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The VC Investment Process(Term Sheet, Due Diligence)
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What We’ll Cover ?
• Venture Capital as only one of the sources offunding for entrepreneurs
• Why raise money from VCs?
• The Structure of VC firms
• The VC investment life cycle
• Venture Capital as only one of the sources offunding for entrepreneurs
• Why raise money from VCs?
• The Structure of VC firms
• The VC investment life cycle
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Other sources of funding
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Sources include…
A. 3F (friends, fools & family)• Easy to approach, hard to-convince!
• They know you best, and can best understand your passion / dreams
• A popular source of start-up finance
When ?• Usually at the idea stage – higher chances if the idea has been thought
through well
A. 3F (friends, fools & family)• Easy to approach, hard to-convince!
• They know you best, and can best understand your passion / dreams
• A popular source of start-up finance
When ?• Usually at the idea stage – higher chances if the idea has been thought
through well
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B. Angels• Angel eco-system is nascent (but evolving) in India (well evolved in the US)• India Angel Network, Mumbai Angels, etc. becoming more active• Best angels are successful professionals from within that industry – ability to
guide and mentor in the early days• Tie’s Entrepreneurship Acceleration Program (EAP) helps entrepreneurs with
such funding
When?• Business Plan reasonably well thought through
• Some validation of the plan increases probability of funding
Sources (contd.)…B. Angels• Angel eco-system is nascent (but evolving) in India (well evolved in the US)• India Angel Network, Mumbai Angels, etc. becoming more active• Best angels are successful professionals from within that industry – ability to
guide and mentor in the early days• Tie’s Entrepreneurship Acceleration Program (EAP) helps entrepreneurs with
such funding
When?• Business Plan reasonably well thought through
• Some validation of the plan increases probability of funding
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C. Incubators• Remove the infra. headache (& cost)
• Make available valuable technical inputs and guidance
• Money could also be part of the deal!
When?• Normally select through screening of business plan – therefore needs well
thought through plan
• May or may not seek some validation of plan
Sources (contd.)…C. Incubators• Remove the infra. headache (& cost)
• Make available valuable technical inputs and guidance
• Money could also be part of the deal!
When?• Normally select through screening of business plan – therefore needs well
thought through plan
• May or may not seek some validation of plan
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D. Customers• Usually available for leading-edge ideas that can transform the customer’s
business.• Takes form of direct equity investments, or advance payments for orders.• Customer funding is a great validation for future financing rounds.
When?• Usually when product idea is crystal clear, higher chances if prototype can be
demonstrated
Sources (contd.)…D. Customers• Usually available for leading-edge ideas that can transform the customer’s
business.• Takes form of direct equity investments, or advance payments for orders.• Customer funding is a great validation for future financing rounds.
When?• Usually when product idea is crystal clear, higher chances if prototype can be
demonstrated
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E. Banks
Sources (contd.)…
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F. Venture Capital• VCs in India rarely (unlike the US) come in at the seed / angel stage
• They usually look for some customer validation:
– For services companies, this means actual customers / revenues
– For product companies, at least a beta customer, if not a paying one
– Company generating revenues has higher chances of raising VC money
– Profitability is normally not a requirement
And finally…F. Venture Capital• VCs in India rarely (unlike the US) come in at the seed / angel stage
• They usually look for some customer validation:
– For services companies, this means actual customers / revenues
– For product companies, at least a beta customer, if not a paying one
– Company generating revenues has higher chances of raising VC money
– Profitability is normally not a requirement
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…because it spreads the risk.…because VCs can add-value!
Why raise money from VCs?
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1. Mentoring– Helping entrepreneurs (specially young ones) grow into great
CEOs.2. Strategic Inputs
– Act as a bouncing-board / devil’s advocate on strategy andoperational issues
– Providing additional competitive surveillance– Updates on technology directions– Sharpen strategy by bringing a fresh perspective
3. Management Areas– Helping evolve organisation structures– Identification & recruitment of key employees– Helping build a powerful board of Directors / Advisors
How do VCs Add Value?1. Mentoring
– Helping entrepreneurs (specially young ones) grow into greatCEOs.
2. Strategic Inputs– Act as a bouncing-board / devil’s advocate on strategy and
operational issues– Providing additional competitive surveillance– Updates on technology directions– Sharpen strategy by bringing a fresh perspective
3. Management Areas– Helping evolve organisation structures– Identification & recruitment of key employees– Helping build a powerful board of Directors / Advisors
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4. Sales & Marketing– Assist in developing product & marketing strategies– Active introductions to partners, distributors & key customers,
specially in overseas markets– Help focus company strategically for enhanced value
5. Financial areas– Key role in subsequent rounds of financing– Providing dispassionate advice during M&A discussions– Introduction to investment bankers, analysts, etc. in
preparation of an IPO6. Relationships
– Open up the VCs network (potential partners, customers,distributors, acquirers, investors)
How do VCs Add Value?4. Sales & Marketing
– Assist in developing product & marketing strategies– Active introductions to partners, distributors & key customers,
specially in overseas markets– Help focus company strategically for enhanced value
5. Financial areas– Key role in subsequent rounds of financing– Providing dispassionate advice during M&A discussions– Introduction to investment bankers, analysts, etc. in
preparation of an IPO6. Relationships
– Open up the VCs network (potential partners, customers,distributors, acquirers, investors)
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How are VC firms structured ?Limited Partners
GeneralPartners
Carried Interest (Profit Share)
Mgmt fee
Advice
VC Fund
GeneralPartners
Co.1 Co.2 Co.3 Co.4
Mgmt fee
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VC Life CycleLPs
- IPO- M&A- Co. / Promoterbuy-backs
- SecondarySale
- Liquidation
- Investment Banks / CA’s- TiE / NEN, etc.- Personal Networks- Seminars, etc.
Fund raisedReturns toLP
Making theInvestment
- Board Seats- Close interaction with
entrepreneur
Mitigating the Risks- Technology Risk- Market Risk- Execution Risk- Finance Risk- Team RiskTerm Sheet
- Financial & Legal Due D- Legal Documentation- Money Transfer- Issue of Shares- Enabling resolutions
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What’s typically covered in a Term Sheet ?
• Financing Amounts• Valuation• Special Rights:
– Drag Along– Tag Along– Pre-emption
• Exit Issues• Anti-Dilution – Full Rachet / Weighted Average• Liquidation Preference• Protective Provisions (Veto)• Conditions Precedent
• Financing Amounts• Valuation• Special Rights:
– Drag Along– Tag Along– Pre-emption
• Exit Issues• Anti-Dilution – Full Rachet / Weighted Average• Liquidation Preference• Protective Provisions (Veto)• Conditions Precedent
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Typical Legal Documentation• Investor’s Rights Agreement (IRA)
• Share Subscription Agreement (SSA)
• Amended Articles of Association / Memorandum ofAssociation
• Employment Agreements (for key employees)
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Role of CA’s
• CA’s play a role in the entire VC cycle but canplay a crucial role in– Deal diligence
– Making the investments, &
– Exits
• CA’s play a role in the entire VC cycle but canplay a crucial role in– Deal diligence
– Making the investments, &
– Exits
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Thank You !Thank You !