Start ups challenges for funding options

Start-Ups Challenges for Funding Options

Venture Capital, PE, Angel Investment + +..

Bangalore Branch of SIRC of ICAI31 October 2014

Anjana Vivek

[email protected]

VentureBean Consulting Private Limited

At the start

Kinds of Investors

Project Requirement

Investment Process

Valuation and Term Sheet

Post Investment

In Summary

Agenda

2 2


At the StartDo take time out to think/reflect…

• What are the kinds of Funding options available today for business?

• What are the alternate equity investment options? VC/ PE/ Incubation?

This session focusses on equity linked funding options and strategies

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At the start

Kinds of Investors

Project Requirement

Investment Process


Post Investment

In Summary

Agenda

4 4


Investors: Equity (Linked): One Slide Checklist

• HNIs, informal and formal angel groups• Seed Funds• Venture Capital• Private Equity• Banks exploring innovative ways to fund SMEs• Strategic Investors• Corporate Funds; (Family) Business Groups, Indian & Global

– Directly and/or through a special division or subsidiary– For employees alone or open to public– As intellectual and/or financial capital with other facilities

• Government supported funds

• Impact Investors

• Incubators• Accelerators

• Crowd funding• Online funding platforms

5

WhichOne

is the …

RightFit for

You?


Contributors• Corporates• Banks and FIs• FIIs• Family Business Groups• HNIs• Combination / others• 3Fs ?

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Caselet: You are an investee

• Zyco Fund has a life Cycle of 10 years, this is a fund with overseas investors

• In year 7 of the fund, Zyco has offered 1 million USD for a 15% stake in Amaze Co., in Bangalore

• The promoters of Amaze also have another offer from Indo, a Rupee Fund; they are offering Rs.6 crores for 20 % stake in the company.

• What are the key deal aspects the Amaze founders should consider

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Caselet – Debrief - Illustrative• Promoters should make an effort to understand the

mandates of potential investors and their reasons for investing

• Some contributors want money back in a finite time period, some are not particular

• The value add and brand accretion or depletion due to an potential investor need to be factored, it is not only about money and equity stake percentage

• The clauses in the contract need to be checked with care

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Caselet – Debrief - Illustrative• Founders of an investee company should think

through possible scenarios over the next 3-5 years, assuming the company does as well as projected and also assuming a scenario where projections are not met

• Valuation today and valuation expected tomorrow, both have a role to play in decision making

• Valuations expected in 3-5 years, depend on assumptions for projections. These need to be thought through carefully from multiple angles, operations, finance, team, competitive landscape and more

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Caselet: You are an investor

• GR Fund is a fund of alumni of GR Institution

• The Fund invests directly and sometimes the alumni may also invest in individual capacity

• Blyitz, a for profit company, which is working on a BOP (Bottom of the Pyramid) model has got a commitment from an Angel Fund (AF)

• AF tells Blyitz that they will put in money along with another co-investor, so Blyitz approaches GR Fund

• Another HNI Fund managed by a professional also hears of this deal and asks for information

• How will you evaluate the investment proposal from Blyitz if you are a Fund Manager for GR Fund? What if you are the HNI Fund Manager, will your approach be different?

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Caselet – Debrief - Illustrative• Each Investor and Fund Manager will approach it

from his or her fund mandate and how the investment and disinvestment from this company will fit into this

• Internal aspects, such as stage in the Fund Life Cycle, current portfolio on hand, etc. will also play a key role in evaluation

• If multiple fund managers are involved, the differences and similarities in the mandates of the funds will need to be assessed

• There needs to be collective discussion as to who will lead the deal, do the due diligence and play an active role post the funding. One or more of the Funds may be involved in these aspects and more

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Stages of investment • Idea / Seed• R&D / Pilot / Proof of Concept• Commercialization / Scale up• Early Stage • Growth / Later Stage / Expansion• Turnaround• Acquisition, Inorganic expansion• … etc.


