Venture Capital
How does a VC operate ?
1 Professionally managed pool of Equity Capital
2 The Pool is formed by Limited Partnership
1 Wealthy Individuals
2 Pension Funds
3 Foreign Inventors
3 Managed by general partner of the VC firm in
exchange of a fee & % of Profit
4 Investment by VC is done in Stages
1 Early Stage
2 Expansion Stage
3 Acquisition Stage
Operations of VC
5 VCs Involvement
1
2
3
Monitoring the Portfolio
Finance Planning
Impart business skills
6 Investor gets her money
1
2
Firm is taken over by another company
In the event of going for an IPO
Stages of Business Development Funding
1
Early Stage
(Angel)
1 Seed
2 Start Up
Expansion
(VC)
1 Second
Stage
2 Third
Stage
PE
3 Acquisitions
Description
Small amount to prove concept &
financial feasibility.
Product Development & Initial Set
up. No commercial sales yet.
Working capital for Initial Growth.
Break-even not yet.
Rapid Sales Growth. Positive Profit
Bridge financing. Go Public.
Assuming control of another company
Nature of Indian VC Industry
1 Silicon Valley has popularized concept of VC
2 In India it is (was) a nascent industry
1
2
3
Local companies not yet participated
Some large banks run VCs as a part of their
portfolio
A few foreign VCs are operational in India
3 Most wealthy individuals prefer to park wealth in
real estate because ..
Sector wise Investments
Communications
Software
Retail & Media
Computer HW
Biotechnilogy
Chemical
VC Raised by Stage of Business
1 Start up & Seed
02 %
2 Early Stage
23 %
3 Expansion
57 %
4 Later Stage
18 %
Stage of Business
Investments
Start Up & Seed
Early Stage
Expansion
Late Stage
Types of Risk Capital Markets
1 Informal Risk Capital Market
2 Venture Capital Market
3 Public Equity Market
Informal Risk Capital Market
1 Equity by Invisible wealthy individuals
2 Virtually in accessible to many Entrepreneurs,
but it is a greatest pool of Risk Capital Market
3 They seek to understand the Industry & need
access to the progress of the company
4 Considerations
1
2
3
4
Evaluate Risk /Return Ratio
Management Team
Commitment
Business Area
Who to approach?
1 If your needs are small, raise money from your
own resources - Family, Fools & Friends
2 If your plan is ambitious, approach Angel
Investor
3 As
business
Capitalist
develops
4 Your VC will help
contact
Venture
get you funds for the next
stage
5 Finally go the Acquisition or IPO route
Philosophy of VCs
1 VCs objective is long term capital appreciation VS
the companys objective is survival and growth
2 Early financing will attract risk. VC expects more
return but invest less in the early stage
3 The VC may not seek control of the company.
However, will keep at least one seat on the board
4 He will leave the day-to-day operations to the
company. Will offer financial help, advice,
management planning and help with contacts
5 Since it is a long term relationship, VC will expect
transparency and trust, no surprises. He is a coach
rather than a boss.
Investment decisions by
VC
1 Investment decision is both an Art & Science
1
ART Intuition & Gut feeling
1
2
3
Accessibility
Relevance
Trust
Science Systemic approach, Data gathering
2 Investment Portfolio Mix
1
2
3
4
Number of Early Stage, Expansion & Buy outs
Nature of Industries & Companies
Volume of Investment
Geographical area
VCs Expectation from the
Company
1 Strong Management Team
1
2
3
4
2
Solid Experience & Background
Personal Commitment & Investment
Positive Family Support
Ability of the team to Execute
Unique Product Opportunity
5 Growing market opportunity
Single Gym VS Talwalkars
Diversity of the Market
Online Travel VS Storage
Patents & Certifications
VCs Expectation from the
Company
3
Significant Capital Appreciation
1 Stage of Involvement
2 Amount of Capital Invested
3 Return/Risk Ratio, Black Stone
4 Available Exit Options
Downside Risk
5 Assessment of Risk
6 Steps to mitigate the Risk
Investment Process
1 Preliminary Screening
1
2
Executive Summery
Detailed Business Plan
2 Agreement on Preliminary Terms
1
2
3
4
5
Compatibility
Amount of Money Involved
Control
ROI
Exit Option
Investment Process
3
Due Diligence
1 Survey & Meetings with all Related Parties
2 Financial Statements
Final Approval
3 MOU with all Terms & Conditions
4 Engage a competent Lawyer
Self Evaluation
1 Do you understand the Market, Competition?
2 How many similar companies operate in the
space?
