EXECUTIVE SUMMARY

Title of the study: The study of Venture Capital Financing The right process of reaching a Venture Capitalist and factors effecting the capital decisions

As a part of Curriculum, I have done an internship project for the period of two months at Funding Solutionz, and by working in the organization I have been able to study venture capital financing and prepare this project report on the factors involved while taking capital decisions on a potential project by a venture capitalist. (present financial condition, potential of the venture, Cost of financing, ownership, organization structure and management, existing customer base, size and tenure). It involves the reliability and innovation in the business idea, companies earning stability (CMR ratios), quality of management, the corporate governance and structure, investment structure and exit plans. Most of the entrepreneurs fail to forecast these factors in a required manner that is demanded by the venture capitalist for their analysis, thereby losing their chances of getting approved by a VC and missing the opportunity of funding their potential venture idea.

This study will cover : 1. Preparation of documentations as per required by the VC i.e a. Investment Teaser b. Business plan(Business idea, Market, Competitor Study, Financial and Marketing Plan, Exit Plan etc) c. Information memorandum (a presentation having summary on all dimensions) d. Financial Plan

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2. The detail study will further be supported by crucial factors that play major role for the business plan to get sanctioned by the venture capitalist.

3. And the process of venture capital financing:

a.

Deal origination

b. Screening c. Evaluation d. Deal structuring e. Post investment activity f. Exit plan

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CHAPTER 1: INTRODUCTION

1.1 VENTURE CAPITAL FINANCING Business requires capital, and getting it at the right time is very important. There are several alternatives to fund the business. A brief heading to name a few would be :

Owner or proprietors capital Equity partner Debt Finance

These can be further be branched to many options giving entrepreneur several options to choose among. In this study the focus would be more on venture capital which comes under equity partner as well as under debt financing.

Venture capital is a risk financing in the form of equity or quasi-euity. It gives the business funds based on their potential and their interest as perceived by the investor. Funds might be required for seed stage funding, expansion/development funding or for acquisition financing. Venture capital is established among developed countries and is developing in third world countries because of its impact on

encouraging entrepreneurial activities within a nation. Venture Capital firms invest funds on any business with a professional outlook, they focus on their primary segment which vary among different specializations (eg. e-commerece, Oil & Gas, Healthcare, Manufacturing, Health/life sciences, etc.). 1

Loughborough University Institutional Repository: Venture Capital Financing in India: a Study of Venture Capitalists Valuation, Structuring, and Monitoring Practices, accessed March 30, 2013, https://dspace.lboro.ac.uk/dspacejspui/handle/2134/6819.

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Venture capital in India today has three forms

Equity Conditional loans Income notes

The number of venture capital firms are raising in India due to the well-developed avenues for buying and selling of shares within SMEs, huge tax benefits for the venture capitalist and support from government policies. Venture capital plays a strategic role to build potential business/enterprises to reach a level where they can reap their capital gains and can cash out these gains by leading directing their financed venture to any of the following exit routes:

Initial public offerings (IPO) Acquisition by other company Purchase of venture capitalists share by other investors or promoters

This is done when the Venture capitalist realizes the required return of return on his primary capital invested on the business to take the exit route. Venture capital financing helps both the entrepreneurs as well as the venture capitalist to realize their goals.

With venture capital financing, the venture capitalist acquires an agreed proportion of the equity of the company in return for the funding that he offers.

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This could be summarized as follows :

Equity participation Long term investment Participation in management

The rate of return on this capital lies within the success of the business venture. Venture capital Equity finance thereby offers the advantage of having no interest charges. It is "patient" capital that seeks a return through long-term capital gain rather than immediate and regular interest payments, as in the case of debt financing. Given the nature of equity financing, venture capital investors are therefore exposed to the risk of the company failing. As a result the venture capitalist must look to invest in companies which have the ability to grow very successfully and provide higher than average returns to compensate for the risk.
2

Venture capitalists management approach differ to that of a lender or a bank. The bank does not participate with the management and keeps its ties away from the ventures management, operations and other decision making. When venture capitalists invest in a business they typically direct and guide the venture so as to lead it towards capital gains. They are a crucial part of the company's decision making and occupy a place in board of directors. These professional venture capitalists act as mentors and aim to provide support and advice on a range of management, sales and technical issues to assist the company to develop its full potential.3

2 3

About Venture Capital (VC), accessed March 30, 2013, http://indiavca.org/about-venture-capital-vc.html. Venture Capitalist, accessed March 30, 2013, http://techaloo.com/venture-capitalist/.

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1.2 BACKGROUND OF THE STUDY:

Today due to the economic crisis and the change in job market. Entrepreneurship has gained market. A number of technocrats in India today plan to setup their own shops and capitalize this opportunities. In todays highly dynamic economic climate with regular technological inventions, few traditional business models may survive but margin lies more towards more innovative business ideas. Today it is not the conglomerates that fuel economic growth but are the new SMEs and other innovative businesses. The bright reason for global economic growth today lies in the hand of the small and medium enterprises. For example, in India SMEs alone contribute to almost 40% of the gross industrial value added in the Indian economy. Whereas in the United States 55% of their global exports are supported by very SMEs with not more than 50 employees and 10% exports are generated by companies with 800 or more employees. There is a paradigm shift from the earlier physical production and economies of scale model to new ventures with technological advancements providing services and under process industry. However, staring an enterprise has its own risk and is never easy. There are number of parameters that contribute to its success or downfall. That is why entrepreneurs find it difficult to find the right venture capitalist and miss the right way to approach them. However, there are methods and a right protocol for any entrepreneur to reach out his investor in a right way and thereby get the funding and that is our topic of study here.

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1.3 NEED FOR THE STUDY

The study has been conducted for gaining the practical knowledge about Venture capital finance and various operations to reach them in a right manner. The study has been undertaken as a part of PGDM_MBA curriculum from 1st jan.to Feb 28th 2013 for the fulfilment of the requirement of PGDM_ MBA degree.

The study covers the domain of conditions checked by the VC firms before heading towards funding the venture, This is the link where the entrepreneur miss their chance due to not having the know-how of how to approach a potential VC for his funding needs. The Venture capitalist on the other hand will have a specific format in their requirement sheet which the entrepreneur has to add maximum value, to gain his attention and thereby to get evaluated for his venture funding

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1.4 OBJECTIVE OF THE STUDY

To understand the right method to reach to a venture capital firm with the required financial presentation and business plan.

To understand about the working of Venture Capital Financing and data required by them.

To study the sources and allocation of Venture Capital Financing.

1.5 SCOPE OF THE STUDY

The scope of the study was to realize the funding lifecycle in a practical format, by preparing business case for entrepreneurs and help them seek a VC. To realize the theoretical aspect of the study into real life work experience by analyzing the financials of the venture and guiding business finance to them. The study of financials and possible funding that could be approved is based on the tools such as Size wise analysis and Ratios. The study is based on the last 5 years Annual Reports of venture capital firms and fund seeking ventures.

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1.6 LIMITATIONS OF THE STUDY

All the data presented for the venture capital financing are limited to few firms and for the last 5 years. The information provided to the researcher may be over simplifications of facts over generalization from insufficient data.

