund size $50 mil

Total deals per annum – 100+

Mostly expansion – few seed or early stage

Lending strategy of banks Business plan Financial statement Profile of promoter Asset base Gross Net Credit scoring

Business plan

Financial statement

Profile of promoter

Asset base

Gross

Net

Credit scoring

How Banks cover risks Collateral Internal incl. a/c receivable External Personal guarantees Debt covenants Short maturity debt

Collateral

Internal incl. a/c receivable

External

Personal guarantees

Debt covenants

Short maturity debt

Managing banks Complete paperwork in time Submit financial statements as scheduled Route all transactions through bank Ask for extras – free drafts, alerts, etc Exude confidence and well being Transmit good news Be proactive about inspections

Complete paperwork in time

Submit financial statements as scheduled

Route all transactions through bank

Ask for extras – free drafts, alerts, etc

Exude confidence and well being

Transmit good news

Be proactive about inspections

SMERA Specifically for SMEs Joint initiative of: SIDBI D & B CIBIL Other banks Office currently only in Mumbai

Specifically for SMEs

Joint initiative of:

SIDBI

D & B

CIBIL

Other banks

Office currently only in Mumbai

Rating process SME contacts SMERA Questionnaire is filled Documents are submitted Site visit by SMERA representative Rating is announced 15 days after all documents are received

SME contacts SMERA

Questionnaire is filled

Documents are submitted

Site visit by SMERA representative

Rating is announced 15 days after all documents are received

Fee Structure Below 1Cr 7500 Upto 5 Cr 25000 Upto 20 Cr 37000 Above 20 Cr 50000

Below 1Cr 7500

Upto 5 Cr 25000

Upto 20 Cr 37000

Above 20 Cr 50000

Cash is king Can result form unplanned success Is usually due to lack of planning or tardiness in collections Dissatisfaction among suppliers Higher costs Lower quality Dissatisfied (worried) employees High bad debts – migration of customers

Can result form unplanned success

Is usually due to lack of planning or tardiness in collections

Dissatisfaction among suppliers

Higher costs

Lower quality

Dissatisfied (worried) employees

High bad debts – migration of customers

Collection strategies Investigate new customers Supply against written orders Sign on a legal contract Maintain close contact with customers Get and repeat positive feedback Send invoice ASAP Contact before sending invoice ( to check particulars)

Investigate new customers

Supply against written orders

Sign on a legal contract

Maintain close contact with customers

Get and repeat positive feedback

Send invoice ASAP

Contact before sending invoice ( to check particulars)

Collection strategies Keep a close watch on customer’s fortunes Immediately contact on any delayed payment Be firm – its your own money Allow a customer to graduate in his credit ratings with you

Keep a close watch on customer’s fortunes

Immediately contact on any delayed payment

Be firm – its your own money

Allow a customer to graduate in his credit ratings with you

Break-even analysis Identify fixed and variable costs Explore possibilities of changing fixed into variable costs And vice-versa Can be expressed in terms of Capacity utilisation Sales revenue

Identify fixed and variable costs

Explore possibilities of changing fixed into variable costs

And vice-versa

Can be expressed in terms of

Capacity utilisation

Sales revenue

Application of BEA Helps in taking investment decisions Profit optimisation planning Helps in pricing decision Can be modified to calculate profitability at various levels of capacity utilisation / sales

Helps in taking investment decisions

Profit optimisation planning

Helps in pricing decision

Can be modified to calculate profitability at various levels of capacity utilisation / sales