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FINANCING THENEW VENTURE
By Team -7
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Agenda
An overview
Debt or Equity Financing
Internal or External Funds
Funding from Banks and Financial institutions,
Governmental and Developmental Sources,
Private Placement,
Types of Investors,
Private Offerings,
Bootstrap Financing,
Venture Capital , Nature of Venture Capital, Approaching,
presenting and obtaining the funds,
FDI
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An overview
Three Core principles of entrepreneurial finance
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Critical Financing Issues
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Financial strategy frame work
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Opportunity
Business
strategy
MarketingOperation
Finance
Value creation
Source and deal
Structure
DebtEquity
other
Finance strategy
Degree of strategic freedom
Time to OOCTime to close
Future alternatives
Risk/reward
Personal concern
FinancialRequirementsDriven by:
Burn rate
Operation needs
Working capital
Asset requirement
And sales
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Debt Financing
Interest bearing instrument
Indirectly related to sales & profits
Some assets to be used as collateral
Pay back the amount with interest
Two types of debt financing
- Short term (less than 1 year)
- Used to provide WC to finance inventory , account
receivables, or operation of business
- Long term
- Purchase assets such as Machinery, land ,building etc. .
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Equity Financing
No collateral required & offers ownership position to investor
Investor Shares profit & loss on Pro rata basis
Depending on availability of funds, the assets & interest rate- investor
will decide.
Amount of equity depend on nature & size of venture
Equity provides basis for Debt financing.
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Internal funds
Most frequently employed funds
Sources: profits, sale of assets, reduction in WC, receivables, selling
little used assets.
Extended payment terms from suppliers.
Collecting bills quickly
Avoid this policy for mass merchandisers
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External funds
External source are evaluated on 3 basis- Length of time the funds are available
- The costs involved
-Amount of company control lost Sources :
- Self , family & friends, banks, small business
administrative loans, R&D limited partnership,
Govt grants etc. . . . . .
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PERSONAL FUNDS
Not only these are the least expensive funds in terms of cost & control,
but they are absolutely essential in attracting outside funding.
The outside providers of capital feel that the entrepreneur may not be
sufficiently committed to the venture, if he/she doesnt have money
invested.
The invested amount by the entrepreneur may be negligible but
valuable here to outside providers.
It is the money which makes outside investors feel comfortable with here
commitment level.
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FUNDS FROM
FAMILY AND FRIENDS
Family and friends are the next most common source of capital for a newventure.
This helps overcome one portion of uncertainty felt by impersonal
investors.
There are both positive and negative aspects.
Negative side: even though being a small amount if its in the form ofequity financing, then which may have a negative effect on employees
sales and profit.
Positive side: Family and friends are not problem investors and in fact
more patient than other investors in desiring the a return their
investment.
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IN ORDER TO AVOIDPROBLEMS BY
THE FAMILY AND FRIENDSS
INVESTMENT
If the family and friends are treated the same as any investor, potentialfuture conflicts can be avoided.
Any loans should specify the rate of interest and proposed repayment
schedule of interest and principal.
A formal agreement like rights and responsibilities of the investors and
what happens if the business fails, must all be agreed upon and written
down.
Finally the entrepreneur should carefully consider the impact of the
investment on the family member or friend before it is accepted.
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INDIAN VENTURE CAPITAL
ASSOCIATION
It is a member based national organization promotes the industry withinIndia and outside, encourages the investment in high growth companies.
IVCA members comprise venture capital firms, institutional investors,
banks, incubators, angel groups, corporate advisors, accountants,
lawyers, govt. bodies, academic institutions and other service providers
to the venture capital.
Members represent most of the active venture capital and private equityfirms in India. These firms provide capital for seed ventures early stage
companies, etc.
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Type of Loan
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Equipment Loan
Commercial Banks
Account Receivable Loans
Inventory Loans
Real Estate Loans
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Cont
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Straight Loans
Long Term Loans
Character Loans
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PRIVATE PLACEMENTS/PRIVATE
OFFERINGS
It means rising of capital via private rather than public placement. since
the private placement is offered to a few, select individuals, the
placement does not have to be registered with the Securities and
Exchange Commission.
In many cases detailed financial information is not disclosed and the
need for prospectus is waived.
Investors involved in private placements are usually large banks, mutual
funds, insurance companies, and pension funds.
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Types of investors
An investor usually takes an equity position in the company, can influence
the nature of the business to some extent , and even may be involved to
some degree of the business operation.
