ROLE OF CHARTERED ACCOUNTANS

IN
VENTURE CAPITAL
AND
ANGEL INVESTING FUNCTION

Prepared By:
Anuj Shah

Brief about PPT

Brief detail about Content of Presentation
1.

Brief About Venture Capital

2.

Investment stages in Venture Capital

3.

Investment Process Under Venture Capital Finance

4.

Development of Venture Capital In India

5.

Drafting of Business Plan

6.

Drafting of Term Sheet

7.

Few Question Usually asked by VC or Investors

Necessity is mother of Invention

Mr Farhad
(Electronic and Communication Engineer)
Has went to remote Place for his Project Work
Could not able to get regular frequancy of mobile network
Thus facing problem catering the clients
Thus started thinking to solve the problem on his own

After doing research for a long time

He found out a chip which can capture remote signal and thus
can enhance mobile network connectivity
This Just an idea
For implementing this idea Mr Farhad needs to manufacture
the chip
For manufacturing chip he requires fund, which he dont have

So he approached Banker
Bankers has asked for
past trend, credit record, collateral security, and Explanation
w.r.t. Repayment of funds
Mr Farhad Could not justify thus banker rejected the proposal
Then he approch Mr Jain local Chartered Accountant
Mr Jain Guided him to prepare business plan and project report

These papers were presented before Mr Thakkar and ABC Venture

Capital Fund
ABC Venture Capital Fund shown interest to fund the venture
With condition of 60% equity and more than 50% directors on Board
Mr Farhad Got money to manufacture and has sold chips to mobile
companies
Now Mr farhads Company is making profit and going for IPO where
ABC Venture Capital Ltd will sale entire stake at 30 times of what
they have invested

What is Venture Capital

Venture capital is Capital/Money

provided by investors to the boost
up the Venture/ concept/idea of the
entrepreneur which is a startup
firms and small businesses with
perceived long-term growth
potential but not having any asset
to get bank finance or not having
past track record or having limited
operating history to justify the
venture revenue.

High risk High return

IDEA
PEOPLE
MONEY

STRARAGIC
INVESTMEN
T

Role of Venture Capitalist

Venture Capitalists generally:

Finance new and rapidly growing companies for longer

time horizon

Purchase equity/securities

Assist in the development of new products or services

Deploy professional for giving proper inputs to venture

Add value to the company through active

participation

What is Venture Capital

How Venture Capital Fund

Functions
The SEBI has defined
Venture Capital Fund in
its Regulation 1996 as
a fund established in
the form of a company
or trust which raises
money through loans,
donations, issue of
securities or units as the
case may be and
makes or proposes to
make investments in
accordance with the
regulations.

What is Angle Investor

Engel Investor are the investor who invest their

own fund to the venture
Usually Low amount of investment compared to
VCF
Usually do not prefers to be on the board
May introduce to some VCs to dilute investment
or expand business
Very active on investment and working very hard
for venture
Expects high returns as they invest at the
conception stage
SUPER ANGELS

Benefits of VC to
Entrepreneur

It injects long term equity finance which provides

a solid capital base for future growth.

The venture capitalist is a business partner, sharing

both the risks and rewards.

The venture capitalist is able to provide practical

advice and assistance to the company based on past
experience with other companies which were in
similar situations

The venture capitalist also has a network of contacts

in many areas that can add value to the company.

Benefits of VC to
Entrepreneur

The venture capitalist may be capable of providing

additional rounds of funding should it be required to
finance growth.

They can help in defining proper marketing , operational

and financial strategy for success of the company.

Venture capitalists are experienced in the process of

preparing a company for an initial public offering (IPO) of
its shares onto the stock exchanges or overseas stock
exchanges.
They can also facilitate a trade sale.

Investment Stages

Investment stages
1. Seed Money:
Low level financing needed to prove a new idea.
2. Early stage investment/start up investment/Angel
Investment:
Idea needs to be developed into product and needs to
be marketed to get commercial orders.
3. First-Round:
Product and Marketing chain has establish but funds
required for manufacturing of first commercial deal
4. Second-Round:
Working capital for early stage companies that are
selling product, but not yet turning a profit .