3 Why will you Succeed in the market?
4 How will you get your first Customer?
5 How will you Reach the customers? (Distribution)
6 How will you Retain them?
7 How will you Scale your Business?
Approaching a VC
1 Understand the area of his focus
2 Approach in a professional business manner.
Send a well conceived Business Plan
3 Take time to seek out an Introduction
4 Be
ready with
Presentation
well
thought
5 Develop early Rapport & Chemistry
6 Do not resort to a very Rigid Approach
out
Oral
Guidelines for Dealing with VCs
1 Avoid Shopworn
2 Do not discuss the deal with other VCs
3 Approach thro reliable Contact & discuss fees
4 Do not include intermediary in initial meetings
5 Test market the concept for a few customers
6 Be careful about what is Projected & Promised
7 Disclose problems/negative situations right in
the first meeting
Guidelines for Dealing with VCs
8 Reach a reasonable understanding with the VC
regarding timeframe of response
9 Do not sell the project based on response from
other VCs
10 Be careful about statements like there is no
competition for this product
11 Do not show Financial Ignorance
12 Do not show concern for past problems
13 It is not love at first sight
Guidelines for Dealing with VCs
14 Do not try to impress the VC or be too friendly
15 Be careful about VCs who do not want to know your
business (Dumb Capital)
16 Be concerned about the color of money
17 Find out the track record of the VC
18 Take commitments from him
19 Go with a VC who treats you at Par
20 Approach VC only when absolutely required
21 Frugality is a great Virtue
Factors in Valuation
1 Nature and History of the business
2 Outlook of the Economy and the Industry
3 Net Value (Book Value) of the Stock
4 Weighted Average of Earnings of the company less
Costs
5 Dividend paying capacity of the company
6 Goodwill and other intangibles
7 Previous stock of sale
8 Market price of the stock of similar companies in the
Industry
Breaking News
Assume that you have been very lucky and get
considerably big fortune from an unknown
relative. You have decided to become a business
Angel straight out of college, after getting your
MBA.
What will be your Investment objectives?
The Road not Taken
1 [Link]
1
2
CEO Faisal Farooque
P2P information exchange on
brands by consumers themselves
products
and
2 Plug HR
1
2
CEO Prashant Bhaskar
Manages HR in 60 companies across 8 industries
in 6 cities.
VCs Point of View- I
Mahesh Murthy Seed Fund
Red bus, Mydentist, Carewale
Background
8 Years, 10,000 Business Plans, 50 Companies
Old Economy (Competition)
Pharma
Automobiles
Newspapers
New Age Companies
Enterprise Software, Mobile apps, E Com, Digital,
Consumer Technology Space (Retail, Fashion, Furniture)
New Age Business
Domination
Search Engine: Google
Market Place: eBay
Personal updates: Whatsup
Micro Chatting : Tweeter
Internet Video: YouTube
India is Unique
Big international companies will always win
No Advertising
300 Million internet users & 4 Billion internationally
VC Point of View- II
Ajit Khurana President SINE at IIT Bombay
Idea is not important
E.g. [Link]
Business Model
Execution is the Key
Flipkart
Investors VS Customers
Business Plan
Make important assumptions upfront e.g. More
goods will be sold online
Uniqueness of the Idea e.g collar mike, tuition
Execution at the time of interaction
Plan to meet the gap in one thing only
Who else is on the boat
What have you learned
From Failure
From Success
Play the game where it is played
[Link]
Founders: Co founder - Adytya Sharma
Funding : Nexus, Softbank
Competition: 99 Acres, Magic Bricks, [Link]
Map Based
100 data points
Lifestyle, Communities, Satisfaction Index, Price
rise index, Senior Citizen friendliness
Sold 50 Crores worth of Tata Housing in 15 days
Vision : Buy houses online
Future Plans
Reach : 45 Cites to 300 Cities
List every home in India
Get into related areas: Interior, Legal, Movers
Expend into other Geos Africa & US