This document summarizes key aspects of entrepreneurial finance and venture capital. It discusses what venture capital is, how venture capital firms are structured, the advantages and disadvantages of venture capital for entrepreneurs, and common terms in venture capital agreements. It also provides an overview of venture capital in India, including some major venture capital firms, average fund sizes, and challenges in the Indian market.

1. ENTREPRENEURIAL FINANCE Rajeev Roy

2. 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

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

4. 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

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

6. 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

7. 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

8. 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

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

10. 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

11. 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

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

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

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

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

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

17. 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

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

19. 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

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

22. 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

23. 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)

24. 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

25. 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

26. 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