Financial analysis of fund seeking ventures does not measure the qualitative aspects of the b u s i n e s s . It d o e s n o t s h o w t h e skill s , t e c h n i c a l kn o w - h o w a n d t h e e f f i c i e n c y o f i t s e m p l o ye e s a n d m a n a ge r s

It does not reveal the fairness of selection criteria b y a venture capital firm.

1.7 DATA COLLECTION

Primary sources include surveys done across 100 respondents across different sectors from SMEs and VC firms and further discussion with the managers at Funding Solutionz.

Secondary Sources were case studies, journals, financial records, books.

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1.8 SAMPLING DESIGN

Sampling Unit:-Financial Statements, VC firms list, funding/yr

Sampling Size:-Last 5 years Financial Statements

1.9 TOOLS USED SPSS (17) and Microsoft Office Excel 2007 Cross tabulation and chi-square statistics

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CHAPTER 2 : INDUSTRY PROFILE

2.1 VC INDUSTRY PROFILE IN INDIA India currently has more than about 400 Venture capital firms. 4

The Venture Capital industry has shown a exponential upward curve from investments of about USD 0.5 billion (56 deals) in 2003 to USD 14 billion (439 deals) in 2007. In the year 2008, there was a decline to about USD 11 billion (382 deals).

Unlike before as observed in the early stages of the industrys growth the investments were inclined largely towards the IT sector, but within 8 years of success stories now in 2009 Venture cvapital firms are now interested in nearly all sectors.

With developing Indian entrepreneurship standards, government support , policies and globalisation policies there are vast opportunities for private equity investors to capitalize on.

Preferred regions for VC investments are Mumbai, Delhi and NCR, followed by Bangalore. Although companies in South India attracted a higher number of investments, in value terms Western India did much better. Among cities, Mumbai-based companies retained the top slot with 108 private equity investments totalling almost US $6 billion in 2007, followed by Delhi/NCR with 63 investments (US $2.7 billion) and Bangalore with 49 investments aggregating US $700 million.
Microsoft Word - The VC Handbook -- _Chapter 0-26_ - PVI.A02_Venture.Capital.Industry.in.India.pdf, accessed March 16, 2013, http://smoothridetoventurecapital.com/PVI.A02_Venture.Capital.Industry.in.India.pdf.
4

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2.2 INTRODUCTION TO THE VENTURE CAPITAL INDUSTRY Initiative in India: Indian tradition of venture capital for industry starts with a history of more than 150 years. Back then many of the managing agency houses acted as venture capitalists providing both finance and management skill to risky projects. It was the managing agency system through which Tata iron and Steel and Empress Mills were able to raise equity from the investing public. The Tatas also initiated a managing agency system, named Investment Corporation of India in 1937, which by acting as venture capitalists, successfully provided hi-tech enterprises such as CEAT tyres, associated bearings, national rayon etc. The early form of venture capital enabled the entrepreneurs to raise large amount of funds and yet retain management control. After the abolition of managing agency system, public sector term lending institutions met a part of venture capital requirements through seed capital and risk capital for hi-tech industries which were not able to meet promoters contribution. However all these institutions supported only proven and sound technology while technology development remained largely confident to government labs and academic institutions. Many hi-tech industries, thus found it impossible to obtain financial assistance from banks and other financial institutions due to unproven technology, conservative attitude, risk awareness and rigid security parameters. Venture capitals growth in India passed through various stages. In 1973, R.S. Bhatt committee recommended formation of Rs. 100 crore venture capital funds. The seventh five year plan emphasized the need for developing a system of funding venture capital. The Research and Development Cess Act was enacted in May 1986, which introduced a cess of 5 percent on all payments made for purchases of technology from abroad. The levy provides the source for the venture capital fund. Formalized venture capital took roots when comptroller of capital issues venture capital guidelines in Nov 1988.5

5 VENTURE CAPITAL - ManagementParadise.com Forums - Your MBA Online Degree Program and Management Students Forum for MBA,BMS, MMS, BMM, BBA, Students & Aspirants., accessed March 30, 2013, http://www.managementparadise.com/forums/miscellaneous-project-reports/11182-venture-capital.html.

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2.3 GROWTH OF VENTURE CAPITAL INDUSTRY

Up to 1996: The Early Years: Funds that were mobilized for venture investment were small in value. The venture capitalists in those times were mostly from a banking background. Banks approached the subject of venture funding much likely they approached debt financing of a project. The accent was on the asset-side of the balance sheet. And the focus on innovation and business building was low. Value creation as a focus had not yet been fully discovered, and exit strategies were being thought more around the life-term of the fund. Valuations were low. No competition between VCs. Indian entrepreneurs had not yet discovered the venture capital route to funding and growth and it reflected in the small amounts that were invested. There was little or no active participation of venture capitalists in entrepreneurial activities such as financial structuring, business strategy. Business enhancement through networks.

1997 to 2000: The Rock n Roll Years:

The SEBI guidelines of 1996 acted as huge incentive for institutional acked MNC venture capital companies to focus their attention on India.

The range of venture capitalists now spanned incubators, ingents, classic venture capitalists and even private equity players. And the lines between them had begun to blur.

Venture capitalists were instrumental in introducing risk taking too many, members of the professional class.

Innovation was the key, and idea flows equaled doer flows at a frantic pace never before seen. Page | 13

2001 Onwards: The Reality Years:

The number of people who had got in to venture capital game was truly impressive. In addition to the seasoned players, there were finance and noon finance professionals of different hues entering the industry and people with little or no experience running the companies.

Venture capital community is finally recognizing that the evolution and business is an on-going process. This added to the return of the business maturation cycle of five to seven years, portends a less frenetic and more sustained pace of venture activity.

2.4 PROBLEMS IN THE VCs IN THE INDIAN CONTEXT:

One can ask why venture funding is so successful in USA but faced a number of problems in India. The biggest problem was a mind set change from collateral funding to high risk high return funding. Most of the pioneers in the industry were people with credit background and exposure to manufacturing industries. Exposure to fast growing intellectual property business and services sector was almost zero. All combined to a slow start to the industry. The other issue that led to such a situation includes:

2.5 LICENSE RAJ AND THE IPO BOOM:

Till early 1990s, under the license raj regime, only commodity centric businesses thrived in a deficit situation. To fund a cement plant, venture capital is not needed. What was needed was ability to get a license, and then get the project funded by the banks and DFIs. In most cases, the promoters were well established industrial houses, with no apparent need for funds. Most of these entities were capable of raising funds from conventional sources, including term loans from institutional and equity markets.

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2.6 SCALABILITY:

The Indian software segment has recorded an impressive growth over the last few years and earns large revenues from its export earnings, yet our share in the global market is less than 1 per cent. Within the software industry the value chain ranges from body shopping at the bottom to strategic consulting at the top. Higher value addition and profitability as well as significant market presence take place at the higher end of the value chain. If the industry has to grow further and survive the flux it would only be through innovation. For any venture idea to succeed there should be a product that has a growing market with a scalable business model. The IT industry (which is most suited for venture funding because of its ideas nature) in India till recently had a service centric business model. Products developed for Indian markets lack scale.