Trends: ‘to trigger thinking’“The Indian startup ecosystem has reached an inflection point, with 800 new tech startups sprouting in a year. This, taken in conjunction with rising investment flows, makes it the world’s fastest growing startup ecosystem, NASSCOM” • https

://www.techinasia.com/india-is-fastest-growing-startup-ecosystem-in-world/

• http://www.nasscom.in/india-fastest-growing-and-3rd-largest-startup-ecosystem-globally-nasscom-startup-report-2014

• Too much money chasing limited deals, i.e. demand is clearly greater than supply, despite India currently being rated country with 3rd largest number of startups as per the NASSCOM report

• Technology based companies, ecommerce linked business, product ventures, businesses leveraging on smart phone user bases, solutions attempting to fix problems or providing solutions that address large populations and customer segments… and more are the flavors of this season.

https://www.techinasia.com/india-is-fastest-growing-startup-ecosystem-in-world/



http://www.nasscom.in/india-fastest-growing-and-3rd-largest-startup-ecosystem-globally-nasscom-startup-report-2014

http://www.nasscom.in/india-fastest-growing-and-3rd-largest-startup-ecosystem-globally-nasscom-startup-report-2014


Trends: ‘to trigger thinking’• Anywhere you turn, anywhere you look, investors are

seeking startups to fund• Start ups are also attracting the interest of investors

from the traditional businesses and business houses from the so-called ‘old-economy’

• New categories of investors are emerging, with their own investment philosophy, due diligence process; rules of the game are being re written, depending on the potential investors and business models

• Consortium funding is finding many takers, with safety being seen in a large set of co-investors. – This comes with its own set of challenges – for both the

investors and the investee.– Consortium investors can also be a mix of individuals, funds and

corporate groups


At the start

Kinds of Investors

Project Requirement

Investment Process


Post Investment

In Summary

Agenda

15 15


What a project must have• High upside potential• Potential for extraordinary returns to investor• Exit route plan

• This implies – Rapid Growth, i.e.– Total addressable market is really high– Company has potential to address this market– Company has ambition to address this market– Company has the capability to Execute to achieve high growth– Risks are articulated – .. Etc

MUST Have Key Requirements:• TEAM with Execution Capability and • Huge Addressable Market


4 Points: Investors look for

• Team – leadership, multidisciplinary, integrity, competence, capability to execute, domain knowledge

• Idea/Service/Product potential to attract large numbers of paying customers

• Market, opportunity, growth expected, barriers to competition

• Exit avenue

What else do you think investors may seek?


Business Plan• An output based on business model and

strategy, expected to evolve over time• To be forward looking, based on past knowledge

of promoters and their work experience in the existing or new venture

• Assumptions to be tested to see if they will be valid for execution, i.e. to demonstrate this is not a business plan on paper alone

• Risks to be factored in plan• Multiple scenarios are looked at, revenues

expected are discounted, expected costs and expected cash flows factored, sensitivity to key parameters checked


Due diligence reviews (DDR)Investment decision is based on DDR, some illustrative reviews are below. Some of these or aspects of these may be done in-house by the investor, others may be out-sourced to experts and professionals:• Business• Market • Accounting• Tax and Legal• Technical• HR


An Illustrative Sales Quality Review..

• Illustrative indicative parameters, for DDR– Sales Quantity – Quality of revenue - in terms of

product/service/vertical/location etc.– Average revenue per employee– Number of customers, number of high value

customers– New customers added– Customers lost– Pipeline customers

– Customer acquisition strategy

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Value Creation Review • Investment should have potential for value

creation not value depletion; i.e. beyond– Top line (revenues)– Bottom line (profits) and – Cash flow

• To understand financial and non-financial aspects of business and investment into business and impact on growth and sustainability

