Entrepreneurial Finance

ENTREPRENEURIAL FINANCE

Rajeev Roy

Entrepreneurial Finance by Rajeev Roy

Venture capital

• Long term equity finance

• Investing as opposed to banks who lend

• Looking for high gains

• Accepting high risks

• Can be involved in management of the invested firm

• Venture capital investment is illiquid


Structure of VCs

• Mostly funds– Charge about 2% + success fee

• Also companies

• Limited partnerships expected soon

• Prevalence of banks– Revenue implications


VC : Advantages

• No fixed expense of debt servicing• Financial flexibility• Sharing of risk• Value added investing

– Attracting talent– Networking with service providers/suppliers– Accessing markets

• Enhanced credibility with lenders


VC : Disadvantages

• Dilution of shareholding

• Increased 3rd party governance

• Increased controls

• Increased commitment to stated strategy


Types of VC

Early stage financing• Seed capital or pre-start up or R&D • Start up financing• Second round financing

Later stage financing• Expansion• Replacement• Turnaround


Valuation excersise

1. Get rid of scamsters2. Hygiene factors – beware of things that

can shut down a business3. Growth & industry considerations4. Due diligence

1. Physical evaluation2. Calling in the experts

5. Monetise value


Agreement particulars

• Amount and terms of investment. • Dividend policy. • Composition of the board of directors. • Reporting - management reports, monthly

accounts, annual budgets. • Liquidity (exit) plans. • Rights of sale • Warranties. • Matters requiring venture capitalist approval


Problems

• Locating players

• Concerns regarding exchange of info

• Larger companies look equally attractive with lesser risk

• Even listed securities are giving great returns


India centric problems

• Indian VC not yet a popular asset class among institutional investors

• Exit challenges– Shallow markets– Little M & A activity

• Brand India, not strong beyond services


The road ahead

• Placement agents (Venture Partners)

• Trade meets

• Syndication– Getting a larger team / new perspective– Spreading risk

Eg July systems (wireless content) got $10m from 6 VCs


Some VCs in India

• Jumpstartup – investing

• Draper Fisher – sector specific

• Charles River Ventures

• Sequoia Capital

• Westbridge – too big?

• ChrysCapital – certainly too big


Others

• Banks– ICICI– UTI– SIDBI– Canara bank

• Corporates– Intel– Motorola– Nokia– cisco


• Average fund size $50 mil

• Total deals per annum – 100+

• Mostly expansion – few seed or early stage


Lending strategy of banks

• Business plan

• Financial statement

• Profile of promoter

• Asset base– Gross – Net

• Credit scoring


How Banks cover risks

• Collateral– Internal incl. a/c receivable– External

• Personal guarantees

• Debt covenants

• Short maturity debt


Managing banks

• Complete paperwork in time

• Submit financial statements as scheduled

• Route all transactions through bank

• Ask for extras – free drafts, alerts, etc

• Exude confidence and well being

• Transmit good news

• Be proactive about inspections


SMERA

• Specifically for SMEs

• Joint initiative of:– SIDBI– D & B– CIBIL– Other banks

• Office currently only in Mumbai


Rating process

• SME contacts SMERA

• Questionnaire is filled

• Documents are submitted

• Site visit by SMERA representative

• Rating is announced 15 days after all documents are received



Fee Structure

• Below 1Cr 7500

• Upto 5 Cr 25000

• Upto 20 Cr 37000

• Above 20 Cr 50000


Cash is king

• Can result form unplanned success• Is usually due to lack of planning or

tardiness in collections• Dissatisfaction among suppliers

– Higher costs– Lower quality

• Dissatisfied (worried) employees• High bad debts – migration of customers


Collection strategies

• Investigate new customers• Supply against written orders• Sign on a legal contract• Maintain close contact with customers• Get and repeat positive feedback• Send invoice ASAP• Contact before sending invoice ( to check

particulars)


Collection strategies

• Keep a close watch on customer’s fortunes

• Immediately contact on any delayed payment

• Be firm – its your own money

• Allow a customer to graduate in his credit ratings with you


Break-even analysis

• Identify fixed and variable costs

• Explore possibilities of changing fixed into variable costs

• And vice-versa

• Can be expressed in terms of – Capacity utilisation– Sales revenue


Application of BEA

• Helps in taking investment decisions

• Profit optimisation planning

• Helps in pricing decision

• Can be modified to calculate profitability at various levels of capacity utilisation / sales

Economy & Finance

Entrepreneurial Finance