2.7 MINDSETS:

Venture capital as an activity was virtually non existence in India. Most venture capital companies went to provide capital on a secured debt basis, to established businesses with profitable operating histories. Most of the venture capital units were off-shoots of financial institutions and banks and the lending mindset continued. True venture capital is capital that is used to help launch products and ideas of tomorrow. Abroad, this problem is solved by the presence of angel investors. They are typically wealthy individuals who not only provide venture finance but also help entrepreneurs to shape their business and make their venture successful.6

Legal - Venture Capital-overview.pdf, accessed March 30, 2013, http://ganga.iiml.ac.in/~mishra/Test/mfsmakg/vcapital/Venture%20Capital-overview.pdf.

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2.8 RETURNS, TAXES AND REGULATIONS:

There is a multiplicity of regulators like SEBI and RBI. Domestic venture funds are set up under the Indian Trusts Act of 1882 as per SEBI guidelines, while offshore funds routed through Mauritius follow RBI guidelines. Abroad, such funds are made under the Limited Partnership Act, which brings advantages in the terms of taxation. The government must allow pension funds and insurance companies to invest in venture capitals as in USA where corporate contributors to venture funds are large.

2.9 EXIT:

The exit routes available to the venture capitalists were restricted to the IPO route. Before deregulation, pricing was dependent on the erstwhile CCI regulations. In general all issues were under period. Even now SEBI guidelines make it difficult for pricing issues for an easy exit. Given the failure if the OTCEI and the revised guidelines, small companies could not hope for a BSE / NSE listing. Given the dull market for mergers and acquisitions, strategic sale was also not available.

2.10 VALUATION:

The recent phenomenon is valuation mismatches. Thanks to the software boom, most promoters have sky high valuation expectations. Given this, it is difficult for deals to reach financial closure as promoters do not agree to a valuation. This coupled with the fancy for software stocks in the bourses means that most companies are proponing their IPOs. Consequently, the number and quality of deals available to the venture funds gets reduced.7

VENTURE CAPITAL - ManagementParadise.com Forums - Your MBA Online Degree Program and Management Students Forum for MBA,BMS, MMS, BMM, BBA, Students & Aspirants.

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2.11 CONTRIBUTORS TO THE VENTURE FUND:

Foreign Institutional Investors. All India Financial Institutions. Multilateral Dev Agencies. Other Banks. Other Public. Private Sector. Public Sector. Nationalized Banks. State Financial Institutions. Insurance Companies. Mutual Funds.

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CHAPTER 3 : COMPANY PROFILE 3.1 OVERVIEW

Funding Solutionz is a boutique investment advisory firms offering services in preparing business plans to raising capital resources for companies in Bangalore, Founded on February 17, 2012 with branches across Bangalore and headoffice located in Jayanagar Bangalore. The company has a well-qualified and experienced management team with ex bankers and other finance professionals to help entreprenuers with raising capital through

a. Private Equity b. Venture capital c. Angel Investments d. Crowd Funding e. Structured Finance through Debt and Equity capital

The company has a wide client base, and a huge network among all venture capital firms and young business firms

They also support clients with business consulting and business finance

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3.2 OBJECTIVES OF THE STUDY:

We shall discuss here these following requirements by a VC firm that helps them judge the right venture they wish to invest in.

Investment Teaser : Executive summary It holds the summary of the business plan and is a smart persuasive, yet realistic. Its a two page of your business plan holding the venture idea and covering all its key elements.

Investor Memorandum : covering aspects as shown below Background of venture The parent company profile for the VC to be sure of the brand strength

Product services offered This part should cover all details of the product or service offered from its competitive edge, USP to the development stages for even a non-specialist to understand. This should also hold details of patents, or any other legal protection pending or required.

Market analysis The plan should describe about the market traction towards your ventures services and products, It should be strong enough to convince the VC firm to seek a real commercial opportunity in your business.

Size of the market Competitor How developed is the market Strategic Positioning Page | 19

Strength and weaknesses if any Projections for company and the market

Marketing and Business operations

The marketing aspect i.e

o Sales and distribution strategy o Strategies for different sales force o Pricing strategy o Promotions

The operations aspects

o Suppliers o Labour requirements o Logistics and other daily working resources

Management team

Quality and depth in the management team Strong records of being involved with successful businesses

Exit plan The routes available for the VC to exit the investment and make a return.

Floating on a stock exchange Selling the share to other trade buyer

Funds required A clear statement of how much funds are required with its source. The purpose for the funding required with its clear break up for the VC to understand and analyse

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Financial projections Ratios that describe all important business financial status for last 5 to 6 years, the capital allocation, cash flow statements, profit n Loss statements, Balance sheets, cost analysis and yearly graphical presentations for the expenses and earnings forecasted in for the coming years with this new venture.

This holds the most important part and will be examined again with few examples later in our study .The Financial should produce a pro forma profit n loss statement and balance sheet and ensure that these are realistic and could be updated or adjusted if need arises. It should also hold the companys present financial outlook that shows their margin and earning stability. It should forecast the prospective future margins keeping the competition in mind.

Company growth prospect Debt to Shareholder fund ratio Budgets allocated to each units

And to prove the consistency of the company of meeting the financial projections relevant historical financials should be presented.

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The second objective is to find the factors that are most crucial and are taken into consideration by a venture capitalist for providing capital to a new company. We focus on a few sets of predefined factors. The process to find these factors is necessary to understand as to how to implement these into the documentation in proper manner so that the venture capitalist seeks the right interest for the proposed venture.

We here will measure the factors

Business Idea Financials Management IRR Conditions Pay Back period

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3.3 VENTURE CAPITAL WORKING 3.3.1 STAGES OF FINANCING: Stages of Financing

Time(Years)

Uses for the Finance

Financing needed to prove an idea and bring a concept or develop it (could be a service or a Seed money stage 7 10 product) Financing needed to develop the start up with better market penetration through promotions Start-up financing 5 10 marketing and other product development technique Funds for taking care of working capital for a firm, that is still losing money though have its Second round financing 37 products or services out in market. Financing for a firm that is breaking even and has a strong venture thereby is contemplating Third round financing 13 an expansion project. Financing firms that are planning to go public,(bridge financing). Fourth round financing 13 13 Financing a firm for its acquisition activity of a product line or service business. Buy-out

Turnaround

35

Re-establishing a business

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3.3.2 STAGES IN VENTURE FINANCING :

Early Stage Financing:

Seed financing for supporting a concept or idea. Research and Development financing for product development. Start-up capital for initiating operations and develop a prototypes. First stage financing for production and marketing.

Expansion Financing:

Second stage financing for working capital and initial expansion. Development financing for major expansion. Bridge or mezzanine financing for facilitating public issue.

Acquisition/Buy-out Financing:

Acquisition financing for acquiring another firm for further growth Management Buy-out financing for enabling operating group to acquire the firm or part of its business.

Turnaround financing.

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3.4 ADVANTAGES OF VENTURE CAPITAL

It injects long term equity finance which provides a solid capital base for future growth. The venture capitalist is a business partner, sharing both the risks and rewards. Venture capitalists are rewarded by business success and the capital gain.

The venture capitalist is able to provide practical advice and assistance to the company based on past experience with other companies which were in similar situations.

The venture capitalist also has a network of contacts in many areas that can add value to the company, such as in recruiting key personnel, providing contacts in international markets, introductions to strategic partners, and if needed co-investments with other venture capital firms when additional rounds of financing are required.