Investment stages
1. . Third-Round:
Also called Mezzanine financing, this is
expansion money for a newly profitable
company
6. Fourth-Round/mazzanine:
Also called bridge financing, it is intended to
finance the "going public" process

Investment stages
Financial
Stage

Seed Money

Start Up

First Stage

Period (Funds
locked in
years)
7-10

5-9

3-7

Risk
Perception

Extreme

Very High

High

Activity to be
financed
For supporting
a concept or
idea or R&D for
product
development
Initializing
operations or
developing
prototypes
Start
commercials
production and
marketing

Investment stages
Financial
Stage

Second Stage

Period (Funds
locked in
years)
3-5

Risk
Perception

Sufficiently high

Third Stage

1-3

Medium

Fourth
Stage/mazanine

1-3

Low

Activity to be
financed
Expand market
and growing
working capital
need
Market
expansion,
acquisition &
product
development
for profit
making
company
Facilitating
public issue

Investment stages

Gestation Inception Prototype

Roll out

Growth

Expansion

Maturity

Product Stage

Idea

Concept

Prototype

Launch

Scaling up

Diversification

Continuous
innovation

Funding Stage

Pre-seed

Seed

Seed

First stage

Second stage

Third stage,
Bridge
financing

Asset-based
financing

VC Investment Process
Pitching/Originat
ion of Deal
Screening
Due diligence
(Evaluation)
Deal structuring
Post investment
activity
Exit plan

Opportunity introduction/
Pitching

To get the opportunity of getting funds the entrepreneur has to pitch/

approach the investor and introduce the concept/idea of the venture.

He has to make a presentation with the team before the intended angels or
VCs.

Present business plan

Concept/idea of Venture

Executive summary

Product

Mile stones

Cash flow

Brief about management, production, finance, marketing strategy

(only 5% business plans are read beyond executive summary, 10% passes
initial screening, out of this 10% proposal goes for due diligence and
funding)( success ration is 0.05%)

Dont get depressed if your idea is rejected at the time of pitching (keep
exploring apportunitities)

Screening and due diligence

Who are the person behind the company?

Founding Members, Key Management, Board members, Advisors

What is the Vision of Company

About Concept/ Product/ Technology based on which Entrepreneur will do business

Competitiveness of Product/ services

What is customer need and how the product is satisfying that need?

Why your solution is better then the competitors? Or why people will approach for your
product?

Whether technology is having long term competitive advantage?

Business Plan or marketing, operational plans are implementable?

What is strategy to pitch the product into the market

Through what channel or vertical will be used to sell the product

Modalities to built momentum and building capacity to cater the momentum

What is revenue model of the company?

Pricing of Product- test affordability of product

Financial Projection Test achievable or not? (Cost as well as revenue) (break even)

Assumptions driving financials Test proper or not?

Mode of Venture Financing

The financing pattern of the deal is the most important element.
Following are the various methods of venture financing:
Issue of Shares

Equity shares( Round satisfaction of condition additional funding)

Preference shares- Convertible preference shares Restriction
Preference shares Non Convertible, Redeemable, irredeemable preference
shares

Generally do not exceed 49% of total equity

Overall control remains with entrepreneur
Beneficail to both

For Entreprenure- No burden of payment of interest or other charges

For VC- Can get High return for taking risk

VC earns CG at the time of disposal of shares

Conditional loan

Payout to VC will start once conditions are satisfied

Payment generally begins once firm started making sales or started making
operating profits
Roayalty charges / management fees once sales starts- 2 to 15% of sales
High Interest rate post sales or other conditions satisfaction- 20 to 25% PA

Mode of Venture Financing

Debenture or Quasi Equity or Debt Instrument

(fixed interest rate irrespective of operations of
company)

Secured debentures, Unsecured Debentures(Companies Act

restriction post 1-4-2014)
Convertible & Non convertible debentures- Debt equity swap

Convertible-Debentures Redeemable at a Premium:Put

Option- entitle to sell bond to issuer(buy back or sale to
promoter) at premium after certain lock in period

Participating debentures
No interest at specified
Lower Rate of interest when sales and profit generates
High rate of interest at growth stage
Quasi Equity- Is loan without interest or lower rate of interest with
no condition attached to it

