Start ups challenges for funding options

Start-Ups Challenges for Funding Options
Venture Capital, PE, Angel Investment + +..
Bangalore Branch of SIRC of ICAI
31 October 2014
Anjana Vivek
anjana@venturebean.com

At the start
Kinds of Investors
Project Requirement
Investment Process
Valuation and Term Sheet
Post Investment
In Summary
VentureBean Consulting Private Limited
Agenda
2 2

At the Start
Do take time out to think/reflect…
• What are the kinds of Funding options available
today for business?
• What are the alternate equity investment
options? VC/ PE/ Incubation?
This session focusses on equity linked funding
options and strategies
3

At the start
Kinds of Investors
Project Requirement
Investment Process
Post Investment
In Summary
Agenda
4 4

Investors: Equity (Linked): One Slide Checklist
• HNIs, informal and formal angel groups
• Seed Funds
• Venture Capital
• Private Equity
• Banks exploring innovative ways to fund SMEs
• Strategic Investors
• Corporate Funds; (Family) Business Groups, Indian & Global
– Directly and/or through a special division or subsidiary
– For employees alone or open to public
– As intellectual and/or financial capital with other facilities
• Government supported funds
• Impact Investors
• Incubators
• Accelerators
• Crowd funding
• Online funding platforms
5
Which
One
is the
…
Right
Fit
for
You?

Contributors
• Corporates
• Banks and FIs
• FIIs
• Family Business Groups
• HNIs
• Combination / others
• 3Fs ?
6

Caselet: You are an investee
• Zyco Fund has a life Cycle of 10 years, this is a
fund with overseas investors
• In year 7 of the fund, Zyco has offered 1 million
USD for a 15% stake in Amaze Co., in
Bangalore
• The promoters of Amaze also have another offer
from Indo, a Rupee Fund; they are offering Rs.6
crores for 20 % stake in the company.
• What are the key deal aspects the Amaze
founders should consider
7

Caselet – Debrief - Illustrative
• Promoters should make an effort to understand the
mandates of potential investors and their reasons
for investing
• Some contributors want money back in a finite time
period, some are not particular
• The value add and brand accretion or depletion due
to an potential investor need to be factored, it is not
only about money and equity stake percentage
• The clauses in the contract need to be checked with
care
8

• Founders of an investee company should think
through possible scenarios over the next 3-5 years,
assuming the company does as well as projected
and also assuming a scenario where projections are
not met
• Valuation today and valuation expected tomorrow,
both have a role to play in decision making
• Valuations expected in 3-5 years, depend on
assumptions for projections. These need to be
thought through carefully from multiple angles,
operations, finance, team, competitive landscape
and more
9

Caselet: You are an investor
• GR Fund is a fund of alumni of GR Institution
• The Fund invests directly and sometimes the alumni may also
invest in individual capacity
• Blyitz, a for profit company, which is working on a BOP
(Bottom of the Pyramid) model has got a commitment from an
Angel Fund (AF)
• AF tells Blyitz that they will put in money along with another
co-investor, so Blyitz approaches GR Fund
• Another HNI Fund managed by a professional also hears of
this deal and asks for information
• How will you evaluate the investment proposal from Blyitz if
you are a Fund Manager for GR Fund? What if you are the
HNI Fund Manager, will your approach be different?
10

• Each Investor and Fund Manager will approach it
from his or her fund mandate and how the
investment and disinvestment from this company will
fit into this
• Internal aspects, such as stage in the Fund Life
Cycle, current portfolio on hand, etc. will also play a
key role in evaluation
• If multiple fund managers are involved, the
differences and similarities in the mandates of the
funds will need to be assessed
• There needs to be collective discussion as to who
will lead the deal, do the due diligence and play an
active role post the funding. One or more of the
Funds may be involved in these aspects and more
11

Stages of investment
• Idea / Seed
• R&D / Pilot / Proof of Concept
• Commercialization / Scale up
• Early Stage
• Growth / Later Stage / Expansion
• Turnaround
• Acquisition, Inorganic expansion
• … etc.

Trends: ‘to trigger thinking’
“The Indian startup ecosystem has reached an inflection point, with
800 new tech startups sprouting in a year. This, taken in conjunction
with rising investment flows, makes it the world’s fastest growing
startup ecosystem, NASSCOM”
• https://www.techinasia.com/india-is-fastest-growing-startup-ecosystem-
in-world/
• http://www.nasscom.in/india-fastest-growing-and-3rd-largest-startup-
ecosystem-globally-nasscom-startup-report-2014
• Too much money chasing limited deals, i.e. demand is clearly
greater than supply, despite India currently being rated country with
3rd largest number of startups as per the NASSCOM report
• Technology based companies, ecommerce linked business, product
ventures, businesses leveraging on smart phone user bases,
solutions attempting to fix problems or providing solutions that
address large populations and customer segments… and more are
the flavors of this season.

Trends: ‘to trigger thinking’
• Anywhere you turn, anywhere you look, investors are
seeking startups to fund
• Start ups are also attracting the interest of investors
from the traditional businesses and business houses
from the so-called ‘old-economy’
• New categories of investors are emerging, with their own
investment philosophy, due diligence process; rules of
the game are being re written, depending on the
potential investors and business models
• Consortium funding is finding many takers, with safety
being seen in a large set of co-investors.
– This comes with its own set of challenges – for both the investors
and the investee.
– Consortium investors can also be a mix of individuals, funds and
corporate groups

At the start
Kinds of Investors
Project Requirement
Investment Process
Post Investment
In Summary
Agenda
15 15

What a project must have
• High upside potential
• Potential for extraordinary returns to investor
• Exit route plan
• This implies – Rapid Growth, i.e.
– Total addressable market is really high
– Company has potential to address this market
– Company has ambition to address this market
– Company has the capability to Execute to achieve high growth
– Risks are articulated
– .. Etc
MUST Have Key Requirements:
• TEAM with Execution Capability and
• Huge Addressable Market

4 Points: Investors look for
• Team – leadership, multidisciplinary, integrity,
competence, capability to execute, domain
knowledge
• Idea/Service/Product potential to attract large
numbers of paying customers
• Market, opportunity, growth expected, barriers
to competition
• Exit avenue
What else do you think investors may seek?