The venture capitalist may be capable of providing additional rounds of funding should it be required to finance growth.

3.5 DISADVANTAGES OF GOING TO VENTURE CAPITAL FINANCE

The agreement of funding is passed on a contract which could be partial ownership or other profit sharing which if not properly negotiated by the entrepreneur he might lose ownership of his whole business or idea and future to them.

Intrusion and control : the VC gets the right to drive the firm thereby can take strategic decision or can drive them to his advantage if the deal is not guided properly.

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3.6 VENTURE CAPITALISTS GENERALLY:

Finance new and rapidly growing companies. Purchase equity securities. Assist in the development of new products or services. Add value to the company through active participation. Take higher risks with the expectation of higher rewards. Have a long term orientation.

When considering an investment, venture capitalists carefully screen the technical and business merits of the proposed company. Venture capitalists only invest in a small percentage of the businesses they review and have a long term perspective. They also actively work with companys management, especially with contacts and strategy formulation8. Venture capitalists mitigate the risk of investing by developing a portfolio of young companies in a single venture fund. Many times they co-invest with other professional venture capital firms. In addition, many venture partnerships manage multiple funds simultaneously. For decades, venture capitalists have nurtured the growth of Americas high technology and entrepreneurial communities resulting in significant job creation, economic growth and international competitiveness. Companies such as Digital Equipment Corporation, Apple, Federal Express, Compaq, Sun Microsystems, Intel, Microsoft and Genetic are famous examples of companies that received venture capital early in their development. In India these funds are governed by the Securities and Exchange Board of India (SEBI) guidelines. According to this venture capital fund means a fund established in the form of a company or trust, which raises money through loans, donations, issue of securities or units as the case may be, and makes or proposes to make investments in accordance with these regulations. (Source: SEBI (Venture Capital Funds), Regulations, 1996).

MomentumVC | About Venture Capital, accessed March 30, 2013, http://www.momentumvc.com.au/docs/3100_f.htm.

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3.7 FACTORS DETERMINING THE VENTURE CAPITAL REQUIREMENTS

Nature of business: The requirements of working is very limited in public utility undertakings such as electricity, water supply and railways because they offer cash sale only and supply services not products, and no funds are tied up in inventories and receivables. On the other hand the trading and financial firms requires less investment in fixed assets but have to invest large amt. of working capital along with fixed investments.

Size of the business: Greater the size of the business, greater is the requirement of working capital.

Length of production cycle: The longer the manufacturing time the raw material and other supplies have to be carried for a longer in the process with progressive increment of labor and service costs before the final product is obtained. So working capital is directly proportional to the length of the manufacturing process.

Seasonal variations: Generally, during the busy season, a firm requires larger working capital than in slack season.

Working capital cycle: The speed with which the working cycle completes one cycle determines the requirements of working capital. Longer the cycle larger is the requirement of working capital.

Business cycle: In period of boom, when the business is prosperous, there is need for larger amt. of working capital due to rise in sales, rise in prices, optimistic expansion of business, etc. On the contrary in time of depression, the business contracts, sales decline, difficulties are faced in collection from debtor and the firm may have a large amt. of working capital.

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CHAPTER 4 : PROJECT DESING AND METHODOLOGY

4.1.1 TITLE OF THE PROJECT: - A study on factors effecting capital decisions by Venture Capitalist 4.1.2 OBJECTIVE OF THE STUDY:

To understand about the process of Venture Capital Financing. To understand relevance of different factors effecting capital decisions To study the expected IRR by a VC To study the right method to reach to a potential VC with his preferred choice of documents.

4.1.3 SCOPE OF THE STUDY:The scope of the study was to put the theoretical aspect of the business plan study into real life work experience by working with a investment banker. The data on preference of factors by venture capitalist are analysed through a survey method consisting of Small and Medium Enterprises.

4.2 RESEARCH METHODOLOGY:Field study was carried out across different VC and capital seeking entrepreneurs, It was analysed through SPSS (17) and Microsoft Office Excel 2007 Cross tabulation and chi-square statistics were utilized to verify the interrelationships between the different respondents and the responses they provided. To find the correlation among the factors Regression Analysis was also done. Pearson correlation coefficient was found to be positive at a significance level over 0.5 which indicates a strong correlation.

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4.2.1 DATA COLLECTION:Primary sources includes survey with the a sample of 100 respondents is collected from Bangalore region. The population is without any sectorial differentiation. Secondary Sources were articles, journals, past records from Funding Solutionz, books and internet sources. 4.2.2 RESEARCH DESIGN: - The research or study conducted at Funding Solutionz is a descriptive research in nature. This design i s a n a t t e mp t t o k n o w t h e preferred factors considered by the venture capitalist before financing a firm..

4.2.3 LIMITATION OF THE STUDY:All the data presented for the study is for a small sample size only in Bangalore. The information provided to the researcher may be over simplifications of facts over generalization from insufficient data. The study does not measure the qualitative aspects of the factors towards the decision making of a Venture Capitalist. It does not show the

skills, technical know-how of a VCs final decision call

4.2.4 SAMPLING DESIGN Sampling Unit:-Respondents include VCs and fund seeking entrepreneurs Sampling Size:-100 4.2.5 TOOLS USED MS-EXCEL and SPSS (17)

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4.3 : HOW TO REACH INVESTORS AND PREPARE DOCUMENTS AS PER THEIR REQUIREMENT
The major issue though after knowing the important factors of decision making by a VCs remains the same, how to reach them in a right manner with the documents they wish to study. The current scenario of Venture Capital Firms show how critical it is to set the right documentation for the analysis and processing of any new venture plan by a VC firm. Through this experience I learned how to prepare the whole set of documents required by a VC as defined below:

Investment Teaser Business plan(Business idea, Market, Competitor Study, Financial and Marketing Plan, Exit Plan etc)

Information memorandum (a presentation having summary on all dimensions) Financial Plan

1. Investment Teaser: This covers the necessary summary and aspects of the new venture proposed, topics like:
o Investment Summary o About the Company o The Need o The current Gap o The opportunity o ROI and Sustainability

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o The Capability and the current state o The Competition o The USP o The Revenue Model o Funding Needs o End note

2. Business plan : This holds the whole information in a detailed manner regarding the venture plan, financials, its market characteristics, and every details from the ownership to capital utilisation. Such details are only inferred to the investor once they seek interest in the venture after having the view at the investment teaser

3. Information Memorandum: This is presentation the investee would show the investor, with clear details on the outline of all features like the Venture Idea, Market analysis, Business model, Marketing plan, Financial Plan, Entrant barrier, Management, Current services, Exit Plan, Risk Involved.

4. Financial Plan: Ratios that describe all important business financial status for last 5 to 6 years, the capital allocation, cash flow statements, profit n Loss statements, Balance sheets, cost analysis and yearly graphical presentations for the expenses and earnings forecasted in for the coming years with this new venture.

Example shown in appendix

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CHAPTER 5 : DATA ANALYSIS

5.1 : FACTORS EFFECTING THE CAPITAL DECISIONS

Descriptive Characteristics The survey covers all factors with a scale of one to five. One been the least and five been the maximum.