Mode of Venture Financing

Income note

Combination between conventional loan and conditional loan

To pay both interest and royalty but at comparatively lower rate

Other Mode of finance

Cumulative convertible preference shares( Restriction Companies

act)
Shares with differential voting right
Equity shares, Preference shares, Debentures with call & put option
Call Option to Holder- VC (Conversion by holder, buying additional
shares or sale shares)
and
put options to entrepreneur (buy back at certain price, Early
redemption with premium)

Post Investment activitiesMonitoring

Appoint a person/ persons to Monitor- day to day activity

Reporting and analyzing the progress that venture is doing

Will examine whether venture is doing well if not then what

should be the steps to be taken to come to the desired
growth in the company

Hire skilled manpower or professionals to Suggest

operational and stratagic decisions for the success of the
venture

Renegotiate the term if requried with the enterprenure

Infuse further equity if required

Make decision for exit

Time of exit from the firms capital is almost never predetermined, but
depends on the development of the company.

In successful cases, divestments take place when the company has

reached the level of expected development and the value of the
company.

Initial public offer(IPOs)

Trade sale- Sale of stake to strategic or financial investors
Promoters buy back
Pre-determined price or independent
valuation of
shares as on the date of buyback
Acquisition by another company (M&A)

Venture Capital Funds in

India
In

early 70's when Govt of India appointed a committee

laid by Late Shri R. S.Bhatt to find out the ways to
meet financing for funding start-up companies
based on absolutely new innovative technologies.
Such companies either did not get any financial
support or the funding was inadequate which
resulted into their early mortality.
The committee recommended starting of Venture
Capital industry in India.
In mid 80's three all India financial institutions viz IDBI,
ICICI, IFCI started investing into the equity of small
technological companies.

Venture Capital Funds in

India

In Nov 1988, Govt of India decided to institutionalize Venture

Capital Industry and announce guidelines in the parliament.
Controller of Capital issues(CCI) implemented these guidelines known
as CCI for VC.
These guidelines were very restrictive and following a very narrow
definition of VC. They required Venture Capital to be invested in
companies based on innovative technologies started by first generation
entrepreneur. This made VC investment highly risky and unattractive.
Nonetheless many private initiatives were taken. At the same time
World Bank selected 6 institutions to start VC investment in India. This
included TDICICI (ICICI), GVFL, Canbank Venture Capital Fund, APIDC,
RCTC (now known as IFCI Venture Capital Funds Ltd.) and ILF (now
known as Pathfinder).

Venture Capital Funds in

India

In 1995, Govt of India permitted Foreign Finance companies to make

investments in India and many foreign VC private equity firms entered India. In
1996, government announced guidelines to regulate the VC industry. Though
there were many shortcomings these guidelines were the starting point.
In 1997, IT boom in India made VC industry more significant. Due to symbiotic
relationship between VC and IT industry, VC got more prominence as a major
source of funding for the rapidly growing IT industry. Indian VC's which were so
far investing in all the sectors changed their focus to IT and telecom industry.
The recession during 1999 - 2001 took the wind out of VC industry. Most of the
VC either closed down or wound-up their operations. Almost all of them
changed their focus to existing successful firms for their growth and
expansion. VC firms also got engaged into funding buyouts, privatisation and
restructuring.
Post recession 2011 onward online retail boom has made the sector once
again hot. Flipkart, snapdeal, Ola, Hosing.com is example of the same.

Venture Capital Funds in

India

VCFs in India can be categorized into following five groups:

1)Those promoted by the Central Government controlled
development finance institutions. For example:
- ICICI Venture Funds Ltd.
- IFCI Venture Capital Funds Ltd (IVCF)
- SIDBI Venture Capital Ltd (SVCL)
2) Those promoted by State Government controlled
development finance institutions.
For example:
- Punjab Infotech Venture Fund
- Gujarat Venture Finance Ltd (GVFL)
- Kerala Venture Capital Fund Pvt Ltd.

Venture Capital Funds in

India

3) Those promoted by public banks.

