The VC Investment Process(Term Sheet, Due Diligence)

What We’ll Cover ?

• Venture Capital as only one of the sources offunding for entrepreneurs

• Why raise money from VCs?

• The Structure of VC firms

• The VC investment life cycle

• Venture Capital as only one of the sources offunding for entrepreneurs

• Why raise money from VCs?

• The Structure of VC firms

• The VC investment life cycle

Other sources of funding

Sources include…

A. 3F (friends, fools & family)• Easy to approach, hard to-convince!

• They know you best, and can best understand your passion / dreams

• A popular source of start-up finance

When ?• Usually at the idea stage – higher chances if the idea has been thought

through well

A. 3F (friends, fools & family)• Easy to approach, hard to-convince!

• They know you best, and can best understand your passion / dreams

• A popular source of start-up finance

When ?• Usually at the idea stage – higher chances if the idea has been thought

through well

B. Angels• Angel eco-system is nascent (but evolving) in India (well evolved in the US)• India Angel Network, Mumbai Angels, etc. becoming more active• Best angels are successful professionals from within that industry – ability to

guide and mentor in the early days• Tie’s Entrepreneurship Acceleration Program (EAP) helps entrepreneurs with

such funding

When?• Business Plan reasonably well thought through

• Some validation of the plan increases probability of funding

Sources (contd.)…B. Angels• Angel eco-system is nascent (but evolving) in India (well evolved in the US)• India Angel Network, Mumbai Angels, etc. becoming more active• Best angels are successful professionals from within that industry – ability to

guide and mentor in the early days• Tie’s Entrepreneurship Acceleration Program (EAP) helps entrepreneurs with

such funding

When?• Business Plan reasonably well thought through

• Some validation of the plan increases probability of funding

C. Incubators• Remove the infra. headache (& cost)

• Make available valuable technical inputs and guidance

• Money could also be part of the deal!

When?• Normally select through screening of business plan – therefore needs well

thought through plan

• May or may not seek some validation of plan

Sources (contd.)…C. Incubators• Remove the infra. headache (& cost)

• Make available valuable technical inputs and guidance

• Money could also be part of the deal!

When?• Normally select through screening of business plan – therefore needs well

thought through plan

• May or may not seek some validation of plan

D. Customers• Usually available for leading-edge ideas that can transform the customer’s

business.• Takes form of direct equity investments, or advance payments for orders.• Customer funding is a great validation for future financing rounds.

When?• Usually when product idea is crystal clear, higher chances if prototype can be

demonstrated

Sources (contd.)…D. Customers• Usually available for leading-edge ideas that can transform the customer’s

business.• Takes form of direct equity investments, or advance payments for orders.• Customer funding is a great validation for future financing rounds.

When?• Usually when product idea is crystal clear, higher chances if prototype can be

demonstrated

E. Banks

Sources (contd.)…

F. Venture Capital• VCs in India rarely (unlike the US) come in at the seed / angel stage

• They usually look for some customer validation:

– For services companies, this means actual customers / revenues

– For product companies, at least a beta customer, if not a paying one

– Company generating revenues has higher chances of raising VC money

– Profitability is normally not a requirement

And finally…F. Venture Capital• VCs in India rarely (unlike the US) come in at the seed / angel stage

• They usually look for some customer validation:

– For services companies, this means actual customers / revenues

– For product companies, at least a beta customer, if not a paying one

– Company generating revenues has higher chances of raising VC money

– Profitability is normally not a requirement

…because it spreads the risk.…because VCs can add-value!

Why raise money from VCs?

1. Mentoring– Helping entrepreneurs (specially young ones) grow into great

CEOs.2. Strategic Inputs

– Act as a bouncing-board / devil’s advocate on strategy andoperational issues

– Providing additional competitive surveillance– Updates on technology directions– Sharpen strategy by bringing a fresh perspective

3. Management Areas– Helping evolve organisation structures– Identification & recruitment of key employees– Helping build a powerful board of Directors / Advisors

How do VCs Add Value?1. Mentoring

– Helping entrepreneurs (specially young ones) grow into greatCEOs.

2. Strategic Inputs– Act as a bouncing-board / devil’s advocate on strategy and

operational issues– Providing additional competitive surveillance– Updates on technology directions– Sharpen strategy by bringing a fresh perspective

3. Management Areas– Helping evolve organisation structures– Identification & recruitment of key employees– Helping build a powerful board of Directors / Advisors

4. Sales & Marketing– Assist in developing product & marketing strategies– Active introductions to partners, distributors & key customers,

specially in overseas markets– Help focus company strategically for enhanced value

5. Financial areas– Key role in subsequent rounds of financing– Providing dispassionate advice during M&A discussions– Introduction to investment bankers, analysts, etc. in

preparation of an IPO6. Relationships

– Open up the VCs network (potential partners, customers,distributors, acquirers, investors)

How do VCs Add Value?4. Sales & Marketing

– Assist in developing product & marketing strategies– Active introductions to partners, distributors & key customers,

specially in overseas markets– Help focus company strategically for enhanced value

5. Financial areas– Key role in subsequent rounds of financing– Providing dispassionate advice during M&A discussions– Introduction to investment bankers, analysts, etc. in

preparation of an IPO6. Relationships

– Open up the VCs network (potential partners, customers,distributors, acquirers, investors)

How are VC firms structured ?Limited Partners

GeneralPartners

Carried Interest (Profit Share)

Mgmt fee

Advice

VC Fund

GeneralPartners

Co.1 Co.2 Co.3 Co.4

Mgmt fee

VC Life CycleLPs

- IPO- M&A- Co. / Promoterbuy-backs

- SecondarySale

- Liquidation

- Investment Banks / CA’s- TiE / NEN, etc.- Personal Networks- Seminars, etc.

Fund raisedReturns toLP

Making theInvestment

- Board Seats- Close interaction with

entrepreneur

Mitigating the Risks- Technology Risk- Market Risk- Execution Risk- Finance Risk- Team RiskTerm Sheet

- Financial & Legal Due D- Legal Documentation- Money Transfer- Issue of Shares- Enabling resolutions

What’s typically covered in a Term Sheet ?

• Financing Amounts• Valuation• Special Rights:

– Drag Along– Tag Along– Pre-emption

• Exit Issues• Anti-Dilution – Full Rachet / Weighted Average• Liquidation Preference• Protective Provisions (Veto)• Conditions Precedent

• Financing Amounts• Valuation• Special Rights:

– Drag Along– Tag Along– Pre-emption

• Exit Issues• Anti-Dilution – Full Rachet / Weighted Average• Liquidation Preference• Protective Provisions (Veto)• Conditions Precedent

Typical Legal Documentation• Investor’s Rights Agreement (IRA)

• Share Subscription Agreement (SSA)

• Amended Articles of Association / Memorandum ofAssociation

• Employment Agreements (for key employees)

Role of CA’s

• CA’s play a role in the entire VC cycle but canplay a crucial role in– Deal diligence

– Making the investments, &

– Exits

• CA’s play a role in the entire VC cycle but canplay a crucial role in– Deal diligence

– Making the investments, &

– Exits

Thank You !Thank You !