The survey is done to check the rank of factors effecting the decision making of an investor. Here the respondents rank

Business Idea Financials Management IRR Conditions Pay Back period

The result of the survey is as shown below for the given 100 respondents:

Table 5.1: Respondent Analysis Scale Business Plan Financials

Management

IRR conditions

Payback period

2 3

17 20

12 23

11

17 21

17

31

29

26

31

27

33

32

32

31

33

20

16

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5.1.1 Statistical tools

Reliability Test Cronbachs alpha is the coefficient of reliability which shows how closely the items are related in the group. The Cronbach's Alpha Value > .8 shows the responses are reliable. The Cronbachs Alpha value observed was 0.887 which is greater than 0.7 hence the variables for the study showed reliability.

Variables The independent variables used here are Business plan, Financials, Management, IRR Conditions, Payback period and dependent variable is Venture Capitalist financing decision

Hypothesis H0: Business plan, Financials, Management, IRR Conditions, Payback period does not affect the Venture Capitalist financing decision. H1: Business plan, Financials, Management, IRR Conditions, Payback period does affect the Venture Capitalist financing decision.

Confidence Interval The confidence associated with an interval estimate is at 95%.

Decision Rule Since Observed value is less than Critical value (at 95% confidence interval value alpha is .05) Ho is rejected. Hence the hypothesis is proved that the venture capital financing is dependent on the factors like Business plan, Financials, Management, IRR Conditions, Payback period. Page | 33

TABLE 5.1.2 COMPONENT ANALYSIS Compon ent 1 2 3 4 5 Total 3.899 .837 .212 .051 1.311E-16 Initial Eigenvalues % of Variance 77.986 16.744 4.250 1.020 2.622E-15 Cumulative % 77.986 94.730 98.980 100.000 100.000 Extraction Sums of Squared Loadings Total 3.899 % of Variance 77.986 Cumulative % 77.986

Extraction Method: Principal Component Analysis.

Factor Analysis Factor analysis is a collection of methods used to examine how underlying constructs influence the responses on a number of measured variables. Factor analyses are performed by examining the pattern of correlations (or covariances) between the observed measures. Measures that are highly correlated (either positively or negatively) are likely influenced by the same factors, while those that are relatively uncorrelated are likely influenced by different factors. (Decoster, 1998)

TABLE 5.1.3 Communalities Initial Timeline Business idea Financials Management IRR 1.000 1.000 1.000 1.000 1.000 Extraction .691 .566 .965 .875 .803

Extraction Method: Principal Component Analysis.

Page | 34

Table 5.1.4 Component Matrix Component 1 Timeline Businessplan Financials Management IRR Extraction Method: Principal Component Analysis. a. 1 components extracted.

.831 .752 .982 .935 .896

Table 5.1.5: KMO and Bartlett's Test Kaiser-Meyer- Olkin Measure of Sampling Adequacy Bartlett's Test of Sphericity Approx. ChiSquare Df Sig 0 .624

321.288 28 0

Source: Primary Data

Decision Rule: Barletts Test of sphericity tests the null hypothesis that the correlation matrix is an identity matrix KMO should be greater than 0.6 in orders to reject null hypothesis. The results for KMO and Bartletts Test showed that factor analysis was success.

Page | 35

Variables Used: The variables used for the study are Business plan, Financials, Management, IRR Conditions, Payback period. These variables were used to examine the pattern of correlations. Out of these 5 factors only 2 components were found to be highly correlated.

Decision Rule: Based on the rotated component matrix two important variables were identified which are Financials, Management. Chi-square testing was done to prove the main hypothesis using these three variables.

Conclusion: The advantage of using factor analysis is that it results in reduction of number of variables, by combining two or more variables into a single factor but the limitation of this tool is its interpretation. Factor analysis is a technique that requires a large sample size. Factor analysis is based on the correlation matrix of the variables involved, and correlations usually need a large sample size before they stabilize.

Page | 36

5.1 Table

RANKING OF THE DOCUMENTS PREFERRED BY VENTURE CAPITALISTS

Documents Financials Management IRR method List of project completion

Rank 1 2 3 4

CRITERIA FOR INVESTING IN START-UP COMPANIES:

The criteria for investing in start-up companies are based on the following factors.

Nature of the venture team Project / Product / Service. Market characteristics. Financial consideration. Entrepreneurial and management experience.

Depending on the critical and analytical evaluation of the above mentioned factors, the decision as to whether to accept or reject the project / proposal will be taken.

Page | 37

Chart-5.1

RANKING OF THE DOCUMENTS PREFERRED BY VENTURE CAPITALIST

Factor Importance
1.2 1 0.8 0.6 0.4 0.2 0 Financials Management IRR Timeline

5.1.2 INTERPRETATION:

In the list of order of preference of required documents, the financials including previous years income statement and forecasted cash flow occupies the first slot as more respondents gave it the first preference.

Page | 38

Financials: Financial plan is preferred by more respondents because it helps to evaluate how well do the firm utilise the fund both for the investor and the consultant early a project will yield returns and based on that investment decision are made. Cash flow projection helps respondents to know how the funded cash will be utilized to give best profitable returns. This helps to analyse the companys ability to utilize the given funds for the optimum results. Balance Sheet, helps to evaluate companys price earning ratio and debt coverage ratio in order to assess whether the company is meeting external debts or not. Management: A strong leadership and an experience of past success venture projects gives venture capitalist an assurance that they are investing money in the right firm and will be utilised for the right purpose. IRR Conditions: Internal rate of return and its share towards the investor further help him make a faster decision on a venture project.He seeks his share of advantage and capital gain through his investment and would only agree to go forwards if that is clear and also achievable for the timeline planned Timeline: A investor will like faster IRR and for that he requires a project with a shorter timeline with greater revenues and profits. His decision making factors would thereby lie on the timeline feature of the desired venture. If the timeline is defined well with achievable targets and acceptable risk conditions an Investor will find it more comfortable in investing in such Venture ideas.

Page | 39

5.1.3 FINDINGS:

Innovative nature of the project and its strong financial outlook with forecasted cash flow statement and proper allocation stated well in the investor documentation becomes the foremost amongst the major criteria in decision making.

Entrepreneurial personality and experience, is given second importance by the respondents. IRR expected and one that can be achieved is given next importance after the entrepreneurial personality and experience.

Timeline, a most crucial decision making factor as it justifies the time for the ROI invested by the venture capitalist.

An International Market and market Characteristics criterion is given fifth position by the respondent.

Page | 40

5.2 Table

5.2 : VENTURE CAPITAL PREFERENCE STAGE OF VENTURE

Stage Start-up Seed Stage Expansion Turnaround

Percentage % 40 30 20 10

The venture capital preference can be divided in to the following category.

Start-up Seed Capital Expansion Turnaround

5.2.1 FINDINGS:

Venture capital preference for start-up is more i.e. 40%.

Venture capital preference for seed stage is 30%.

Venture capital preference for expansion is 20%.

Venture capital preference for turnaround is 10%.