For example:
- Canbank Venture Capital Fund
- SBI Capital Market Ltd ( now into PE)

4)Those promoted by private sector

companies.
For example:
- IL&FS Trust Company Ltd
- Aditya Birla Venture Capital
5)Those established as an overseas venture capital fund.
For example:
-Sequoia Capital
- Blume Ventures
- Helion Venture Partners
- Accel Partners
- Nexus Venture Partners

Brief about some VC firms

and funds managed by
them
SIDBI VENTURE AS MAINLY FOUR FUNDS WHICH ARE OPERATING TODAY
Samridhi Fund (SF)
Focus on Environment, Social and Governance matters.
Corpus: 450 crore

Target sectors is MSME

Water & Sanitation, Affordable Healthcare ,Agriculture &Allied services
Clean Energy, Financial Inclusion (Includeing MFIs), Education ,Skill
Building, etc. In the area of 8 defined states
India Opportunities Fund (IOF)
IOF is a sector agnostic fund focused mainly on growth capital needs of
Indias growing and unlisted MSMEs operating in emerging sectors such as
light engineering, clean-tech, agro-based industries, logistics,
infrastructure, educational services, IT/ITES etc. IOF will also invest
in early as well as late stage companies selectively.

Sidbi VC fund details

SME Growth Fund
Object is same as mentioned in Indian Opportunity fundfucused on SME-High growth business.
Initial Corpus : 500 Cr
But all investments are freesed and now looking to the
divestment.
However opportunities will be raised once portfolio will be
divested and reinvested in new businesses/ventures.
National Venture Fund For Software and IT Industry (NFSIT)
SIDBIhas contributed500 million.,Ministry of Information
Technology, Government of India300 million. And 200
millionby IDBI.
launched in 1999 by Shri Atal Behari Vajpayee
The fund is almost fully divested.

IFCI VC Fund
IFCI VENTURE AS MAINLY FOUR FUNDS WHICH ARE OPERATING
TODAY

Green India Venture Fund

India Enterprise Development Fund
Venture Capital Fund For Scheduled Caste
India Automotive Components
Manufacturers Fund

Rajastan Venture Capital

Fund
RAJASTHAN VENTURE CAPITAL FUND (RVCF) a professionally managed
and privately held company supported by 15 investors including
Rajasthan State Industrial Development and Investment Corporation
(RIICO) and Small Industries Development Bank of India (SIDBI) as lead
investors.

RVCF FUND-1 (MADE EXIT IN 9 OUT OF 10 INVESTMENTS)

RVCF II SME Tech Fund ( INVESTMENTS ARE GETTING MATURED)

PLANNING TO LAUNCH NEW FUND WHICH IS HAVING CORPUS OF

150 CRORE
Investing for growth capital for new and existing non listed
companies in the Information Technology, Bio-Technology, Retail,
Auto, Agri-Tech, Health Care, Tourism, Entertainment, Logistics,
Packaging and other Technology driven projects.

Also invest in second round

Recent Development
On 23rd Jan 2015- mint reported that
- Telegana Govt begun constuction of Technology Incubator
for start up in the capital Hydrabad
- Planning to invest in the infrastructure for start up 200
crores
- 300000 sq ft construction with hi tech infrastructure
- also tied up with IIIT-H and Nalsar univercity to IPR and other
training
- Planning to create fund of 600 cores with other VC funds
Revolution has been started- Other state will also launch the
same scheme later on

VC deals 2014

Sequoia Capital 25 deals in 2014

Most active amongst all VC
Sequoia invested in firms like:
In the tech space

In the non-tech field it backed names like

Fashionandyou, Zomato, Olacabs, Knowlarity, Capillary, ZoomCar,

Druva Software, Octro, Tinyowl, Grofers and Akosha in the tech
space.
Koye Pharma and
Indigo Paints

part-exited from local business classifieds firm JustDial. It

scored over 30x on its original investment in 2009.

VC deals 2014
Blume Ventures - 19deals
Size of investment is relatively smaller compared to
other fund
The companies it invested last year include
TaxiForSure, VoxPopClothing, Zopper, HashCube, Instamojo,
Railyatri and Covacsis.
Other follow-on investments
Exit in Spunk Media Pvt Ltd sold to San Fransisco-based
mobile payments company Boku

VC deals 2014
Helion Venture Partners 19 deals
Very aggressive in the year 2014
The companies it invested last year include
TaxiForSure, Housing, Yepme, BigBasket, Indiahomes,
Pubmatic and Jivox
In Non Tach Industry
Shubham Housing Finance, ID Fresh Foods and Dentys (A
dental chain ).

Role of Chartered
Accountant
Chartered Accountant can provide their services in following areas
Act as mediator for angel financing function/ VC

1.

