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ENTREPRENEURIAL
    FINANCE
Objectives
• To list the various sources of debt finance
• To understand the process of securing debt finance
• To discuss the importance of collateral security
• To tabulate the lending strategies of banks
• To discuss the characteristics of venture capital
• To understand the structure of venture funds
• To list the various roles within a venture fund
• To understand how venture capitalists get compensated for their
  efforts
• To describe a step by step screening process followed by venture
  funds while making an investment
• To list the elements of a termsheet
• To understand the current scenario of VC funding in India
Disadvantages of Equity Finance
•   Dilution of shareholding
•   Increased 3rd party governance
•   Increased external controls
•   Increased commitment to stated strategy
Sources of Debt
• State Finance Corporations
• NBFC
• Banks
Securing Debt
•   Drawing up the business plan.
•   Identifying sources of debt finance.
•   Presenting the proposal to the bank.
•   If the manager is considering your
    proposal favourably, you will have to go
    for further talks
•   Once the two parties have broadly
    agreed, details have to be worked out.
Principles of Good Lending
•   Purpose
•   Safety
•   Profitability
•   Other considerations
Security
• Collateral
    – Inside
    – Outside
•   Personal guarantee
•   Maturity
•   Covenants
•   Menu pricing
Lending Strategies
• Financial statements
• Relationship lending
  – Length of relationship
  – Breadth of relationship
  – Degree of trust
• Credit scoring
Venture Capital
Venture capital is characterized by:
• Financing of new and potentially high growth companies
• Investments primarily in the form of equity participation
• Assistance in the early days of the enterprise
• Adding value to the company through active
  participation, even joining the management on occasions
• Willingness to take on higher risk
• Expectation of higher rewards
• A long-term outlook regarding the investment
Roles in a Venture Fund
•   General partner
•   Investor
•   Venture partner
•   Entrepreneur-in-residence
•   Others
Screening by VCs
•   Get rid of scamsters
•   Major broad concerns
•   Growth and industry considerations
•   Monetising value
Important Considerations
• The entrepreneurial team
  – Personal or individual characteristics
  – Experience of the individual
• Ease of exit
  – Via IPO
  – Sale to PE, etc
The Termsheet
•   Amount and terms of investment
•   Dividend policy
•   Composition of the board of directors
•   Reporting
•   Liquidity (exit) plans
•   Rights of sale
•   Warranties
•   Matters requiring venture capitalist approval
Problems Facing VCs in India
• Large established firms with strong growth figures look
  like a very attractive proposition.
• Investments in public listed firms are giving returns in
  excess of 30%, at far lesser perceived risk
• Small firms in India are informationally opaque.
• Indian entrepreneurs are perceived as lacking in
  marketing and management skills.
• Indian entrepreneurs are more reluctant to give up
  controls than their western counterparts.
• VCs face an exit challenge as the capital markets in
  India are still shallow
• Brand ‘India’ is strong only in some manpower driven
  services sectors like IT and ITES.
Sectors Favoured by VCs
•   IT and IT-enabled services
•   Software Products
•   Wireless and telecom
•   Banking and financial services
•   Divestments in public sector units
•   Media and entertainment
•   Biotechnology
•   Pharma and diagnostics
•   High technology Manufacturing
•   Retail

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Entrepreneurial finance

  • 1. ENTREPRENEURIAL FINANCE
  • 2. Objectives • To list the various sources of debt finance • To understand the process of securing debt finance • To discuss the importance of collateral security • To tabulate the lending strategies of banks • To discuss the characteristics of venture capital • To understand the structure of venture funds • To list the various roles within a venture fund • To understand how venture capitalists get compensated for their efforts • To describe a step by step screening process followed by venture funds while making an investment • To list the elements of a termsheet • To understand the current scenario of VC funding in India
  • 3. Disadvantages of Equity Finance • Dilution of shareholding • Increased 3rd party governance • Increased external controls • Increased commitment to stated strategy
  • 4. Sources of Debt • State Finance Corporations • NBFC • Banks
  • 5. Securing Debt • Drawing up the business plan. • Identifying sources of debt finance. • Presenting the proposal to the bank. • If the manager is considering your proposal favourably, you will have to go for further talks • Once the two parties have broadly agreed, details have to be worked out.
  • 6. Principles of Good Lending • Purpose • Safety • Profitability • Other considerations
  • 7. Security • Collateral – Inside – Outside • Personal guarantee • Maturity • Covenants • Menu pricing
  • 8. Lending Strategies • Financial statements • Relationship lending – Length of relationship – Breadth of relationship – Degree of trust • Credit scoring
  • 9. Venture Capital Venture capital is characterized by: • Financing of new and potentially high growth companies • Investments primarily in the form of equity participation • Assistance in the early days of the enterprise • Adding value to the company through active participation, even joining the management on occasions • Willingness to take on higher risk • Expectation of higher rewards • A long-term outlook regarding the investment
  • 10. Roles in a Venture Fund • General partner • Investor • Venture partner • Entrepreneur-in-residence • Others
  • 11. Screening by VCs • Get rid of scamsters • Major broad concerns • Growth and industry considerations • Monetising value
  • 12. Important Considerations • The entrepreneurial team – Personal or individual characteristics – Experience of the individual • Ease of exit – Via IPO – Sale to PE, etc
  • 13. The Termsheet • Amount and terms of investment • Dividend policy • Composition of the board of directors • Reporting • Liquidity (exit) plans • Rights of sale • Warranties • Matters requiring venture capitalist approval
  • 14. Problems Facing VCs in India • Large established firms with strong growth figures look like a very attractive proposition. • Investments in public listed firms are giving returns in excess of 30%, at far lesser perceived risk • Small firms in India are informationally opaque. • Indian entrepreneurs are perceived as lacking in marketing and management skills. • Indian entrepreneurs are more reluctant to give up controls than their western counterparts. • VCs face an exit challenge as the capital markets in India are still shallow • Brand ‘India’ is strong only in some manpower driven services sectors like IT and ITES.
  • 15. Sectors Favoured by VCs • IT and IT-enabled services • Software Products • Wireless and telecom • Banking and financial services • Divestments in public sector units • Media and entertainment • Biotechnology • Pharma and diagnostics • High technology Manufacturing • Retail