Page | 41

5.2 Chart

5.2 : VENTURE CAPITAL PREFERENCE STAGE OF VENTURE

Percentage %
45 40 35 30 25 20 15 10 5 0 Start-up Start-up Seed Stage Seed Stage Expansion Expansion Turnaround Turnaround

5.2.2 : INTERPRETATION: Majority of venture capitalists in India and as observed from literature records on internet prefer providing finance to start-ups with a seeding stage though providing finance involves high risks, but never the less promises high returns. Seed stage financing is difficult to execute as it involves great effort not for making the project take-off. The management further also is responsible for constant monitoring and supporting the project. Expansion and Turnaround stage covers 20% and 10% respectively, as at these stages conventional finance is available and even there is a very limited exit option for venture capitalists.

Page | 42

5.3 Table

5.3 IRR EXPECTATION BY VENTURE CAPITALISTS:

IRR 20 25 25 30 Above 30

Percentage% 40 20 40

5.3 Chart

IRR EXPECTATION BY VENTURE CAPITALISTS:

Percentage%

Percentage%, Above 30, 40, 40%

20 25 Percentage%, 20 25, 40, 40% 25 30 Above 30

Percentage%, 25 30, 20, 20%

Page | 43

5.3.1 INTERPRETATION: The percentage of the required minimum IRR preferences by venture capitalists turns out to be more than that demanded by the banking companies or other financial firms backed by banks due to several reason :

Opportunity cost when compared is high by private firms is more. Exchange risk in financing and raising funds is more, countrys constraints and economic risk faced by private venture capitalist is more.

Page | 44

CHAPTER 6 : FINDINGS & CONCLUSION

6.1 INTERPRETATION FOR FACTORS PREFFERED BY VC BEFORE INVESTING IN A VENTURE:

An innovative project is essential but within realistic and logical area, venture capitalists seeks any project which promises immense growth potential and competitive ability to succeed and sustain in the market.

Entrepreneurial personality, experience and his management team contribute towards the execution and success of the project, since they utilise the VCs fund the venture capitalist make sure of their major role with managing, working, guiding and co-coordinating the team towards the right path.

International markets for the project also assumes importance in the present situation where no barriers exits for entry all can complete in one place and the success of the

Project depends on facing competition not just in the local market but also in the global market.

Good Team work, the mantra for modern success stories in the market, holds good for venture capital funding too.

Market Characteristics covers the marketability of the product and the competition it faces from other competitors. Returns in the short period depend on the market characteristics of the projecthence it is importance as a major criterion in decision making for capital funding.

Page | 45

6.2 FINDINGS AND CONCLUSION:

Venture capital has become a part of the popular business in India. Venture capital has also become synonymous with investing in high risk technology businesses, that could be majorly IT and can spread across further domains like healthcare, agriculture etc.

The VCs final decision on a proposed venture is based on many criteria and also it differs from one to other. All seek one common thing the right and proper way of documentation for them to analyse the projects faster and easily.

If the project is new, promising and has innovative features then VCs seek to have more interest and are ready to help with more amounts because of its wide market characteristics and its ability to capture the market.

Many SMEs usually lack the right method and technique to approach the suitable VC and thereby they seek consultants to seek funds in the startup stage through financial institution.

SME firms in India believed that ownership of the company is compromised with the price paid for VC funds

The preference for investing venture capital is given to start-up stage may be because of innovativeness of the project and a good team. It is found that less preferences is given for expansion and turnaround stage of the venture.

Due to the formal structure of the VC operation and more stringent evaluation process, complete business plans are compulsory.

The Internal Rate of Return is more when risk is high. 40 percent of the people dont want to take high risk and hence they are satisfied with moderate returns of 20-25 percent. Only 20 percent of the people are taking risk expecting high returns. Page | 46

The venture capital investment is made adequate on IT, Banking, Media and construction but investment is inadequate in Telecom, Energy, Resorts and Healthcare. For overall development adequate investments must be made in all the sectors.

The money invested in late stage is more utilized as compared to any other stage. The reason is, in late stage the firm will be well established, has good brand name and loyal customers and hence the money invested is used to promote the product and is fully utilized.

The risk is more in the early stage as the product is new to the market and requires huge capital to promote the product. Similarly the risk is less in the late stage where the firm is well established and risk of losses moderate in the growth stage.

Equity shares are much preferred since high returns can be earned. It also ensures active participation in management and also ownership. Equity shares are preferred since no fixed interest is given to shareholders; the dividend depends on the profit of the firm. Preference shares are less preferred because a fixed amount is to be paid irrespective of the condition of the firm.

Page | 47

CHAPTER 7 : BIBLIOGRAPHY
About Venture Capital (VC). Accessed March 30, 2013. http://indiavca.org/about-venturecapital-vc.html. Legal - Venture Capital-overview.pdf. Accessed March 30, 2013. http://ganga.iiml.ac.in/~mishra/Test/mfsmakg/vcapital/Venture%20Capital-overview.pdf. Loughborough University Institutional Repository: Venture Capital Financing in India: a Study of Venture Capitalists Valuation, Structuring, and Monitoring Practices. Accessed March 30, 2013. https://dspace.lboro.ac.uk/dspace-jspui/handle/2134/6819. Microsoft Word - The VC Handbook -- _Chapter 0-26_ PVI.A02_Venture.Capital.Industry.in.India.pdf. Accessed March 16, 2013. http://smoothridetoventurecapital.com/PVI.A02_Venture.Capital.Industry.in.India.pdf. MomentumVC | About Venture Capital. Accessed March 30, 2013. http://www.momentumvc.com.au/docs/3100_f.htm. VENTURE CAPITAL - ManagementParadise.com Forums - Your MBA Online Degree Program and Management Students Forum for MBA,BMS, MMS, BMM, BBA, Students & Aspirants. Accessed March 30, 2013. http://www.managementparadise.com/forums/miscellaneous-project-reports/11182-venturecapital.html. Venture Capitalist. Accessed March 30, 2013. http://techaloo.com/venture-capitalist/.

Page | 48

APPENDIX

Investment Teaser Information memorandum Financial Plan

Page | 49

INVESTMENT TEASER
New- ABC Services Company

Location: Bangalore, India Investment Summary: Our company is a one year old Technology Services firm with over 20+ member team and has acquired few Fortune 500 companies as clients and have built a strong pipeline of prospects from across the Globe which include USA and Europe. Company will be achieving revenue of US$ 500,000 during the financial year 2012-13. We are now seeking US$ 5 Million investment to be used for Working capital. Based on our projections the turnover of the company is expected to touch US$ 100 Million by 2017 proving a healthy return for the investors. About the Company: The Company is promoted by 2 Technology professionals with experience in the IT & ITe Technology domain for over 20 years. The company is currently focusing on markets in USA, Europe, India and has plans to operate from other countries as well. "Our company specializes in new-age services like
Cloud Computing, Enterprise Mobility, Enterprise Applications, Information Management and ITe Consulting." using unique ITe methods.

The Need: Across the world, the business needs are changing faster compared to a decade ago due to shorter product cycles, consumer behavior and more competition. Traditional waterfall model of IT delivery is not suitable to support changing business anymore; IT has to support business in an 'ITe' way. ITe IT means a new specialized way of software engineering that requires different skills and expertise The current Gap:

Page | 50

Indian vendors are struggling to support this demand for ITe (due to shortage of ITe skills and knowhow, difficulty to change the current factory models). Outsourced IT providers are asked by clients to provide more value (time to market and better quality) as opposed to volume and cheap resources. These days, at least one in 3 large RFPs is specifically demanding ITe delivery.

