VII:FINANCING THE NEW VENTURE

By Team -7

Team members
Praveen Kumar H Pavan M K Arun Kumar MC Ramesh Patil Sharan Kumar Praveen Pujari Lokesh Shivraj Shreekanth Shakti Prasad

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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

CASH

FINANCE

RISK

TIME

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Critical Financing Issues

Shareholders Value Creation Customers Employees

Allocating the risk and return Slicing the Value pie

Cash Risk Return

Debt take control Covering risk

Equity staged commitments

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Financial strategy frame work

Opportunity

Finance strategy Degree of strategic freedom Time to OOC Time to close Future alternatives Risk/reward Personal concern

Source and deal Structure Debt Equity other

Business strategy Marketing Operation Finance Value creation

Financial Requirements
Driven 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 new venture. 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 of equity 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 AVOID PROBLEMS BY THE FAMILY AND FRIENDSS INVESTMENT

If the family and friends are treated the same as any investor, potential future 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 within India 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 equity firms in India. These firms provide capital for seed ventures early stage companies, etc.

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Type of Loan

Commercial Banks Account Receivable Loans Inventory Loans Equipment Loan

Real Estate Loans

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Cont

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 that involves a tax shelter.

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3 Important 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 the development 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 medium enterprises SMEs are as follows:

Traders Easy Loan Scheme SSI Loans Business Current Accounts Open Term Loan Retail Trade Doctor Plus Dental Doctor Plus SBI Shoppe Cyber Plus SME Credit Plus
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 Small Business Credit Card SME Petro Credit Dal Mill Plus Paryatan Plus Transport Plus Transport Operations Auto Clean Eicher Motor Limited (EML) Auto Loan Charter for SSI Artisan Credit Card Rice Mills Plus School 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, highpotential, 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 capital industry 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

Highest Risk Early Stage Acquisitions & Leveraged Buyouts Lowest Risk

Developmen t Financing

50% ROI Highest Return Expected

40% ROI

30% ROI Lowest Return Expected

Late Stage in Investments:- lower risks, faster returns, less managerial assistance and fewer deals to be evaluated.
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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 the formal 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 of
prospective 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 company and its foreign subsidiary. The foreign direct investor may acquire 10% or more of the voting power of an enterprise in an economy through any of the following methods Foreign Direct Investment (FDI) equity inflows in the country have increased from US $ 5.5 billion in 2005-06 to US $ 27.31 billion in the year 2008-09. despite the economic slowdown, showing a percentage growth of 11% 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 enterprise Policy Initiatives To strengthen higher overseas investment into cash-broke micro and small enterprises (MSEs), the government has liberalized the FDI norms for the sector replacing the current 24 per cent ceiling on foreign holding with the sectoral caps. These industries will now be guided like other large enterprises as far as FDI is concerned.

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THANK YOU

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