Sources of Funds 2

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Sources of Funds 2

  1. 1. Venture Capital Firms Professor Rajendra K. Lagu Department of Electrical Engineering e-mail: rklagu@ee.iitb.ac.in Webpage: http://www.ee.iitb.ac.in/~rklagu
  2. 2. 2 Outline of the Presentation • Fund raising process • Venture Capital firms • Angel Investors • Finance Marketing
  3. 3. 3 Stages in the Growth of a Company • Idea / Concept • Prototype / Proof of the concept • Incubation / Product development • Organization building • Scale up (alliances, partnerships) • IPO: Initial Public Offer
  4. 4. 4 Funds Requirements • Idea / Concept: USD 10K • Prototype: USD 50K • Product development: USD 0.5M – 2M • Organization building: USD 8M-10M • Scale up: USD 50M • IPO: Initial Public Offer
  5. 5. 5 Sources of Funds • Idea / Concept: Personal savings • Prototype: Loan from friends and relatives • Incubation: Angel / Early stage fund • Organization building: VC, first round • Scale up: Second round / growth/ scale up funds • IPO: Investment bankers, underwriters
  6. 6. 6 Cost of Equity • Angels would expect higher rate of returns than VCs • Typical VC expectations is 40-50% compounded annual return • Risk-return curve: New venture increasingly reduces its risk as it goes through stages
  7. 7. 7 Types of Risks • Technology risk: Platform does not succeed • Product risk • Market risk: Competitor, price-performance • Management risk: Scale-up, team building • Product liability risk • Image risk: Cultural, socio-economic factors (mostly for pharma / biotech)
  8. 8. 8 Venture Capital Firms • VCs and Angels provide private equity for young companies • Angels / High net worth individuals • Early stage VC firms • Scale-up VC firms • Technology / “Space” specific  Biotechnology  Networking  Chips and hardware  E Commerce
  9. 9. 9 Structure of a VC Firm • General partners 3-5 (themselves successful entrepreneurs): put about 2-3% of the corpus • Limited partners (Pension funds, Retirement plans): Put 97% corpus • Corpus = Fund, typically ranges between USD 50M to 2B • Management fee is about 2-3 % per year • Funds about 5-30 new companies per year • Employs junior managers for due diligence(associates) • After IPO/Acquisition, general partners keep 20% of gains, limited partners get Principal+80%
  10. 10. 10 VC Firm’s Annual Throughput • 10,000 qualified business plans • 1000 meetings • 400 company visits • 25 new investments
  11. 11. 11 Role of the VC in the Portfolio Company • Negotiate aggressive terms • Select strong co-investor • Help in constituting the Board of Directors • Assist in  Recruitment  Market validation  Strategic relationships • Pursue liquidity aggressively
  12. 12. 12 Valuation: Bargaining Point • Causes of mismatch  Asymmetry of information  Ego  Greed • Factors that drive the valuation – Technology, ESOP rates, management – Orders in hand, scalability, brand strength
  13. 13. 13 Difficulties in Valuing Start-up Companies  Immediate earnings are negative  No past history  No comparable companies  No market prices
  14. 14. 14 Angel Investors • High Net Worth individual • Themselves successful entrepreneurs • Work in packs • Quick decision making • Very early-stage • Prashant Bhalerao, Suhas Patil, Kanwal Rekhi, N.S. Raghavan
  15. 15. 15 Finance Marketing • Product Marketing • Finance Marketing – Sell business concept – Value Proposition – Break-even period – Team

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