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At the start

Kinds of Investors

Project Requirement

Investment Process


Post Investment

In Summary

Agenda

22 22


VC investment & exit

InitialMeetings

PrelimnaryProjectReview byVentureCapitalist

Term SheetSigned byVentureCapitalist &Promoters

DueDiligenceReview ofProject

VentureCapitalistwith Funds

PromoterswithProject

LegalDocuments/AgreementSigned

Investmentmade byVentureCapitalistin Project

Mentoring&Monitoringof Project

Divestment& ExitfromProject

Promoters

VentureCapitalist


Investment life cycle• Partner (s) identification• Due diligence review• Forecasts and valuation, Exit Plan• Negotiation, acceptable and non-acceptable

terms (deal breaker and deal maker issues)• Other deal terms and conditions• Deal closure• Post deal monitoring and mentoring

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At the start

Kinds of Investors

Project Requirement

Investment Process


Post Investment

In Summary

Agenda

25 25


Valuation• Based on

– Tangibles and intangibles– Data and assumptions– Subjectivity and objectivity

• Many methods of computation including but not limited to– Multiples of revenue, earning, user base etc– Cash flow based, discounted– Cost based

• Factor statutory, accounting, and tax implications

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Valuation• Driven by markets including flavor of season,

competitive scenario, team at helm etc.• Driven by percentage of stake offered,

negotiation etc.• Deals can sometimes be structured to

accommodate valuation perceptions; by linking to future performance etc.

• For more on valuation: detailed notes are at http://www.slideshare.net/anjanavivek/valuation-basics (from the popular set of the TOP 4% viewed on SlideShare in 2013)

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http://www.slideshare.net/anjanavivek/valuation-basics

http://www.slideshare.net/anjanavivek/valuation-basics


Term Sheet• Term sheet is a letter of intent and may or may

not be legally binding• Term sheet terms give a summary of proposed

principal terms of investment• Term sheet is usually subject to satisfactory

completion of due diligence reviews• These may need the company to enter into a

period of exclusivity • May range from simple (few pages) to a complex

term sheet running into hundred plus pages• Review this from the practical angel as well as

from a legal angle

VentureBean Consulting Private Limited29

Term Sheet extract

Type of security Equity Shares

Pre-money valuation Rs. 300 million

Post-money valuation Rs. 400 million

Equity shareholding ofthe company postinvestment

Existing holders ofequity

Stock options pool

VC Investor Limited

abcdef

15%15%10%10% 5% 5%

15%

25%

Amount of investment Rs. 100 million


At the start

Kinds of Investors

Project Requirement

Investment Process


Post Investment

In Summary

Agenda

30 30


Post investment• Can mentor and play advisory role• Can assist in multiple aspects, from sales to

getting a good team on board, to assistance in fund raising for future rounds of investment, i.e. helps network, provides contacts, opens doors..

• Can improve governance, systems and process as venture gets monitored

• Can add to the brand value, some investors may conversely, deplete the brand value

• Some like accelerators, angel investors, may play an even more active role, like a co-partner/promoter


Post investment

Flip side • Could be perceived as interfering, this

depends on investor/entrepreneur relationship

• Multiple investors with different agendas can pull founders in different directions

• If the investors feel the company is not moving as anticipated, they may choose to ignore requests and focus on other companies in their portfolio


At the start

Kinds of Investors

Project Requirement

Investment Process


Post Investment

In Summary

Agenda

33 33


In Summary

• Both investor and investee need to take care and plan before going ahead..

• Execution is the key for success, so the plan must be a realistic one, an executable one ..

• And if planned, executed and monitored with care… Success will follow

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In Summary

• Thank you for the patient hearing

• Delighted to invite you to view/follow for periodic insights, class notes & more, from thought leaders, academicians…

@ The VentureBean K.Hub: (Knowledge Hub)

http://www.linkedin.com/company/venturebean-consulting-private-limited

www.slideshare.net/anjanavivek

https://twitter.com/anjana_vivek

• Contact for more information and inputs: [email protected] 35





http://www.slideshare.net/anjanavivek



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Small Business & Entrepreneurship

Start ups challenges for funding options