Business Plan
• An output based on business model and
strategy, expected to evolve over time
• To be forward looking, based on past knowledge
of promoters and their work experience in the
existing or new venture
• Assumptions to be tested to see if they will be
valid for execution, i.e. to demonstrate this is not
a business plan on paper alone
• Risks to be factored in plan
• Multiple scenarios are looked at, revenues
expected are discounted, expected costs and
expected cash flows factored, sensitivity to key
parameters checked

Due diligence reviews (DDR)
Investment decision is based on DDR, some
illustrative reviews are below. Some of these or
aspects of these may be done in-house by the
investor, others may be out-sourced to experts and
professionals:
• Business
• Market
• Accounting
• Tax and Legal
• Technical
• HR

An Illustrative Sales Quality Review..
• Illustrative indicative parameters, for DDR
– Sales Quantity
– Quality of revenue - in terms of
product/service/vertical/location etc.
– Average revenue per employee
– Number of customers, number of high value
customers
– New customers added
– Customers lost
– Pipeline customers
– Customer acquisition strategy
20

Value Creation Review
• Investment should have potential for value
creation not value depletion; i.e. beyond
– Top line (revenues)
– Bottom line (profits) and
– Cash flow
• To understand financial and non-financial
aspects of business and investment into
business and impact on growth and
sustainability
21

At the start
Kinds of Investors
Project Requirement
Investment Process
Post Investment
In Summary
Agenda
22 22

VC investment & exit
Initial
Meetings
Promoters
with
Project
Prelimnary
Project
Review by
Venture
Capitalist
Term Sheet
Signed by
Venture
Capitalist &
Promoters
Due
Diligence
Review of
Project
Venture
Capitalist
with Funds
Legal
Documents
/Agreement
Signed
Investment
made by
Venture
Capitalist
in Project
Mentoring
&
Monitoring
of Project
Divestment
& Exit
from
Project
Promoters
Venture
Capitalist

Investment life cycle
• Partner (s) identification
• Due diligence review
• Forecasts and valuation, Exit Plan
• Negotiation, acceptable and non-acceptable
terms (deal breaker and deal maker issues)
• Other deal terms and conditions
• Deal closure
• Post deal monitoring and mentoring
24

At the start
Kinds of Investors
Project Requirement
Investment Process
Post Investment
In Summary
Agenda
25 25

Valuation
• Based on
– Tangibles and intangibles
– Data and assumptions
– Subjectivity and objectivity
• Many methods of computation including but not
limited to
– Multiples of revenue, earning, user base etc
– Cash flow based, discounted
– Cost based
• Factor statutory, accounting, and tax implications
26

Valuation
• Driven by markets including flavor of season,
competitive scenario, team at helm etc.
• Driven by percentage of stake offered,
negotiation etc.
• Deals can sometimes be structured to
accommodate valuation perceptions; by linking
to future performance etc.
• For more on valuation: detailed notes are at
http://www.slideshare.net/anjanavivek/valuation-basics
(from the popular set of the TOP 4%
viewed on SlideShare in 2013)
27

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
• These may need the company to enter into a
period of exclusivity
• May range from simple (few pages) to a complex
term sheet running into hundred plus pages
• Review this from the practical angel as well as
from a legal angle

29
Term Sheet extract
Type of security Equity Shares
Pre-money valuation Rs. 300 million
Post-money valuation Rs. 400 million
Equity shareholding of
the company post
investment
Existing holders of
equity
Stock options pool
VC Investor Limited
a
b
c
d
e
f
15%
15%
10%
10%
5%
5%
15%
25%
Amount of investment Rs. 100 million

At the start
Kinds of Investors
Project Requirement
Investment Process
Post Investment
In Summary
Agenda
30 30

Post investment
• Can mentor and play advisory role
• Can assist in multiple aspects, from sales to
getting a good team on board, to assistance
in fund raising for future rounds of investment,
i.e. helps network, provides contacts, opens
doors..
• Can improve governance, systems and
process as venture gets monitored
• Can add to the brand value, some investors
may conversely, deplete the brand value
• Some like accelerators, angel investors, may
play an even more active role, like a co-partner/
promoter

Post investment
Flip side
• Could be perceived as interfering, this
depends on investor/entrepreneur
relationship
• Multiple investors with different agendas can
pull founders in different directions
• If the investors feel the company is not
moving as anticipated, they may choose to
ignore requests and focus on other
companies in their portfolio

At the start
Kinds of Investors
Project Requirement
Investment Process
Post Investment
In Summary
Agenda
33 33

In Summary
• Both investor and investee need to take care
and plan before going ahead..
• Execution is the key for success, so the plan
must be a realistic one, an executable one ..
• And if planned, executed and monitored with
care… Success will follow
34

In Summary
• Thank you for the patient hearing
• Delighted to invite you to view/follow for periodic insights,
class notes & more, from thought leaders, academicians…
@ The VentureBean K.Hub: (Knowledge Hub)
http://www.linkedin.com/company/venturebean-consulting-private-
limited
www.slideshare.net/anjanavivek
https://twitter.com/anjana_vivek
• Contact for more information and inputs:
beanie@venturebean.com
35

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