Help in coming to the amicable deal for benefit of both the parties

Helps in preparation of

2.
1.
2.
3.

3.

4.

5.
6.

Business Plan
Cash Flow forcast
Giving financial presentation and explaining revenue model at the time of
pitching the proposal before VC and Engle Investors

Suggesting suitable structure for finance in accordance with

prevailing law in India( FEMA, SEBI, Company Law etc)
Negotiation with VC for valuation
Drafting of term sheet
For VC- they can do Due diligence and valuation

Preparation of Business Plan

Business plan is the most important document which VC or
Angel investor will focus thus care should be taken at the time of
drafting of business plan. Chartered Accountant has major role
in defining and preparing business plan on behalf of the client.
What should be there in the business Plan?
- Those conceret information about the venture based on what
the investor will invest in the venture.
- Should answer WHAT, WHY AND HOW of investors
- Each and every information is important and can generate
discussion further

Preparation of Business Plan

Cover Sheet

Executive Summary

Table of Contents

1)

Statement of Purpose

2)

Company History/ Details about Venture

3)

Business Description

4)

Products and Services

Preparation of Business Plan

5)

Market Analysis
a.
Customers
b.
Competition
c.
Marketing Strategy

6)

Management

7)

Operations

8)

Financial Plan

9)

Appendices

Preparation of Business Plan

Cover Page

Identity information
The words Business Plan
business name
Company logo
Address
Telephone number
Fax Number
Email Address
Web Address (URL)

Submission date

Purpose

Should look attractive

Preparation of Business Plan

Executive Summary
Most important part of Business Plan

30-second test

Concise explanation
Venture objectives
Market prospects
Financial forecasts
Sources and uses

SHOULD BE WRITTEN LAST TO AVOID MISMATCH

Preparation of Business Plan

Table of Contents

Include page numbers

List of headings
Major
Subsections

Same font!

Preparation of Business Plan

Statement of Purpose

The business plans objectives - purpose of taking fund or

approaching VC
DESCRIBE WHAT VENTURE WHANTS TO CREATE AND HOW THE
FUNDS WILL BE UTILISED TO ATTAIN THE PURPOSE
Should outline purpose of financing arrangement requested

How much fund is actually needed

How the fund will be utilized
What asset will be generated in the Venture
How investment will be beneficial to business
What returns are expected out of it

Tenure for which company will be under growth phase

How financing will be structured

Preparation of Business Plan

Company History

Basic product currently dealing into

Names of principals and brief background on each
Legalities: business type, Venture legal format
Company location
Number of employees as on date
Probable or existing Customer highlights
Your niche and unique qualities/ technology which will drive
growth
Strategic alliances ( for product or services or technology)

Preparation of Business Plan

Business Description

Mission Statement Operational and financial

Basic product or service description (present and future)
New, takeover, expansion, franchise
General strategy plan to drive business
Business Modal
Planned strategic alliances
Company milestones as on date and after 3 years
(business formation, opening date, hiring employees,
launching product, begin Operation ,Achieving revenue
levels/ growth)

Preparation of Business Plan

Products and Services

Detailed description of products or services

Current stage of development of product: in-process,

prototypes, samples

Patents or trademarks, legal contracts, licensing

agreements, regulations, certifications

Uniqueness - How product is different then other product

Competitive advantage of product

The Brochure Section- Attahchment

Preparation of Business Plan

Market Analysis

Industry analysis

Customers: individual, business entity

Competition

Marketing Strategy

Cite Sources from where information is taken or trend details is

taken

Industry Analysis

Industry in India- information, trends

Local industry information, trends

Social, economic, legal, technological issues in Industry

Justify Opportunity for the product

Preparation of Business Plan

Market Analysis

Customer Analysis
Individual customer demographics

Location, age, gender, occupation

Ethnic group, lifestyle, education, income

Business customer demographics

Sector, location, structure

Sales level, distribution classification, number of employees

Preparation of Business Plan

Market Analysis

Competition

Who are the competitors If you say no competition then be ready

for grilling

Why your company/product/services are superior

Similar and dissimilar

SWOT (strengths, weaknesses, opportunities, threats)

Advertising- as a tool to reduce competition-

Eye on the future ( Currently no competitor, but can be competitor

at future date)

Competitive grid and explanation (Pricing comparison, product

comparison, customer comparison)

