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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 Mouthshut.com
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. Makemytrip.com
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

Housing.com
Founders: Co founder - Adytya Sharma
Funding : Nexus, Softbank
Competition: 99 Acres, Magic Bricks, Makan.com
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