ENTREPRENEURIAL FINANCE

Rajeev Roy

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
Entrepreneurial Finance by Rajeev Roy

Structure of VCs
Mostly funds
Charge about 2% + success fee

Also companies Limited partnerships expected soon Prevalence of banks

Revenue implications

Entrepreneurial Finance by Rajeev Roy

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

Entrepreneurial Finance by Rajeev Roy

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

Entrepreneurial Finance by Rajeev Roy

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
Entrepreneurial Finance by Rajeev Roy

Valuation excersise
1. Get rid of scamsters 2. Hygiene factors beware of things that can shut down a business 3. Growth & industry considerations 4. Due diligence
1. Physical evaluation 2. Calling in the experts

5. Monetise value
Entrepreneurial Finance by Rajeev Roy

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
Entrepreneurial Finance by Rajeev Roy

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

Entrepreneurial Finance by Rajeev Roy

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

Entrepreneurial Finance by Rajeev Roy

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

Entrepreneurial Finance by Rajeev Roy

Some VCs in India

Jumpstartup investing Draper Fisher sector specific Charles River Ventures Sequoia Capital Westbridge too big? ChrysCapital certainly too big

Entrepreneurial Finance by Rajeev Roy

Others
Banks
ICICI UTI SIDBI Canara bank Intel Motorola Nokia cisco
Entrepreneurial Finance by Rajeev Roy

Corporates

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

Entrepreneurial Finance by Rajeev Roy

Lending strategy of banks

Business plan Financial statement Profile of promoter Asset base
Gross Net

Credit scoring
Entrepreneurial Finance by Rajeev Roy

How Banks cover risks

Collateral
Internal incl. a/c receivable External

Personal guarantees Debt covenants Short maturity debt

Entrepreneurial Finance by Rajeev Roy

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
Entrepreneurial Finance by Rajeev Roy

SMERA
Specifically for SMEs Joint initiative of:
SIDBI D&B CIBIL Other banks

Office currently only in Mumbai

Entrepreneurial Finance by Rajeev Roy

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

Entrepreneurial Finance by Rajeev Roy

Entrepreneurial Finance by Rajeev Roy

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

Entrepreneurial Finance by Rajeev Roy

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

Entrepreneurial Finance by Rajeev Roy

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)
Entrepreneurial Finance by Rajeev Roy

Collection strategies
Keep a close watch on customers fortunes Immediately contact on any delayed payment Be firm its your own money Allow a customer to graduate in his credit ratings with you

Entrepreneurial Finance by Rajeev Roy

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
Entrepreneurial Finance by Rajeev Roy

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

Entrepreneurial Finance by Rajeev Roy