The opportunity: Industries like Banking and Finance, Healthcare, Retail, Manufacturing, Telecom are shifting towards ITe . Apart from the shift in the current market, a new market for ITe is also emerging due to emerging trends like e-retail, e-governance, cloud and mobility. ITe is the way forward; Gartner predicts that in the next few years, 80% of the IT will move to ITe. Current IT service companies are not geared up to support this demand. There are no pure-play ITe IT providers from India. The size of the target market is at least USD 40 billion by 2017. We are positioning ourselves as India's first pure-play ITe company, offering ITe at large scale from offshore.

ROI and Sustainability: The cost of an ITe developer in the west is twice than a regular developer. Customers are willing to pay higher for this niche and scarce skill, so the ROI is higher. ITe is a unidirectional shift and a strong sustainable delivery model for the future. The Capability and the current state: We have evangelized and transformed ITe delivery setup in the past for a large international Banks IT in India, so we can establish this model in the Indian services industry as the new service benchmark. We have started small-scale operations from India from October 2011 with a completely operational ITe facility. We need to enter the ITe savvy target markets of US and Europe to exploit the strong demand. The Competition: Page | 51

The only pure play competition is a US based company called ThoughtWorks owned 97% by an individual. They have 23 offices in 9 countries with a workforce of less than 2000 people making revenue more than USD 250 million. The success of the model clearly shows that there is a good demand for the service willing to pay above the market rates. The USP: We have already marketed and positioned ourselves to be the leading 'ITe thought leaders' from India (popularity on social and professional networking sites). We will give a face-lift to the Indian IT outsourcing scene by providing high-end business value through ITe. A new entrant would require similar ITe image, thought leadership and subject matter expertise, and large scale ITe implementation background to enter this arena. The Revenue Model: Our business model is a mix of ITe consulting and ITe delivery. In this short time, we have managed to attract some known names like Fidelity, Barclays, HP, Monsanto etc. among others with very minimal investments on sales. We have open pipeline on clients like Goldman Sachs, GE Healthcare, RBS, PwC, FirstData etc. that need to convert and needs more investment on account management and sales. Funding Needs: We need funding of USD 5 million to invest in establishing offices in the US and Europe, setup strong sales team, strengthening the management structure and board of directors, setup ITe infrastructure and to groom ITe skills from the market through the ITe university model. Our target is to reach minimum revenue of USD 101 million by 2017 which would be a faction (0.05%) of the projected ITe market. End note: We have a full business plan available on request. We are very passionate about our business and we would invite any interested investors to contact our Advisors now to discuss this investment proposal further with us now.

Page | 52

Financial Plans

Financial Plan Start-up Funding Table: Start-up Funding Start-up Funding Start-up Expenses to Fund Start-up Assets to Fund Total Funding Required Assets Non-cash Assets from Start-up Cash Requirements from Start-up Additional Cash Raised Cash Balance on Starting Date Total Assets

R2,000,000 R115,000,000 R117,000,000

R75,000,000 R40,000,000 R23,000,000 R63,000,000 R138,000,000

Liabilities and Capital Liabilities Current Borrowing Long-term Liabilities Accounts Payable (Outstanding Bills) Other Current Liabilities (interest-free) Total Liabilities Capital Planned Investment Owner Investor Additional Investment Requirement Total Planned Investment Loss at Start-up (Start-up Expenses) Total Capital Total Capital and Liabilities Total Funding

R0 R0 R0 R0 R0

R0 R140,000,000 R0 R140,000,000 (R2,000,000) R138,000,000 R138,000,000 R140,000,000

Page | 53

Break-even Analysis

Table: Break-even Analysis

Break-even Analysis

Monthly Units Break-even Monthly Revenue Break-even Assumptions: Average Per-Unit Revenue Average Per-Unit Variable Cost Estimated Monthly Fixed Cost

1,178 R10,363,636

R8,800.00 R3,960.00 R5,700,000

Chart: Break-even Analysis

Page | 54

Projected Profit and Loss

Table: Profit and Loss

Pro Forma Profit and Loss Sales Direct Cost of Sales Other Costs of Sales Total Cost of Sales Year 1 R88,000,000 R39,600,000 R1,800,000 R41,400,000 Year 2 R273,000,000 R122,850,000 R5,460,000 R128,310,000 Year 3 R665,000,000 R299,250,000 R13,300,000 R312,550,000 Year 4 R832,500,000 R374,625,000 R16,650,000 R391,275,000 Year 5 R1,080,000,000 R486,000,000 R21,600,000 R507,600,000

Gross Margin Gross Margin %

R46,600,000 52.95%

R144,690,000 53.00%

R352,450,000 53.00%

R441,225,000 53.00%

R572,400,000 53.00%

Expenses Payroll Marketing/Promotion Depreciation Utilities Insurance Other Total Operating Expenses Profit Before Interest and Taxes EBITDA Interest Expense Taxes Incurred

R34,800,000 R30,000,000 R0 R1,200,000 R1,200,000 R1,200,000 R68,400,000

R36,600,000 R25,000,000 R3,000,000 R1,400,000 R1,200,000 R1,500,000 R68,700,000

R38,700,000 R25,000,000 R3,000,000 R1,600,000 R1,200,000 R1,500,000 R71,000,000

R41,400,000 R25,000,000 R3,000,000 R1,800,000 R1,200,000 R1,800,000 R74,200,000

R44,200,000 R30,000,000 R3,000,000 R2,000,000 R1,200,000 R2,000,000 R82,400,000

(R21,800,000) (R21,800,000) R0 R0

R75,990,000 R78,990,000 R0 R22,797,000

R281,450,000 R284,450,000 R0 R84,435,000

R367,025,000 R370,025,000 R0 R110,107,500

R490,000,000 R493,000,000 R0 R147,000,000

Net Profit Net Profit/Sales

(R21,800,000) -24.77%

R53,193,000 19.48%

R197,015,000 29.63%

R256,917,500 30.86%

R343,000,000 31.76%

Page | 55

Chart: Profit Monthly

Chart: Profit Yearly

Page | 56

Chart: Gross Margin Monthly

Chart: Gross Margin Yearly

Page | 57

Projected Cash Flow

Table: Cash Flow

Pro Forma Cash Flow Year 1 Cash Received Cash from Operations Cash Sales Subtotal Cash from Operations Additional Cash Received Sales Tax, VAT, HST/GST Received New Current Borrowing New Other Liabilities (interestfree) New Long-term Liabilities Sales of Other Current Assets Sales of Long-term Assets New Investment Received Subtotal Cash Received Expenditures Expenditures from Operations Cash Spending Bill Payments Subtotal Spent on Operations Additional Cash Spent Sales Tax, VAT, HST/GST Paid Out Principal Repayment of Current Borrowing Other Liabilities Principal Repayment Long-term Liabilities Principal Repayment Purchase Other Current Assets Purchase Long-term Assets Dividends Subtotal Cash Spent Net Cash Flow Cash Balance Year 2 Year 3 Year 4 Year 5

