VENTURE CAPITAL

By CA Bharat Kanani COO PERMIONICS MEMBRANES PVT. LTD.

What is VC?
Investment in High risk projects High return potential projects Equity related instruments Unlisted companies

Types of risk financiers

Regular VCs Corporate VCs Angel investors Incubators

Stages of VCs investment

Seed Stage Early stage Later stage Turnaround

VC - Process
Promoters with Project

Initial Meetings
Venture Capitalist with Funds

Prelimnary Project Review by Venture Capitalist

Term Sheet Signed by Venture Capitalist & Promoters

Due Diligence Review of Project

Promoters

Divestment & Exit from Project

Mentoring & Monitoring of Project

Investment made by Venture Capitalist in Project

Legal Documents /Agreement Signed

Venture Capitalist

What a project must have

Potential for high growth High upside potential Potential for extraordinary returns to
investor Exit route plan

VC looks for
Team leadership, multidisciplinary,
integrity, competence, domain knowledge Project, product, USP Market, opportunity, growth expected, barriers to competition Exit avenue

Business Plans
Business plans are to be forward looking, based on past knowledge of promoters and their work experience in the existing or new company Must discount revenues expected, account for all expected costs and project expected cash flows

Due diligence reviews

Investment decision based on DDR Business Market Accounting Tax and Legal Technical HR

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

Term Sheet extract VC Investment of Rs. 1 Crore

Type of security Pre-money valuation Post-money valuation Equity shareholding of the company post investment Equity Shares Rs. 3 Crore Rs. 4 Crore

Existing holders of equity

a b

37.50 37.50

VC Investor Limited

25

Post VC investment
Is a partner in the project Mentors and monitors the project Hand holds through the investment Networks on behalf of the investee,

provides contacts, opens doors flip side could be perceived as interfering, this depends on VC/entrepreneur relationship

What a VC does
Each fund manager mentors only a
handful of projects While fund size is big, no. of investments cannot be too much, hence project size increases Unlike debt/other investor, VC is not silent spectator, often is on the Board of investee company

VC investment
Some VCs therefore have separate
persons to look at investment and others to look at post investment, monitoring as the skill sets can be different Others have the same fund manager looking at project from day one of receiving proposal thru exit from investment

Target markets
Different VCs may target different industries such as:
IT further split into niche areas Agri related Bioinformatics Manufacturing - new materials Service

Valuation How ?
There is no universal method of business /
company valuation, different situations call for different valuation methods. VC Typically uses three methods while valuing business / enterprise. The final valuation is always arrived at through negotiations between VC and Investee.

The Cost or Assets Method

As per this model business value = Total
cost of all the assets total out standing liabilities. Historical cost i.e. actual cost or Replacement value of the assets are considered. This method is not suitable for a start-up companies.

Discounted Cash Flow Method

DCF method uses the present value of
future cash flow to arrive at the value of business. The discounting rate is determined to factor out risk, time and cost of capital. DCF Method is more suitable and preferred for Start-up companies.

COMBINED VALUATION
VC also consider combination of Assets
Valuation and DCF Valuation. Considering both the valuations negotiations are carried-out with the broad range which falls within the broad valuations arrived at by two methods.

SOME STATISTIC
>90 % Startups Do Not Require VC
Capital VC Average first round investment is < Rs. 10 Crore Average Dillution from First round VC Investment is < 40 % VC looks > 100 Business Plans (Deals) and may fund one or two out-of these.

When VC Investment is good!

If your business is R&D oriented which
requires huge funding before commercialization of new Product / Technology. If your business requires large Working Capital Investment

Real Cost of VC Funding

Dilution :- Most of the founders who avail
VC will be holding < 25 % of the business upon exit. VC will want to take their money out first You may not always end up controlling the business.

When is VC wrong for your

Too Early you dont have enough to
show yet Sales, Product, Team, etc If your business is too small where by you may need < 100 Lacs to get Profitable IF your business / product / service is not Proprietary, Unique, no barriers to Entry. You need to move fast You are dilution sensative / Control

What are the alternatives

Self-finance Friends and Family Find partners who can share risk. Debt funding by Banks / FI

Self Finance
Enterpreneurship is RISK TAKING, if you
are not willing to take risk, why should any one will take. Initially go without Salary May have to sell Properties / Assets for arranging self finance

Friends and family

The most common form of Start-up
Finance. If any one will believe In you, they will Be honest in saying that there is a Good chance of loosing their money as well.

Partners
A tem is always better than a one alone Two or more can generate more money to
self finance the business Have potential to attract VC Investors

Debt Funding
Nationalised Banks are providing Working
Capital funding for SSI / SME Units Central Government Agencies (i.e. DST) supports technology oriented Projects with low cost of funding. Personal loans against Properties, etc.

IN SHORT
VC Money comes with a lot of strings
attached. Make sure you can live with them. Raising VC money is not a guarantee of success Seriously consider the alternatives to raising VC Money

Any Questions ?

THANK YOU