20630760 Financing the New Venture

8/3/2019 20630760 Financing the New Venture

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FINANCING THENEW VENTURE

By Team -7


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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


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Critical Financing Issues


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Financial strategy frame work

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Opportunity

Business

strategy

MarketingOperation

Finance

Value creation

Source and deal

Structure

DebtEquity

other

Finance strategy

Degree of strategic freedom

Time to OOCTime to close

Future alternatives

Risk/reward

Personal concern

FinancialRequirementsDriven 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 newventure.

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 ofequity 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 AVOIDPROBLEMS BY

THE FAMILY AND FRIENDSS

INVESTMENT

If the family and friends are treated the same as any investor, potentialfuture 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 withinIndia 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 equityfirms in India. These firms provide capital for seed ventures early stage

companies, etc.

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Type of Loan

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Equipment Loan

Commercial Banks

Account Receivable Loans

Inventory Loans

Real Estate Loans


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Cont

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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 thatinvolves a tax shelter.


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3Important 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 thedevelopment 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 mediumenterprises SMEs are as follows:

Traders Easy Loan Scheme

SSI Loans

Business Current Accounts

Open Term Loan

Retail Trade

Doctor Plus

Dental Doctor PlusSBI Shoppe

Cyber Plus

SME Credit Plus


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Small Business Credit Card

SME Petro Credit

Dal Mill PlusParyatan Plus

Transport Plus

Transport Operations

Auto CleanEicher Motor Limited (EML)

Auto Loan

Charter for SSI

Artisan Credit Card

Rice Mills PlusSchool 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, high-

potential, 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 capitalindustry 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

Late Stage in Investments:- lower risks, faster returns, less managerial assistance and

fewer deals to be evaluated.

Highest

Risk

Lowest

Risk

HighestReturn

Expected

LowestReturn

Expected

Early

Stage

Developmen

t Financing

Acquisitions

& Leveraged

Buyouts

50%

ROI

40%

ROI

30%

ROI


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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 theformal 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 ofprospective 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 companyand its foreign subsidiary.

The foreign direct investor may acquire 10% or more of the votingpower of an enterprise in an economy through any of thefollowing methods

Foreign Direct Investment (FDI) equity inflows in the countryhave increased from US $ 5.5 billion in 2005-06 to US $ 27.31billion in the year 2008-09.

despite the economic slowdown, showing a percentage growth of11% 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

enterprisePolicy Initiatives

To strengthen higher overseas investment into cash-broke microand small enterprises (MSEs), the government has liberalized theFDI norms for the sector replacing the current 24 per cent ceilingon foreign holding with the sectoral caps. These industries willnow be guided like other large enterprises as far as FDI isconcerned.

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Conclusion


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20630760 Financing the New Venture