Preparation of Business Plan

Market Analysis

Marketing Strategy

How Venture will Obtain a good share of the entire

marketplace
Product: sellable aspects (uniqueness, Age factor,
Location factor, brand image, Utility)
Pricing: Initial phase low pricing- creation of habit- then
increase
Placement timing right market
Promotion Mouth publicity- paper- media- Internetroad show- event

Preparation of Business Plan

Market Analysis

Marketing Strategy

How Venture will Obtain a good share of the entire

marketplace
Product: sellable aspects (uniqueness, Age factor,
Location factor, brand image, Utility)
Pricing: Initial phase low pricing- creation of habit- then
increase
Placement timing right market
Promotion Mouth publicity- paper- media- Internetroad show- event

Preparation of Business Plan

Management

Job descriptions of the decision makers

I do everything!- Never tell the same
Compensation, benefits ESOPS- Dilution of Equity
Contribution and background as leverage to perform
Advisory board

Preparation of Business Plan

Production/ Operations

Location of Plant or Operational store or website

Facilities needs for Production Water, electricity, server,
security system etc.
Space planning for operation considering further expansion
Manpower needed for Production or sub contracting
(Stagewise)
Logistics arrangement
Environmental and other issues
Licenses availed and to be applied for doing business
Purchasing policy, quality control program, inventory control
system, production cost breakdown

Preparation of Business Plan

Financial Plan

Should define initial start up cost

What is Cost Post start up and when the funds are required

Estimate of capital expenses with supporting

Estimate of working capital requirement under the phase manner

Fund Required at what point of time

Way of funding- Equity, debt or Income note or Subsidy or Govt.

Grant

Factoring way of funding and its cost during working out estimated
financial pojection

Expected Cash flow

Break Even years

ROI working

Preparation of Business Plan

Appendices

Supplemental materials
Resumes of management team
Past financials if available
Interim income statement and balance sheet
Copies of potential contracts
Financial Projections
Brochure of the product
Prototype description details
Details about technology with more specification
Schedule of implementation
Letters of reference

Preparation of Business Plan

Appendices

Supplemental materials
Resumes of management team
Past financials if available
Interim income statement and balance sheet
Copies of potential contracts
Financial Projections
Brochure of the product
Prototype description details
Details about technology with more specification
Schedule of implementation
Letters of reference

Summary

planning

Term Sheet

Term sheet plays important role in venture capital finance

Term sheet is a major document which describes broader

terms and conditions which are finalised at the end of
negotiation

Term sheet can be called as MOU or Letter of Intent

Term should not be non binding to creat relevence

TS gives clarity of terms and operation and intention of both

Formal Agreements executed post term sheet depending up

on method of funding ( for equity- share holders agreement,
share purchase agreement etc )

Should keep it confidencial before formal agreement

executed

Term Sheet
Points to be considered while drafting term sheet

Purpose of term sheet

Amount and Type of Investment

Amount of Investment

Amount of investment based on period

Amount of investment based on condition

Type of security issue against investment

Equity shares should classify class of shares if differential voting rights are given

Preference shares

Share warrant

Debenture

Or combination of above

Security mechanisms- Guarantee, pledge of shares mortgage of asset

Milestones- on whose achiement VC will fund further or right to call

and put excercises

Term Sheet

Investors rights

Conversion Right for mandatory conversion trigger of event

descr.
Anti dilution Right- Clause is added to secure that company will not
issue new shares at price lower then price at which share
issued to investors. If issuing at discount then current investor
should be approached first.
Redemption/ Repurchase Right- Term sheet should indicate at what
time redemption or repurchase can be exercise.
Right upon Liquidation and dividend
Right of voting and Board representation- differential voting right1 share holder has 2 vote in AGM- event when differential voting
right will be effective?
Right of first refusal/co-sale- Right to acquire new shares
Right to get information

Term Sheet
Other General Points to be covered

Right of IPR- who will hold in case venture not materialised

Non Competition agreement

Agreement for taking over employees

Representation and Warranties

Default- whether grace period should allow or not ?

Consequences of default

Conditions to closing conditions to be fulfilled before closing

final agreement ( like statutory approval, financial audit, duediligence report by expert , pre clinical report in Parma
company etc)

Signature and parties

Thank You