R88,000,000 R88,000,000

R273,000,000 R273,000,000

R665,000,000 R665,000,000

R832,500,000 R832,500,000

R1,080,000,000 R1,080,000,000

R0 R0 R0 R0 R0 R0 R140,000,000 R228,000,000 Year 1

R0 R0 R0 R0 R0 R0 R0 R273,000,000 Year 2

R0 R0 R0 R0 R0 R0 R0 R665,000,000 Year 3

R0 R0 R0 R0 R0 R0 R0 R832,500,000 Year 4

R0 R0 R0 R0 R0 R0 R0 R1,080,000,000 Year 5

R104,700,000 R0 R104,700,000

R302,185,551 R0 R302,185,551

R551,942,026 R0 R551,942,026

R507,593,281 R0 R507,593,281

R774,375,264 R0 R774,375,264

R0 R0 R0 R0 R5,000,000 R20,000,000 R0 R129,700,000 R98,300,000 R161,300,000

R0 R0 R0 R0 R2,500,000 R0 R0 R304,685,551 (R31,685,551) R129,614,449

R0 R0 R0 R0 R5,000,000 R0 R0 R556,942,026 R108,057,974 R237,672,423

R0 R0 R0 R0 R5,000,000 R0 R0 R512,593,281 R319,906,719 R557,579,142

R0 R0 R0 R0 R5,000,000 R10,000,000 R0 R789,375,264 R290,624,736 R848,203,878

Page | 58

Chart: Cash

Month 1 Month 2 Month 3 Month 4 Month 5 Month 6 Month 7 Month 8 Month 9 Month 10 Month 11 Month 12

Page | 59

Projected Balance Sheet

Table: Balance Sheet

Pro Forma Balance Sheet Year 1 Assets Current Assets Cash Inventory Other Current Assets Total Current Assets Long-term Assets Long-term Assets Accumulated Depreciation Total Long-term Assets Total Assets Liabilities and Capital Current Liabilities Accounts Payable Current Borrowing Other Current Liabilities Subtotal Current Liabilities Long-term Liabilities Total Liabilities Paid-in Capital Retained Earnings Earnings Total Capital Total Liabilities and Capital Net Worth Year 2 Year 3 Year 4 Year 5

R161,300,000 R9,900,000 R5,000,000 R176,200,000

R129,614,449 R95,278,551 R7,500,000 R232,393,000

R237,672,423 R182,235,577 R12,500,000 R432,408,000

R557,579,142 R117,246,358 R17,500,000 R692,325,500

R848,203,878 R157,621,622 R22,500,000 R1,028,325,500

R80,000,000 R0 R80,000,000 R256,200,000 Year 1

R80,000,000 R3,000,000 R77,000,000 R309,393,000 Year 2

R80,000,000 R6,000,000 R74,000,000 R506,408,000 Year 3

R80,000,000 R9,000,000 R71,000,000 R763,325,500 Year 4

R90,000,000 R12,000,000 R78,000,000 R1,106,325,500 Year 5

R0 R0 R0 R0 R0 R0 R280,000,000 (R2,000,000) (R21,800,000) R256,200,000 R256,200,000 R256,200,000

R0 R0 R0 R0 R0 R0 R280,000,000 (R23,800,000) R53,193,000 R309,393,000 R309,393,000 R309,393,000

R0 R0 R0 R0 R0 R0 R280,000,000 R29,393,000 R197,015,000 R506,408,000 R506,408,000 R506,408,000

R0 R0 R0 R0 R0 R0 R280,000,000 R226,408,000 R256,917,500 R763,325,500 R763,325,500 R763,325,500

R0 R0 R0 R0 R0 R0 R280,000,000 R483,325,500 R343,000,000 R1,106,325,500 R1,106,325,500 R1,106,325,500

Business Ratios

Table: Ratios
Ratio Analysis Year 1 Sales Growth Percent of Total Assets Inventory Other Current Assets Total Current Assets Long-term Assets Total Assets Current Liabilities Long-term Liabilities Total Liabilities n.a. Year 2 210.23% Year 3 143.59% Year 4 25.19% Year 5 29.73% Industry Profile 0.00%

3.86% 1.95% 68.77% 31.23% 100.00% 0.00% 0.00% 0.00%

30.80% 2.42% 75.11% 24.89% 100.00% 0.00% 0.00% 0.00%

35.99% 2.47% 85.39% 14.61% 100.00% 0.00% 0.00% 0.00%

15.36% 2.29% 90.70% 9.30% 100.00% 0.00% 0.00% 0.00%

14.25% 2.03% 92.95% 7.05% 100.00% 0.00% 0.00% 0.00%

0.00% 100.00% 100.00% 0.00% 100.00% 0.00% 0.00% 0.00%

Page | 60

Net Worth Percent of Sales Sales Gross Margin Selling, General & Administrative Expenses Advertising Expenses Profit Before Interest and Taxes Main Ratios Current Quick Total Debt to Total Assets Pre-tax Return on Net Worth Pre-tax Return on Assets Additional Ratios Net Profit Margin Return on Equity Activity Ratios Inventory Turnover Accounts Payable Turnover Payment Days Total Asset Turnover Debt Ratios Debt to Net Worth Current Liab. to Liab. Liquidity Ratios Net Working Capital Interest Coverage Additional Ratios Assets to Sales Current Debt/Total Assets Acid Test Sales/Net Worth Dividend Payout

100.00%

100.00%

100.00%

100.00%

100.00%

100.00%

100.00% 52.95% 77.73% 34.09% -24.77%

100.00% 53.00% 33.52% 9.16% 27.84%

100.00% 53.00% 23.37% 3.76% 42.32%

100.00% 53.00% 22.14% 3.00% 44.09%

100.00% 53.00% 21.24% 2.78% 45.37%

100.00% 0.00% 0.00% 0.00% 0.00%

0.00 0.00 0.00% -8.51% -8.51% Year 1 -24.77% -8.51%

0.00 0.00 0.00% 24.56% 24.56% Year 2 19.48% 17.19%

0.00 0.00 0.00% 55.58% 55.58% Year 3 29.63% 38.90%

0.00 0.00 0.00% 48.08% 48.08% Year 4 30.86% 33.66%

0.00 0.00 0.00% 44.29% 44.29% Year 5 31.76% 31.00%

0.00 0.00 0.00% 0.00% 0.00%

n.a n.a

4.00 0.00 0 0.34

2.34 0.00 0 0.88

2.16 0.00 0 1.31

2.50 0.00 0 1.09

3.54 0.00 0 0.98

n.a n.a n.a n.a

0.00 0.00

0.00 0.00

0.00 0.00

0.00 0.00

0.00 0.00

n.a n.a

R176,200,000 0.00

R232,393,000 0.00

R432,408,000 0.00

R692,325,500 0.00

R1,028,325,500 0.00

n.a n.a

2.91 0% 0.00 0.34 0.00

1.13 0% 0.00 0.88 0.00

0.76 0% 0.00 1.31 0.00

0.92 0% 0.00 1.09 0.00

1.02 0% 0.00 0.98 0.00

n.a n.a n.a n.a n.a

Page | 61

Use of Funds

Table: Use of Funds

Use of Funds

Use Office Furnitures Technology set up/Servers/Web etc Printing Marketing Building Construction Working capital R&D Total

Amount R5,000,000 R20,000,000 R15,000,000 R30,000,000 R20,000,000 R40,000,000 R10,000,000 R140,000,000

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Page | 1