The investors may be classified into three types
1.The investors who want to be actively involved in the business
operations
2.Those who desire at least an advisory role in the direction and operation
of the venture and want to share its profits.
3.Others are more passive in nature , desiring no active involvement in the
venture at all.
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Regulation D
Regulation D contains
1.Broad provisions designed to simplify the private offerings,
2.General definitions of what constitutes a private offering,
3.Specific operating rules Rule504,Rule505,and Rule506..
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RESEARCH AND DEVELOPMENT LIMITED
PARTNERSHIPS
Money given to a firm for developing a technology thatinvolves a tax shelter.
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3Important Components of any R & D Limited
Partnership
The Contract
The Sponsoring company
The Limited Partnership
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SMALL BUSINESS ADMINISTRATION LOANS
When the entrepreneur is unable to secure a regular
commercial bank loan, an alternative is a SBA Guaranty
Loan.
In this loan, SBA guarantees 80% of the amount loaned to
the entrepreneurs business will be repaid by the SBA if the
company cannot make payment.
Both long and short term loans can be guaranteed by the
SBA.
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SMALL ADMINISTRATION LOANS IN INDIA
State Bank of India has been playing a vital role in thedevelopment of small scale industries since 1956.
The Bank has financed over 8 lakhs SSI units in the country. It has
55 specialised SSI branches, 99 branches in industrial estates and
more than 400 branches with SIB divisions.
The Bank finances for Small Business activities which are of
special significance to a large number of people.
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Various schemes of SBI for small and mediumenterprises SMEs are as follows:
Traders Easy Loan Scheme
SSI Loans
Business Current Accounts
Open Term Loan
Retail Trade
Doctor Plus
Dental Doctor PlusSBI Shoppe
Cyber Plus
SME Credit Plus
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Small Business Credit Card
SME Petro Credit
Dal Mill PlusParyatan Plus
Transport Plus
Transport Operations
Auto CleanEicher Motor Limited (EML)
Auto Loan
Charter for SSI
Artisan Credit Card
Rice Mills PlusSchool Plus
Swarojgar Credit Card
Flexi Loan
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BOOTSTRAP FINANCING
Definition: To finance your company's startup and growth with the assistance of
or input from others.
Bootstrapping is one of most effective and inexpensive ways to ensure a
business' positive cash flow. Bootstrapping means less money has to be
borrowed and interest costs are reduced.
This becomes important when capital from debt & equity financing is
more expensive.
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NECESSITY FOR BOOTSTRAPING
In addition to the monitory costs, outside capital has other costs as well
like.,
Outside capital usually takes between 3 & 6 months to raise outside
capital.
Outside capital often decreases a firms drive for sales & profits.
The availability of capital increases the impulse to spend.
Outside capital can decrease the companys flexibility.
Outside capital may cause more disruption & problems in the venture
than was present without it.
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Venture Capital
Is a type of private equity capital typically provided for early-stage, high-
potential, growth companies in the interest of generating a return .
A venture capitalist is a person or investment firm that makes venture
investments, and these venture capitalists are expected to bring managerial and
technical expertise as well as capital to their investments.
A venture capital fund refers to a pooled investment vehicle that primarily
invests the financial capital of third-party investors in enterprises that are too
risky for the standard capital market or bank loans.
George Doriot, is the "father of venture capitalism.
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Structure of Venture Capital Firms
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Over view of VC
Before World War II, venture capital investments (originally known as"development capital") were primarily the domain of wealthy individuals and
families.
ARDC is credited with the first major venture capital success story when its
1957 investment of $70,000 in Digital Equipment Corporation (DEC) would be
valued at over $355 million after the company's initial public offering in 1968.
The public successes of the venture capital industry in the 1970s and early
1980s.
The growth of the industry was hampered by sharply declining returns and
certain venture firms began posting losses for the first time.
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Cont
Professor Andrew Metrick refers to first 15 years of the modern venture capitalindustry beginning in 1980 as the "pre-boom period" in anticipation of the boom
that would begin in 1995 and last through the bursting of the Internet Bubble in
2000.
As a percentage of GDP, venture investment was 0.058% percent in 1994,
peaked at 1.087% (nearly 19x the 1994 level) in 2000 and ranged from 0.164%
to 0.182 % in 2003 and 2004.
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VENTURE CAPITAL PROCESS
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Risk and Return Criteria
Late Stage in Investments:- lower risks, faster returns, less managerial assistance and
fewer deals to be evaluated.
