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Venture Capital

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Financing the Business

Venture CapitalHow does a VC operate ?Professionally managed pool of Equity CapitalThe Pool is formed by Limited PartnershipWealthy IndividualsPension Funds Foreign InventorsManaged by general partner of the VC firm in exchange of a fee & % of ProfitInvestment by VC is done in Stages Early StageExpansion StageAcquisition Stage

Operations of VCVCs Involvement Monitoring the PortfolioFinance PlanningImpart business skillsInvestor gets her moneyFirm is taken over by another company In the event of going for an IPO

Stages of Business Development FundingEarly Stage (Angel)SeedStart UpExpansion (VC)Second StageThird StagePE3 AcquisitionsDescription Small amount to prove concept & financial feasibility. Product Development & Initial Set up. No commercial sales yet. Working capital for Initial Growth. Break-even not yet.Rapid Sales Growth. Positive ProfitBridge financing. Go Public.Assuming control of another companyNature of Indian VC IndustrySilicon Valley has popularized concept of VCIn India it is (was) a nascent industryLocal companies not yet participatedSome large banks run VCs as a part of their portfolioA few foreign VCs are operational in IndiaMost wealthy individuals prefer to park wealth in real estate because ..

Sector wise InvestmentsVC Raised by Stage of BusinessStart up & Seed02 %Early Stage23 %Expansion57 %Later Stage18 %

Stage of BusinessTypes of Risk Capital MarketsInformal Risk Capital MarketVenture Capital MarketPublic Equity MarketInformal Risk Capital MarketEquity by Invisible wealthy individualsVirtually in accessible to many Entrepreneurs, but it is a greatest pool of Risk Capital MarketThey seek to understand the Industry & need access to the progress of the companyConsiderationsEvaluate Risk /Return RatioManagement TeamCommitmentBusiness Area

Who to approach?If your needs are small, raise money from your own resources - Family, Fools & FriendsIf your plan is ambitious, approach Angel InvestorAs business develops contact a Venture CapitalistYour VC will help get you funds for the next stageFinally go the Acquisition or IPO routePhilosophy of VCsVCs objective is long term capital appreciation VS the companys objective is survival and growthEarly financing will attract risk. VC expects more return but invest less in the early stageThe VC may not seek control of the company. However, will keep at least one seat on the boardHe will leave the day-to-day operations to the company. Will offer financial help, advice, management planning and help with contactsSince it is a long term relationship, VC will expect transparency and trust, no surprises. He is a coach rather than a boss.Investment decisions by VCInvestment decision is both an Art & ScienceART Intuition & Gut feelingAccessibilityRelevanceTrust Science Systemic approach, Data gatheringInvestment Portfolio MixNumber of Early Stage, Expansion & Buy outsNature of Industries & CompaniesVolume of InvestmentGeographical area

VCs Expectation from the CompanyStrong Management TeamSolid Experience & BackgroundPersonal Commitment & InvestmentPositive Family SupportAbility of the team to Execute 2Unique Product OpportunityGrowing market opportunitySingle Gym VS TalwalkarsDiversity of the MarketOnline Travel VS Storage 3Patents & Certifications

VCs Expectation from the Company3Significant Capital Appreciation Stage of InvolvementAmount of Capital InvestedReturn/Risk Ratio, Black StoneAvailable Exit Options 4Downside RiskAssessment of RiskSteps to mitigate the Risk

Investment ProcessPreliminary ScreeningExecutive SummeryDetailed Business PlanAgreement on Preliminary TermsCompatibilityAmount of Money InvolvedControl ROIExit Option

Investment Process3Due DiligenceSurvey & Meetings with all Related PartiesFinancial Statements4Final ApprovalMOU with all Terms & ConditionsEngage a competent Lawyer

Self EvaluationDo you understand the Market, Competition?How many similar companies operate in the space?Why will you Succeed in the market?How will you get your first Customer?How will you Reach the customers? (Distribution)How will you Retain them?How will you Scale your Business?Approaching a VCUnderstand the area of his focusApproach in a professional business manner. Send a well conceived Business PlanTake time to seek out an IntroductionBe ready with a well thought out Oral PresentationDevelop early Rapport & ChemistryDo not resort to a very Rigid Approach

Guidelines for Dealing with VCsAvoid ShopwornDo not discuss the deal with other VCsApproach thro reliable Contact & discuss feesDo not include intermediary in initial meetingsTest market the concept for a few customersBe careful about what is Projected & Promised Disclose problems/negative situations right in the first meeting

Guidelines for Dealing with VCsReach a reasonable understanding with the VC regarding timeframe of responseDo not sell the project based on response from other VCsBe careful about statements like there is no competition for this productDo not show Financial IgnoranceDo not show concern for past problemsIt is not love at first sightGuidelines for Dealing with VCs14 Do not try to impress the VC or be too friendlyBe careful about VCs who do not want to know your business (Dumb Capital)Be concerned about the color of moneyFind out the track record of the VCTake commitments from him Go with a VC who treats you at ParApproach VC only when absolutely requiredFrugality is a great Virtue

Factors in ValuationNature and History of the businessOutlook of the Economy and the IndustryNet Value (Book Value) of the StockWeighted Average of Earnings of the company less CostsDividend paying capacity of the companyGoodwill and other intangiblesPrevious stock of saleMarket price of the stock of similar companies in the Industry

Breaking NewsAssume that you have been very lucky and get considerably big fortune from an unknown relative. You have decided to become a business Angel straight out of college, after getting your MBA. What will be your Investment objectives? The Road not TakenMouthshut.com CEO Faisal FarooqueP2P information exchange on products and brands by consumers themselvesPlug HR CEO Prashant BhaskarManages HR in 60 companies across 8 industries in 6 cities. VCs Point of View- IMahesh Murthy Seed Fund Red bus, Mydentist, CarewaleBackground8 Years, 10,000 Business Plans, 50 CompaniesOld Economy (Competition)PharmaAutomobilesNewspapersNew Age CompaniesEnterprise Software, Mobile apps, E Com, Digital, Consumer Technology Space (Retail, Fashion, Furniture)

New Age BusinessDominationSearch Engine: GoogleMarket Place: eBayPersonal updates: WhatsupMicro Chatting : TweeterInternet Video: YouTubeIndia is UniqueBig international companies will always winNo Advertising 300 Million internet users & 4 Billion internationally

VC Point of View- II Ajit Khurana President SINE at IIT BombayIdea is not importantE.g. Makemytrip.comBusiness ModelExecution is the KeyFlipkartInvestors VS Customers

Business PlanMake important assumptions upfront e.g. More goods will be sold onlineUniqueness of the Idea e.g collar mike, tuitionExecution at the time of interactionPlan to meet the gap in one thing onlyWho else is on the boatWhat have you learnedFrom FailureFrom SuccessPlay the game where it is playedHousing.comFounders: Co founder - Adytya SharmaFunding : Nexus, SoftbankCompetition: 99 Acres, Magic Bricks, Makan.comMap Based100 data pointsLifestyle, Communities, Satisfaction Index, Price rise index, Senior Citizen friendlinessSold 50 Crores worth of Tata Housing in 15 daysVision : Buy houses online

Future PlansReach : 45 Cites to 300 CitiesList every home in India Get into related areas: Interior, Legal, MoversExpend into other Geos Africa & US