Highest
Risk
Lowest
Risk
HighestReturn
Expected
LowestReturn
Expected
Early
Stage
Developmen
t Financing
Acquisitions
& Leveraged
Buyouts
50%
ROI
40%
ROI
30%
ROI
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Three General Criteria before commit to the
Venture
A STRONG MGT TEAM consists of individuals with solid experience &backgrounds, a strong commitment to the co., capabilities in their specific areas
of expertise the ability to meet challenges and the flexibility to scramble wherever
necessary.
THE PRODUCT/MKT OPPORTUNITY MUST BE UNIQUE, having a differential
advantage in a growing market. Securing a unique niche is essential since the
product or service must be able to compete & grow during the investment period.
BUSINESS OPPORTUNITY MUST HAVE A SIGNIFICANT CAPITAL APPRECIATION
The venture capitalist typically expects a 40 to 60 percent return on investment in
most investment situations.
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Four Stages
PRELIMINARY SCREENING
Starts with the receipt of Business Plan by the venture capitalist. Determines if
the deal or similar deals have been seen previously. Then, determines if the
proposal fits his or her long-term needs in developing a portfolio balance.
Investigates the economy of the industry and evaluates weather he or she has
the appropriate knowledge and ability to invest in that industry. Reviews
weather the deal can deliver the ROI required. The credentials and capability of
the mgt team are evaluated to determine if they can carry out the plan presented.
AGREEMENT ON PRINCIPAL TERMS
The venture capitalist wants a basic understanding of the process before making
the major commitment of the time and effort involved in the formal due
diligence process.
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Stages Con
DETAILED REVIEW AND DUE DILIGENCE
It is the longest stage, involving anywhere from one to three months. There is a
detailed review of the companys history, the business plan, the resumes of the
individuals, their financial history, and target customers. The upside potential
and downside risk are assessed; and there is a thorough evaluation of the
markets, industry, finances, suppliers, customers and mgt. FINAL APPROVAL
A comprehensive, internal investment memorandum is prepared. This document
reviews the venture capitalists findings and details the investment terms and
conditions of the investment transaction. This information is used to prepare theformal legal documents that both the entrepreneur and venture capitalist will
sign to finalize the deal.
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Locating Venture Capitalists
An entrepreneur should carefully research the names and addresses ofprospective venture-capital firms that might have an interest in the particular
investment opportunity. There are also regional and national venture capital
associations. For a nominal fee or none at all, these associations will frequently
send the entrepreneur a directory that lists their members, the types of business
their members invest in, and any investment restrictions. Whenever possible, the
entrepreneur should be introduced to the venture capitalist. Bankers,
accountants, lawyers, and professors are good sources for introductions.
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HOW TO APPROACH A
VENTURE CAPITALIST
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How to Approach a Venture Capitalist
Approaching a venture capital firm is a difficult and complex task.
There are many ways to go about approaching an investor for venture
capital funds. Some are good, some are bad, and some are just
downright ugly!
Venture capitalists deal with hundreds of potential clients, and reject
the majority of them
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Instructions
Make professional contact with the venture capital firm.
Know your product inside and out.
Develop an airtight business plan.
Find the right kind of venture capital firm.
After making initial contact with the right firm, send an executive
summary
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A few basic rules
Do your homework.
Be Concise.
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Here's how NOT to solicit investors
Mass Emails
Hype
Trade shows
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Summary
Investors are people too and they have busy
schedules. Do your homework and be concise
when reaching out to them. Avoid such tactics as
mass emails and hyped up language in your
messages. It will go a long way in improving your
odds.
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FDI FDI or Foreign Direct Investment is any form of investment that
earns interest in enterprises which function outside of the
domestic territory of the investor.
FDIs require a business relationship between a parent companyand its foreign subsidiary.
The foreign direct investor may acquire 10% or more of the votingpower of an enterprise in an economy through any of thefollowing methods
Foreign Direct Investment (FDI) equity inflows in the countryhave increased from US $ 5.5 billion in 2005-06 to US $ 27.31billion in the year 2008-09.
despite the economic slowdown, showing a percentage growth of11% over the previous financial year.
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Methods of Foreign Direct Investments
by incorporating a wholly owned subsidiary or company
by acquiring shares in an associated enterprise
through a merger or an acquisition of an unrelated enterprise
participating in an equity joint venture with another investor or
enterprisePolicy Initiatives
To strengthen higher overseas investment into cash-broke microand small enterprises (MSEs), the government has liberalized theFDI norms for the sector replacing the current 24 per cent ceilingon foreign holding with the sectoral caps. These industries willnow be guided like other large enterprises as far as FDI isconcerned.
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Conclusion
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THAN
KYOU